Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       For the quarterly period ended June 30, 2003

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       For the transition period from                  to                 

 

Commission file number 1-10524

 


 

United Dominion Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   54-0857512

(State or other jurisdiction of

incorporation of organization)

 

(I.R.S. Employer

Identification No.)

 

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

(Address of principal executive offices - zip code)

 

(720) 283-6120

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

The number of shares of the issuer’s common stock, $1 par value, outstanding as of August 8, 2003 was 116,041,213.

 



Table of Contents

UNITED DOMINION REALTY TRUST, INC.

FORM 10-Q

INDEX

 

          PAGES

     PART I—FINANCIAL INFORMATION     

Item 1.

   Consolidated Financial Statements (unaudited)     
     Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002    3
     Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002    4
     Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002    5
     Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2003    6
     Notes to Consolidated Financial Statements    7-18

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18-31

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    31

Item 4.

   Controls and Procedures    31
     PART II—OTHER INFORMATION     

Item 2.

   Changes in Securities and Use of Proceeds    31

Item 4.

   Submission of Matters to a Vote of Security Holders    32

Item 6.

   Exhibits and Reports on Form 8-K    33

Signatures

   34

 

2


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

(Unaudited)

 

     June 30,
2003


    December 31,
2002


 

ASSETS

                

Real estate owned:

                

Real estate held for investment (Note 2)

   $ 4,070,585     $ 3,908,746  

Less: accumulated depreciation

     (810,978 )     (742,876 )
    


 


       3,259,607       3,165,870  

Real estate under development

     38,552       30,624  

Real estate held for disposition (net of accumulated depreciation of $13,022 and $5,857) (Note 3)

     81,299       22,256  
    


 


Total real estate owned, net of accumulated depreciation

     3,379,458       3,218,750  

Cash and cash equivalents

     1,627       3,152  

Restricted cash

     7,147       11,773  

Deferred financing costs, net

     23,801       17,548  

Investment in unconsolidated development joint venture (Note 4)

     3,581       —    

Other assets

     30,440       24,870  

Real estate held for disposition assets

     284       43  
    


 


Total assets

   $ 3,446,338     $ 3,276,136  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Secured debt (Note 5)

   $ 1,045,178     $ 1,015,740  

Unsecured debt (Note 6)

     1,062,647       1,041,900  

Real estate taxes payable

     24,032       29,743  

Accrued interest payable

     11,631       11,908  

Security deposits and prepaid rent

     20,931       21,379  

Distributions payable

     38,197       35,141  

Accounts payable, accrued expenses, and other liabilities

     42,196       49,634  

Real estate held for disposition liabilities

     2,804       204  
    


 


Total liabilities

     2,247,616       2,205,649  

Minority interests

     89,227       69,216  

Shareholders’ equity:

                

Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized;

                

5,416,009 shares 8.60% Series B Cumulative Redeemable issued and outstanding (5,416,009 in 2002)

     135,400       135,400  

6,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (8,000,000 in 2002)

     131,250       175,000  

3,425,217 shares 8.00% Series E Cumulative Convertible issued and outstanding (0 in 2002)

     56,893       —    

Common stock, $1 par value; 250,000,000 shares authorized 115,885,074 shares issued and outstanding (106,605,259 in 2002)

     115,885       106,605  

Additional paid-in capital

     1,280,072       1,140,786  

Distributions in excess of net income

     (596,406 )     (541,428 )

Deferred compensation—unearned restricted stock awards

     (6,736 )     (2,504 )

Notes receivable from officer-shareholders

     (2,291 )     (2,630 )

Accumulated other comprehensive loss, net (Note 10)

     (4,572 )     (9,958 )
    


 


Total shareholders’ equity

     1,109,495       1,001,271  
    


 


Total liabilities and shareholders’ equity

   $ 3,446,338     $ 3,276,136  
    


 


 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three months ended June 30,

    Six months ended June 30,

 
     2003

    2002

    2003

    2002

 

REVENUES

                                

Rental income

   $ 149,118     $ 144,353     $ 297,194     $ 286,721  

Non-property income

     194       400       396       747  
    


 


 


 


Total revenues

     149,312       144,753       297,590       287,468  

EXPENSES

                                

Rental expenses:

                                

Real estate taxes and insurance

     17,106       16,473       34,241       32,629  

Personnel

     14,699       13,794       29,714       27,866  

Utilities

     8,760       7,808       17,806       16,101  

Repair and maintenance

     9,385       8,349       18,729       16,571  

Administrative and marketing

     5,689       4,795       11,137       10,125  

Property management

     4,201       4,354       8,379       8,716  

Other operating expenses

     316       322       610       656  

Real estate depreciation

     38,944       36,507       77,542       71,473  

Interest

     29,594       32,569       61,094       64,014  

Loss/(gain) on early debt retirement

     —         447       (171 )     15,389  

General and administrative

     5,144       4,884       10,594       12,505  

Other depreciation and amortization

     765       1,211       1,519       2,266  
    


 


 


 


Total expenses

     134,603       131,513       271,194       278,311  
    


 


 


 


Income before minority interests and discontinued operations

     14,709       13,240       26,396       9,157  

Minority interests of outside partnerships

     (239 )     (266 )     (614 )     (721 )

Minority interests of unitholders in operating partnerships

     (63 )     (369 )     (368 )     353  
    


 


 


 


Income before discontinued operations

     14,407       12,605       25,414       8,789  

Income from discontinued operations, net of minority interests (Note 3)

     1,077       14,783       3,510       16,938  
    


 


 


 


Net income

     15,484       27,388       28,924       25,727  

Distributions to preferred shareholders—Series B

     (2,911 )     (2,911 )     (5,822 )     (5,822 )

Distributions to preferred shareholders—Series D (Convertible)

     (3,393 )     (3,964 )     (7,428 )     (7,929 )

Distributions to preferred shareholders—Series E (Convertible)

     (228 )     —         (228 )     —    

Premium on preferred share repurchases

     (6,250 )     —         (6,250 )     —    
    


 


 


 


Net income available to common shareholders

   $ 2,702     $ 20,513     $ 9,196     $ 11,976  
    


 


 


 


Earnings per common share—basic and diluted:

                                

Income/(loss) before discontinued operations, net of minority interests

   $ 0.01     $ 0.05     $ 0.05     $ (0.05 )

Income from discontinued operations, net of minority interests

   $ 0.01     $ 0.14     $ 0.03     $ 0.16  

Net income available to common shareholders

   $ 0.02     $ 0.19     $ 0.08     $ 0.11  

Common distributions declared per share

   $ 0.2850     $ 0.2775     $ 0.5700     $ 0.5550  

Weighted average number of common shares outstanding—basic

     112,467       107,016       110,169       105,349  

Weighted average number of common shares outstanding—diluted

     113,439       108,242       111,101       106,454  

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended June 30,

 
     2003

       2002

 

Operating Activities

                   

Net income

   $ 28,924        $ 25,727  

Adjustments to reconcile net income to net cash provided by operating activities:

                   

Depreciation and amortization

     80,616          81,253  

Gains on sales of land and depreciable property

     (933 )        (12,744 )

Minority interests

     1,209          1,495  

Premium on preferred stock conversion

     6,250          —    

(Gain) / loss on early debt retirement

     (171 )        16,762  

Amortization of deferred financing costs and other

     2,942          1,955  

Changes in operating assets and liabilities:

                   

Decrease in operating liabilities

     (9,648 )        (7,033 )

(Increase) / decrease in operating assets

     (2,133 )        9,527  
    


    


Net cash provided by operating activities

     107,056          116,942  

Investing Activities

                   

Proceeds from sales of real estate investments, net

     11,350          91,772  

Acquisition of real estate assets, net of liabilities assumed and equity

     (135,025 )        (179,496 )

Development of real estate assets

     (9,661 )        (7,411 )

Capital expenditures and other major improvements—real estate assets, net of escrow reimbursement

     (23,535 )        (21,519 )

Capital expenditures—non-real estate assets

     (480 )        (1,010 )
    


    


Net cash used in investing activities

     (157,351 )        (117,664 )

Financing Activities

                   

Proceeds from the issuance of secured debt

     37,415          324,282  

Scheduled principal payments on secured debt

     (7,746 )        (6,488 )

Non-scheduled principal payments and prepayment penalties on secured debt

     —            (287,139 )

Proceeds from the issuance of unsecured debt

     149,250          198,476  

Payments and prepayment penalties on unsecured debt

     (207,307 )        (54,280 )

Net proceeds / (repayment) of revolving bank debt

     78,200          (148,000 )

Payment of financing costs

     (7,413 )        (4,024 )

Proceeds from the issuance of common stock

     91,312          57,707  

Distributions paid to minority interests

     (4,024 )        (4,356 )

Distributions paid to preferred shareholders

     (13,858 )        (13,653 )

Distributions paid to common shareholders

     (66,988 )        (57,605 )

Repurchase of common stock

     (71 )        (3,260 )
    


    


Net cash provided by financing activities

     48,770          1,660  

Net (decrease)/increase in cash and cash equivalents

     (1,525 )        938  

Cash and cash equivalents, beginning of period

     3,152          4,641  
    


    


Cash and cash equivalents, end of period

   $ 1,627        $ 5,579  
    


    


Supplemental Information:

                   

Interest paid during the period

   $ 59,986        $ 69,913  

Issuance of restricted stock awards

     5,286          2,904  

Non-cash transactions:

                   

Secured debt assumed with the acquisition of properties

     —            29,076  

Issuance of preferred stock in connection with acquisitions

     58,811          —    

Issuance of preferred operating partnership units in connection with acquisitions

     26,872          —    

Reduction in secured debt from the disposition of properties

     —            14,193  

Conversion of operating partnership minority interests to common stock (38,423 shares in 2003 and 80,104 shares in 2002)

     476          1,063  

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, excepts share data)

(Unaudited)

 

    Preferred Stock

    Common Stock

   

Additional
Paid-in

Capital


    Distributions in
Excess of
Net Income


   

Deferred

Compensation—
Unearned Restricted

Stock Awards


   

Notes Receivable
from Officer—

Shareholders


   

Accumulated
Other

Comprehensive
Loss


    Total

 
    Shares

    Amount

    Shares

    Amount

             

Balance, December 31, 2002

  13,416,009     $ 310,400     106,605,259     $ 106,605     $ 1,140,786     $ (541,428 )   $ (2,504 )   $ (2,630 )   $ (9,958 )   $ 1,001,271  

Comprehensive Income

                                                                           

Net income

                                        28,924                               28,924  

Other comprehensive income:

                                                                           

Unrealized gain on derivative instruments (Note 7)

                                                                5,386       5,386  
                                       


                 


 


Comprehensive income

                                        28,924                       5,386       34,310  
                                       


                 


 


Issuance of common shares to employees, officers and director-shareholders

                726,533       727       8,563                                       9,290  

Issuance of common shares through dividend reinvestment and stock purchase plan

                4,564       5       52                                       57  

Issuance of common shares through public offering

                5,100,000       5,100       76,510                                       81,610  

Issuance of 8.00% Series E Cumulative Convertible shares

  3,425,217       56,893                     1,918                                       58,811  

Purchase of common stock

                (4,564 )     (5 )     (66 )                                     (71 )

Issuance of restricted stock awards

                337,936       338       4,948               (5,286 )                     —    

Adjustment for conversion of minority interests of unitholders in operating partnerships

                38,423       38       438                                       476  

Principal repayments on notes receivable from officer-shareholders

                                                        339               339  

Conversion of 7.50% Series D Cumulative Convertible Redeemable shares

  (2,000,000 )     (43,750 )   3,076,923       3,077       46,923                                       6,250  

Common stock distributions declared ($0.5700 per share)

                                        (70,424 )                             (70,424 )

Preferred stock distributions declared-Series B ($1.075 per share)

                                        (5,822 )                             (5,822 )

Preferred stock distributions declared-Series D ($1.018 per share)

                                        (7,428 )                             (7,428 )

Preferred stock distributions declared-Series E ($0.3322 per share)

                                        (228 )                             (228 )

Amortization of deferred compensation

                                                1,054                       1,054  
   

 


 

 


 


 


 


 


 


 


Balance, June 30, 2003

  14,841,226     $ 323,543     115,885,074     $ 115,885     $ 1,280,072     $ (596,406 )   $ (6,736 )   $ (2,291 )   $ (4,572 )   $ 1,109,495  
   

 


 

 


 


 


 


 


 


 


 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

1. CONSOLIDATION AND BASIS OF PRESENTATION

 

The accompanying consolidated financial statements include the accounts of United Dominion Realty Trust, Inc. 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, 2003, there were 108,996,263 units in the Operating Partnership outstanding, of which 99,189,107 units, or 91.0%, were owned by United Dominion and 9,807,156 units, or 9.0%, were owned by non-affiliated limited partners. As of June 30, 2003, there were 3,492,889 units in the Heritage OP outstanding, of which 3,116,665 units, or 89.2 %, were owned by United Dominion and 376,224 units, or 10.8%, were owned by non-affiliated limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the operating partnerships.

 

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, 2002, filed with the Securities and Exchange Commission as amended on Form 8-K filed May 14, 2003.

 

In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at June 30, 2003 and results of operations for the interim periods ended June 30, 2003 and 2002. Such adjustments are normal and recurring in nature. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim results presented are not necessarily indicative of results that can be expected for a full year.

 

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

 

2. REAL ESTATE HELD FOR INVESTMENT

 

At June 30, 2003, there are 257 communities with 73,791 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment at June 30, (dollars in thousands):

 

    

June 30,

2003


    December 31,
2002


 

Land and land improvements

   $ 757,629     $ 718,109  

Buildings and improvements

     3,100,304       2,980,941  

Furniture, fixtures, and equipment

     212,652       209,696  
    


 


Real estate held for investment

     4,070,585       3,908,746  

Accumulated depreciation

     (810,978 )     (742,876 )
    


 


Real estate held for investment, net

   $ 3,259,607     $ 3,165,870  
    


 


 

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Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

3. INCOME FROM DISCONTINUED OPERATIONS

 

During 2002, United Dominion sold 25 communities with a total of 6,990 apartment homes, one parcel of land, and one commercial property with 143,000 square feet. For the six months ended June 30, 2003, United Dominion sold one community with a total of 220 apartment homes and one commercial property with 104,000 square feet. At June 30, 2003, United Dominion had seven communities with 2,063 apartment homes and a net book value of $75.7 million and two parcels of land with a net book value of $5.6 million included in real estate held for disposition. The results of operations for these properties and the interest expense associated with the secured debt on these properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations, net of minority interests.”

 

The following is a summary of income from discontinued operations for the three and six months ended June 30, 2003 and 2002 (dollars in thousands):

 

    

Three Months Ended

June 30,


    

Six Months Ended

June 30,


 
     2003

    2002

     2003

     2002

 

Rental income

   $ 3,861     $ 14,438      $ 7,990      $ 31,106  

Rental expenses

     1,738       6,240        3,608        12,980  

Real estate depreciation

     848       3,113        1,555        7,433  

Interest

     —         599        —          1,616  

Loss on early debt retirement

     —         507        —          1,373  

Impairment loss on real estate and investments

     —         —          —          2,301  

Other expenses

     17       37        23        82  
    


 


  


  


       2,603       10,496        5,186        25,785  

Income before (loss)/gains on sales of investments, and minority interests

     1,258       3,942        2,804        5,321  

(Loss)/gains on sales of depreciable property

     (111 )     11,825        933        12,744  
    


 


  


  


Income before minority interests

     1,147       15,767        3,737        18,065  

Minority interests on income from discontinued operations

     (70 )     (984 )      (227 )      (1,127 )
    


 


  


  


Income from discontinued operations, net of minority interests

   $ 1,077     $ 14,783      $ 3,510      $ 16,938  
    


 


  


  


 

8


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

4. INVESTMENT IN UNCONSOLIDATED DEVELOPMENT JOINT VENTURE

 

On September 10, 2002, United Dominion signed a development joint venture agreement with AEGON USA Realty Advisors, Inc. in which United Dominion is serving as the managing member. The venture is expected to develop approximately eight to ten garden style apartment communities over the next three years, with a total development cost of up to $210 million. The venture will obtain bank construction financing for 65% to 80% of total costs and will provide equity contributions for the balance of the costs with AEGON providing 80% and United Dominion providing 20%. United Dominion is serving as the developer, general contractor and property manager for the venture and has guaranteed those project development costs, excluding financing costs (including fees and interest), which exceed the defined project cost budgeted amounts. In June 2003, United Dominion contributed land with a carrying value of $3.8 million to the joint venture.

 

The following is a summary of the financial position of the joint venture as of June 30, 2003 (dollars in thousands):

 

Assets

      

Real estate under development

   $ 3,798

Cash and cash equivalents

     581

Deferred financing costs

     24

Other assets

     68
    

Total assets

   $ 4,471
    

Liabilities and Partners’ Capital

      

Accounts payable and other accrued liabilities

   $ 48

Partners’ capital

     4,423
    

Total liabilities and partners’ capital

   $ 4,471
    

 

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Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

5. SECURED DEBT

 

Secured debt on continuing and discontinued operations, which encumbers $1.6 billion or 37.7% of United Dominion’s real estate owned ($2.6 billion or 62.3% of United Dominion’s real estate owned is unencumbered) consists of the following at June 30, 2003 (dollars in thousands):

 

     Principal Outstanding

   Weighted
Average
Interest Rate


    Weighted
Average
Years to Maturity


   Number of
Communities
Encumbered


    

June 30,

2003


  

December 31,

2002


   2003

    2003

   2003

Fixed Rate Debt

                             

Mortgage notes payable (a)

   $ 186,024    $ 187,927    7.57 %   6.2    13

Tax-exempt secured notes payable

     55,450      61,278    6.55 %   10.8    7

Fannie Mae credit facilities

     288,875      288,875    6.40 %   7.5    9

Fannie Mae credit facilities—swapped

     17,000      17,000    6.74 %   0.8    —  
    

  

  

 
  

Total fixed rate secured debt

     547,349      555,080    6.83 %   7.2    29

Variable Rate Debt

                             

Mortgage notes payable

     48,921      11,752    3.31 %   9.2    5

Tax-exempt secured notes payable

     7,770      7,770    1.31 %   24.7    1

Fannie Mae credit facilities

     370,469      370,469    1.71 %   13.9    51

Freddie Mac credit facility

     70,669      70,669    1.73 %   7.6    8
    

  

  

 
  

Total variable rate secured debt

     497,829      460,660    1.86 %   12.7    65
    

  

  

 
  

Total Secured Debt

   $ 1,045,178    $ 1,015,740    4.46 %   9.8    94
    

  

  

 
  

(a)   Includes fair value adjustments aggregating $1.8 million at June 30, 2003 and $2.2 million at December 31, 2002, recorded in connection with the assumption of debt associated with two acquisitions consummated in 1998.

 

Approximate principal payments due during each of the next five calendar years and thereafter, as of June 30, 2003, are as follows (dollars in thousands):

 

Year


     Fixed Rate
Maturities


     Variable Rate
Maturities


     Total
Secured
Maturities


2003

     $ 15,589      $ 222      $ 15,811

2004

       60,112        463        60,575

2005

       18,935        4,928        23,863

2006

       32,256        3,845        36,101

2007

       7,252        146        7,398

Thereafter

       413,205        488,225        901,430
      

    

    

       $ 547,349      $ 497,829      $ 1,045,178
      

    

    

 

For the six months ended June 30, 2002, United Dominion recognized $16.8 million ($0.16 per diluted share) of expense as a result of prepayment penalties incurred from the refinancing of certain secured loans, using proceeds from the Fannie Mae and Freddie Mac credit facilities, and the early payoff of loans on the sale of properties.

 

10


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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

6. UNSECURED DEBT

 

A summary of unsecured debt at June 30, 2003 and December 31, 2002 is as follows (dollars in thousands):

 

     2003

     2002

Commercial Banks

               

Borrowings outstanding under an unsecured credit facility due March 2007 (a)

   $ 254,000      $ —  

Borrowings outstanding under an unsecured credit facility due August 2003(a)

     —          175,800

Borrowings outstanding under an unsecured term loan due May 2004–2005 (a)

     —          100,000
       

Senior Unsecured Notes—Other

               

7.65% Medium-Term Notes due January 2003

     —          10,000

7.22% Medium-Term Notes due February 2003

     —          11,815

8.63% Notes due March 2003

     —          78,005

7.98% Notes due March 2002–2003

     —          7,428

5.05% City of Portland, OR Bonds due October 2003

     7,345        7,345

7.67% Medium-Term Notes due January 2004

     46,585        46,585

7.73% Medium-Term Notes due April 2005

     21,100        21,100

7.02% Medium-Term Notes due November 2005

     49,760        49,760

7.95% Medium-Term Notes due July 2006

     85,374        85,374

7.07% Medium-Term Notes due November 2006

     25,000        25,000

7.25% Notes due January 2007

     92,255        92,265

4.50% Medium-Term Notes due March 2008 (b)

     150,000        —  

ABAG Tax-Exempt Bonds due August 2008

     46,700        46,700

8.50% Monthly Income Notes due November 2008

     29,081        29,081

6.50% Notes due June 2009

     200,000        200,000

8.50% Debentures due September 2024 (c)

     54,118        54,118

Other (d)

     1,329        1,524
    

    

       808,647        766,100
    

    

Total Unsecured Debt

   $ 1,062,647      $ 1,041,900
    

    


(a)   During the first quarter of 2003, United Dominion closed on a new three-year $500 million unsecured revolving credit facility. The credit facility replaced United Dominion’s $375 million unsecured revolving credit facility and $100 million unsecured term loan. If United Dominion receives commitments from additional lenders or if the initial lenders increase their commitments, United Dominion will be able to increase the credit facility to $650 million. At United Dominion’s option, the credit facility can be extended for one year to March 2007. At June 30, 2003, United Dominion had seven interest rate swap agreements associated with commercial bank borrowings under the revolver with an aggregate notional value of $151.5 million under which United Dominion paid a fixed rate of interest and received a variable rate of interest on the notional amounts. The interest rate swaps, which mature from August 2003 through July 2004, effectively change United Dominion’s interest rate exposure on the $151.5 million of borrowings from a variable rate to a weighted average fixed rate of approximately 7.7%. As of June 30, 2003, the weighted average interest rate of the $254 million in commercial borrowings, after giving effect to swap agreements, was 5.4%.
(b)   In February 2003, United Dominion issued $150 million of 4.50% senior unsecured medium-term notes due in March 2008. The net proceeds of $149.3 million from the sale were used to repay amounts outstanding on United Dominion’s $375 million unsecured revolving credit facility.
(c)   Includes an investor put feature that grants a one-time option to redeem the debentures in September 2004.
(d)   Includes $1.3 million and $1.5 million at June 30, 2003 and December 31, 2002, respectively, of 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

JUNE 30, 2003

(UNAUDITED)

 

7. FINANCIAL INSTRUMENTS

 

United Dominion accounts for its derivative instruments in accordance with Statements of Financial Accounting Standards No. 133 and 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” At June 30, 2003, all of United Dominion’s derivative financial instruments are interest rate swap agreements that are designated as cash flow hedges of debt with variable interest rate features, and are qualifying hedges for financial reporting purposes. For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

 

The fair value of United Dominion’s derivative instruments is reported on the balance sheet at their current fair value. Estimated fair values for interest rate swaps rely on prevailing market interest rates. These fair value amounts should not be viewed in isolation, but rather in relation to the values of the underlying hedged transactions and investments and to the overall reduction in exposure to adverse fluctuations in interest rates. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. The interest rate swaps involve the periodic exchange of payments over the life of the related agreements. Amounts received or paid on the interest rate swaps are recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt based on the accrual method of accounting. The related amounts payable to and receivable from counterparties are included in other liabilities and other assets, respectively.

 

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

The following table presents the fair values of United Dominion’s derivative financial instruments outstanding, based on external market quotations, as of June 30, 2003 (dollars in thousands):

 

Notional

Amount


   Fixed
Rate


    Type of
Contract


   Effective
Date


   Contract
Maturity


   Fair
Value


 
  Secured Debt:                              
  FNMA                              

$

10,000

   6.92 %   Swap    12/01/99    04/01/04      (445 )

 

7,000

   6.48 %   Swap    06/30/99    06/30/04    $ (400 )


  

                


 

17,000

   6.74 %                    (845 )

 

Unsecured Debt:

                             

 

Bank Credit Facility

                             

 

25,000

   7.29 %   Swap    11/01/00    08/01/03      (215 )

 

25,000

   7.29 %   Swap    11/01/00    08/01/03      (215 )

 

25,000

   7.11 %   Swap    12/01/00    08/01/03      (208 )

 

25,000

   7.11 %   Swap    12/04/00    08/01/03      (208 )

 

23,500

   8.52 %   Swap    11/15/00    05/15/04      (1,197 )

 

23,000

   8.52 %   Swap    11/15/00    05/15/04      (1,172 )

 

5,000

   8.65 %   Swap    06/26/95    07/01/04      (284 )


  

                


 

151,500

   7.65 %                    (3,499 )


  

                


$

168,500

   7.56 %                  $ (4,344 )


  

                


 

During the quarter ended June 30, 2003, United Dominion recognized $2.3 million of unrealized gains in comprehensive income and $0.3 million of gain was recorded to net income for what would be the ineffective portion of our hedging instruments. In addition, United Dominion has recognized $4.3 million of derivative financial instrument liabilities on the Consolidated Balance Sheet.

 

As of June 30, 2003, United Dominion expects to reclassify $4.3 million of net losses on derivative instruments from accumulated other comprehensive loss to earnings (interest expense which, combined with the interest paid on the underlying debt, results in interest expense at the fixed rates shown above) during the next twelve months on the related hedged transactions.

 

8. EARNINGS PER SHARE

 

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

 

13


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

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

 

     Three months ended
June 30,


    Six months ended
June 30,


 
     2003

    2002

    2003

    2002

 

Numerator for basic and diluted earnings per share—Net income available to common shareholders

   $ 2,702     $ 20,513     $ 9,196     $ 11,976  
    


 


 


 


Denominator:

                                

Denominator for basic earnings per share—Weighted average common shares outstanding

     112,952       107,293       110,525       105,626  

Non-vested restricted stock awards

     (485 )     (277 )     (356 )     (277 )
    


 


 


 


       112,467       107,016       110,169       105,349  
    


 


 


 


Effect of dilutive securities:

                                

Employee stock options and non-vested restricted stock awards

     972       1,226       932       1,105  
    


 


 


 


Denominator for diluted earnings per share

     113,439       108,242       111,101       106,454  
    


 


 


 


Basic and diluted earnings per share

   $ 0.02     $ 0.19     $ 0.08     $ 0.11  
    


 


 


 


 

The effect of the conversion of the operating partnership units 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, 2003 would be 7,286,193 and 7,124,753 and 7,003,884 and 7,029,393 for the three and six months ended June 30,2002. If the convertible preferred stock was converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2003 would be 11,632,713 and 11,968,318 weighted average common shares and 12,307,692 weighted average common shares for the three and six months ended June 30, 2002.

 

9. STOCK-BASED COMPENSATION

 

United Dominion has elected to follow the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for its employee stock options because the alternative fair value accounting provided for under Statement 123, “Accounting for Stock Based Compensation” (“SFAS 123”), requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of United Dominion’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized.

 

14


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

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

 

     Three months ended
June 30,


    Six months ended
June 30,


 
     2003

    2002

    2003

    2002

 

Reported net income available to common shareholders

   $ 2,702     $ 20,514     $ 9,196     $ 11,976  

Stock-based employee compensation cost included in net income

     543       403       1,056       747  

Stock-based employee compensation cost that would have been included in net income under the fair value method

     (617 )     (499 )     (1,204 )     (843 )
    


 


 


 


Adjusted net income available to common shareholders

   $ 2,628     $ 20,418     $ 9,048     $ 11,880  
    


 


 


 


Earnings per common share—basic and diluted

                                

As reported

   $ 0.02     $ 0.19     $ 0.08     $ 0.11  

Pro forma

   $ 0.02     $ 0.19     $ 0.08     $ 0.11  

 

10. COMPREHENSIVE INCOME

 

Total comprehensive income for the three and six months ended June 30, 2003 and 2002 was $17.8 million and $34.3 million for 2003 and $26.1 million and $27.6 million for 2002, respectively. The difference between net income and total comprehensive income is primarily due to the fair value accounting for interest rate swaps.

 

11. COMMITMENTS AND CONTINGENCIES

 

Commitments

 

United Dominion is committed to completing its real estate currently under development, which has an estimated cost to complete of $53.1 million at June 30, 2003.

 

Contingencies

 

Series A Out-Performance Program

 

In May 2001, the shareholders of United Dominion approved the Series A Out-Performance Program (the “Series A Program”) pursuant to which executives and other key officers of United Dominion (the “participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in a limited liability company (the “Series A LLC”), the only assets of which are a special class of partnership units of the Operating Partnership (“Series A Out-Performance Partnership Shares” or “Series A OPPSs”), for an initial investment of $1.27 million (the full market value of the Series A OPPSs at inception, as determined by an independent investment banking firm). The Series A Program measured United Dominion’s performance over a 28-month period beginning February 2001 and ending on May 31, 2003.

 

The Series A Program was designed to provide participants with the possibility of substantial returns on their investment if United Dominion’s total return, as measured by the cumulative amount of dividends paid plus share price appreciation on its common stock during the measurement period, exceeded the greater of (a) industry average (defined as the total cumulative return of the Morgan Stanley REIT Index over the same period) or (b) a 30% total return (12% annualized).

 

15


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

At the conclusion of the measurement period on May 31, 2003, United Dominion’s total return satisfied these criteria. As a result, the Series A LLC as holder of the Series A OPPSs will receive distributions and allocations of income and loss from the Operating Partnership equal to the distributions and allocations that would be received on 1,853,204 interests in the Operating Partnership (“OP Units”), which distributions and allocations will be distributed to the participants on a pro rata basis based on ownership of the Series A LLC.

 

Series B Out-Performance Program

 

In May 2003, the shareholders of United Dominion approved the Series B Out-Performance Program (the “Series B Program”) pursuant to which executives of United Dominion (the “participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in a limited liability company (the “Series B LLC”), the only assets of which are a special class of partnership units of the Operating Partnership (“Series B Out-Performance Partnership Shares” or “Series B OPPSs”), for an initial investment of $1.0 million (the full market value of the Series B OPPSs at inception, as determined by an independent investment banking firm). The Series B Program will measure United Dominion’s performance over a 24-month period beginning June 2003.

 

The Series B Program is designed to provide participants with the possibility of substantial returns on their investment if United Dominion’s total return, as measured by the cumulative amount of dividends paid plus share price appreciation, on its common stock during the measurement period, exceeds the greater of (a) industry average (defined as the total cumulative return of the Morgan Stanley REIT Index over the same period) or (b) a 22% total return (11% annualized) (the “minimum return”).

 

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

 

  i.   determining the amount by which the cumulative total return of United Dominion’s common stock over the measurement period exceeds the greater of the cumulative total return of the peer group index (the Morgan Stanley REIT Index) or the minimum return (such being the “excess return”);

 

  ii.   multiplying 5% of the excess return by United Dominion’s market capitalization (defined as the average number of shares and OP Units outstanding over the 24-month period multiplied by the daily closing price of United Dominion’s common stock) up to a maximum of 2% of market capitalization; and

 

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

 

If, on the valuation date, the cumulative total return of United Dominion’s common stock does not meet the minimum return or the total return of the peer group and there is no excess return, then the participants will forfeit their entire initial investment of $1.0 million. It is this feature, combined with the fact that management paid market value for the indirect interest in the Series B OPPSs, that we believe makes this program better than previous programs, such as stock options, that were likewise designed to motivate and retain executives and key management, by ensuring that management’s goals are perpetually aligned with the shareholders.

 

12. RELATED PARTY TRANSACTIONS

 

As of June 30, 2003, United Dominion has $2.3 million of notes receivable from certain officers and directors of United Dominion (original principal balances of $2.7 million), at an interest rate of 7.0% that mature between December 2003 and October 2005. The purpose of the loans was for the borrowers to purchase shares of United Dominion’s common stock pursuant to United

 

16


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

Dominion’s 1991 Stock Purchase and Loan Plan. The loans are evidenced by promissory notes between the borrowers and United Dominion and are secured by a pledge of the shares of common stock (218,000 shares with a market value of $3.8 million at June 30, 2003). The notes require that dividends received on the shares be applied towards payment of the notes.

 

In addition, United Dominion entered into a Servicing and Purchase Agreement (the “ Servicing Agreement”) with SunTrust Bank (the “Bank”) whereby United Dominion has agreed to act as servicing agent for and to purchase certain loans made by the Bank to officers and directors of United Dominion (the “Borrowers”) to finance the purchase of shares of United Dominion’s common stock. The loans are evidenced by promissory notes (“Notes”) between each Borrower and the Bank. The Servicing Agreement provides that the Bank can require United Dominion to purchase the Notes upon an event of default by the Borrower or United Dominion under the Servicing Agreement and at certain other times during the term of the Servicing Agreement. The aggregate outstanding principal balance of the Notes as of June 30, 2003 was $9.0 million (original principal balance was $10.3 million), and all of the Notes mature during 2004. Because certain of the Borrowers elected floating rate loans and others elected fixed rate loans, the interest rates on these loans as of June 30, 2003 ranged from 2.08% to 7.68%. Each Borrower entered into a Participation Agreement with United Dominion that requires that all cash dividends received on the shares (870,113 shares at June 30, 2003 with a closing market value of $15.0 million) be applied towards payment of the Notes. Based upon the fact that 100% of all cash dividend payments are paid to amortize the Notes and that the Notes are recourse to the Borrowers, United Dominion believes that its exposure to liability under the Notes is remote.

 

13. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities.” This statement refines the identification process of variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to consolidate that entity. United Dominion, from time to time, enters into partnership and joint venture arrangements, which may be required to be consolidated under this statement. As of June 30, 2003, none of United Dominion’s joint venture investments require consolidation. The provisions of Interpretation 46 are applicable to joint ventures created before January 1, 2003 for the first reporting period which begins after June 15, 2003. United Dominion is currently assessing the impact that this interpretation will have on its consolidated financial position and results of operations.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation, Transition and Disclosure” (“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition disclosure requirements of SFAS 148 are effective for the fiscal year 2003. The interim and annual disclosure requirements are effective for the third quarter of 2003. As of January 1, 2003, United Dominion elected to adopt the disclosure requirements of SFAS 148.

 

In November 2002, the FASB issued Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that a liability for the fair value of a guarantee be recognized at the time the obligation is undertaken. The statement also requires that the liability be measured over the term of the related guarantee. This statement is effective for all guarantees entered into subsequent to December 31, 2002. For all guarantees entered into prior to December 31, 2002, there is to be no change in accounting; however, disclosure of management’s estimate of its future obligation under the guarantee is to be made. As of June 30, 2003, management estimates that its likelihood of funding its guarantor obligations is remote and that the impact to United Dominion would be immaterial.

 

In April 2002, the FASB issued Statement 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction” (“SFAS No. 145”). Statement 4, “Reporting Gains and Losses from Extinguishment of

 

17


Table of Contents

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

Debt” (“SFAS No. 4”), required that gains and losses from the extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item. As of March 31, 2003, United Dominion has recorded current period items and reclassified prior period items that do not meet the extraordinary classification into continuing operations in accordance with the provisions of SFAS No. 145.

 

14. SUBSEQUENT EVENTS

 

On July 31, 2003, United Dominion completed the sale of $50 million of 4.50% senior unsecured notes due in March 2008 under its existing shelf registration. The net proceeds from the issuance of approximately $49.9 million are anticipated to be used to repay amounts outstanding on United Dominion’s $500 million unsecured revolving credit facility.

 

Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  

 

Forward-Looking Statements

 

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of United Dominion Realty Trust, Inc. to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting 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. In June 2003, United Dominion changed its state of incorporation from Virginia to Maryland. 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.

 

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, in markets where we have a significant share and long-term rent growth prospects are greatest, 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—Operational excellence is a way of conducting business with consistent, disciplined, and efficient systems and business processes throughout our organization, to provide residents, suppliers, and associates with predictable,

 

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positive experiences, regardless of location. Through operational excellence, we believe that we can enhance the performance of 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 residents who cannot typically afford an entry-level home, or residents 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 while maintaining sufficient geographic diversification. 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.

 

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At June 30, 2003, United Dominion’s portfolio included 264 communities with 75,854 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 June 30, 2003

  

Three Months Ended

June 30, 2003


  

Six Months Ended

June 30, 2003


     Number of
Apartment
Communities


   Number of
Apartment
Homes


   Percentage of
Carrying
Value


    Carrying
Value
(in thousands)


   Average
Physical
Occupancy


    Average
Monthly
Rental Rates


   Average
Physical
Occupancy


    Average
Monthly
Rental Rates


Southern California

   9    2,626    6.4 %   $ 268,355    94.6 %   $ 993    94.8 %   $ 979

Dallas, TX

   15    5,133    6.3 %     263,209    95.2 %     666    95.3 %     673

Houston, TX

   22    5,726    5.6 %     233,518    91.4 %     635    90.5 %     639

Phoenix, AZ

   11    3,635    5.2 %     217,536    92.4 %     714    92.1 %     715

Orlando, FL

   14    4,140    5.0 %     208,885    94.1 %     708    93.6 %     712

Raleigh, NC

   11    3,663    4.9 %     205,740    93.8 %     737    93.4 %     739

Tampa, FL

   11    3,836    4.4 %     186,213    93.7 %     701    93.6 %     700

Metropolitan DC

   8    2,331    4.2 %     174,085    96.1 %     975    96.0 %     973

Arlington, TX

   10    3,465    3.8 %     159,073    94.7 %     657    94.8 %     663

Columbus, OH

   6    2,530    3.6 %     149,818    93.4 %     676    93.4 %     678

Monterey Peninsula, CA

   9    1,706    3.5 %     147,705    93.5 %     926    93.1 %     919

San Francisco, CA

   4    980    3.4 %     141,514    95.4 %     1,518    95.8 %     1,527

Charlotte, NC

   10    2,711    3.3 %     139,839    96.1 %     604    96.0 %     604

Nashville, TN

   8    2,220    2.9 %     121,246    94.0 %     656    93.7 %     658

Greensboro, NC

   8    2,122    2.5 %     105,179    94.1 %     577    93.9 %     578

Richmond, VA

   8    2,372    2.4 %     98,790    95.2 %     708    95.5 %     709

Wilmington, NC

   6    1,868    2.2 %     91,666    91.4 %     628    91.3 %     631

Baltimore, MD

   7    1,470    2.2 %     90,201    95.7 %     899    95.8 %     900

Atlanta, GA

   6    1,426    1.8 %     72,961    90.8 %     662    91.6 %     670

Columbia, SC

   6    1,584    1.5 %     63,159    93.0 %     599    93.4 %     598

Jacksonville, FL

   3    1,157    1.4 %     59,372    96.2 %     679    96.4 %     678

Norfolk, VA

   6    1,438    1.3 %     55,219    95.3 %     725    95.3 %     721

Lansing, MI

   4    1,226    1.2 %     51,042    93.8 %     649    94.4 %     654

Seattle, WA

   3    628    0.8 %     34,438    93.8 %     734    92.6 %     739

Other Western

   6    2,650    3.8 %     158,159    91.5 %     777    90.5 %     785

Other Pacific

   8    2,275    3.0 %     124,572    91.3 %     751    91.9 %     752

Other Southwestern

   8    2,077    2.6 %     110,984    89.1 %     662    88.1 %     674

Other Florida

   8    2,089    2.6 %     108,567    94.2 %     843    94.9 %     843

Other Midwestern

   10    2,123    2.3 %     96,111    94.5 %     619    94.5 %     622

Other North Carolina

   8    1,893    1.8 %     76,500    93.2 %     573    93.1 %     576

Other Southeastern

   4    1,394    1.7 %     70,067    90.9 %     580    90.4 %     581

Other Mid-Atlantic

   5    928    1.0 %     43,247    96.1 %     833    96.4 %     827

Other Northeastern

   2    372    0.4 %     18,334    95.4 %     711    95.9 %     709

Real Estate Under Development

   —      60    0.6 %     27,148    —         —      —         —  

Land

   —      —      0.4 %     16,964    —         —      —         —  
    
  
  

 

  

 

  

 

Total

   264    75,854    100.0 %   $ 4,189,416    93.6 %   $ 716    93.5 %   $ 718
    
  
  

 

  

 

  

 

 

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Liquidity and Capital Resources

 

Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. 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.

 

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 its $1.0 billion shelf registration statement. We received net proceeds from this offering, after an underwriting discount, of $31.2 million, which were used to repay debt and for general corporate purposes. In February 2003, United Dominion sold $150 million aggregate principal amount of 4.50% medium-term notes due in March 2008 under a new $300 million medium-term note program. The net proceeds from this issuance of approximately $149.3 million were used to repay amounts outstanding on United Dominion’s unsecured revolving credit facility. In April 2003, United Dominion sold 3.0 million shares of common stock under its $1.0 billion shelf registration statement at a public offering price of $16.97 per share. We received net proceeds from this offering of $49.2 million that were used to acquire additional apartment communities. In May 2003, the underwriters exercised their right to purchase 100,000 shares of common stock through their over-allotment received with the April 2003 offering, and the net proceeds of $1.6 million were used for general corporate purposes. As of June 30, 2003, approximately $766 million of equity and debt securities remain available for use under the shelf registration. 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, with proceeds from the sale of property, with construction loans and, to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be largely financed through the issuance of equity and debt securities, the issuance of operating partnership units, the assumption or placement of secured debt, and by the reinvestment of proceeds from the sale of property in non-strategic markets.

 

During the remainder of 2003, United Dominion has approximately $15.8 million of secured debt and $7.6 million of unsecured debt maturing that we anticipate repaying using proceeds from borrowings under our 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. Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no significant changes in our critical accounting policies from those reported in our 2002 Annual Report on Form 10-K. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.

 

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Statements of Cash Flow

 

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

 

Operating Activities

 

For the six months ended June 30, 2003, United Dominion’s cash flow provided by operating activities was $107.1 million compared to $116.9 million for the same period in 2002. The decrease in cash flow provided by operating activities resulted primarily from a decrease in property operating income provided by our same communities and a decrease in the overall size of United Dominion’s apartment community portfolio (see discussion under “Apartment Community Operations”). These decreases in cash flows were partially offset by a decrease in interest and general and administrative expenses.

 

Investing Activities

 

For the six months ended June 30, 2003, net cash used in investing activities was $157.4 million compared to $117.7 million for the same period in 2002. Changes in the level of investing activities from period to period reflect 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 six months ended June 30, 2003, United Dominion acquired four apartment communities in Orange County, California totaling 1,068 homes, the remaining 47% joint venture partners’ ownership interest in nine communities totaling 1,706 homes in Salinas and Pacific Grove, California, one apartment community with 464 apartment homes in St. Petersburg, Florida, and one parcel of land in Irving, Texas for an aggregate consideration of approximately $247 million. Consistent with our long-term strategic plan to achieve greater operating efficiencies by investing in fewer, more concentrated markets, United Dominion, over the last two years, has been expanding its interests in the fast growing Southern California market. Throughout the remainder of 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.

 

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 the first six months of 2003, $23.5 million or $321 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 $17.5 million or $238 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 $4.2 million or $58 per home and major renovations totaled $1.8 million or $25 per home for the six months ended June 30, 2003.

 

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

 

     Six Months Ended June 30,

   

Six Months Ended

June 30, (per unit)


 
     2003

   2002

   % Change

    2003

   2002

   %
Change


 

Turnover capital expenditures

   $ 6,906    $ 8,235    -16.1 %   $ 94    $ 107    -12.1 %

Other recurring capital expenditures

     10,585      8,647    22.4 %     144      113    27.4 %
    

  

  

 

  

  

Total recurring capital expenditures

     17,491      16,882    3.6 %     238      220    8.2 %

Revenue enhancing improvements

     4,242      4,247    -0.1 %     58      55    5.5 %

Major renovations

     1,802      390    362.1 %     25      5    400.0 %
    

  

  

 

  

  

Total capital improvements

   $ 23,535    $ 21,519    9.4 %   $ 321    $ 280    14.6 %
    

  

  

 

  

  

Repair and maintenance

     19,332      18,525    4.4 %     264      241    9.5 %
    

  

  

 

  

  

Total expenditures

   $ 42,867    $ 40,044    7.0 %   $ 585    $ 521    12.3 %
    

  

  

 

  

  

 

Total capital improvements increased $2.0 million or $41 per home in the first half of 2003 compared to the same period in 2002. 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.

 

Real Estate Under Development

 

Development activity is focused in core markets that have strong operations in place. For the six months ended June 30, 2003, United Dominion invested approximately $9.7 million in development projects, up $2.3 million from $7.4 million for the same period in 2002.

 

The following projects were under development at June 30, 2003:

 

    

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    60    $ 10,300    $ 13,300    $ 74,700    4Q03

2000 Post III

   San Francisco, CA    24    —        2,200      6,600      275,000    3Q04

Rancho Cucamonga

   Los Angeles, CA    414    —        14,700      60,400      145,900    4Q05
         
  
  

  

  

    
          616    60    $ 27,200    $ 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 June 30, 2003 of $11.4 million. Five 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.

 

Development Joint Venture

 

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

 

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financing costs (including fees and interest), which exceed the defined project cost budgeted amounts for each respective project, as they come to fruition.

 

The following joint venture project was under development at June 30, 2003:

 

    

Location


   Number of
Apartment
Homes


   Completed
Apartment
Homes


   Cost to
Date
(In thousands)


   Budgeted
Cost
(In thousands)


   Estimated
Cost
Per Home


   Expected
Completion
Date


Villa Tuscana

   Houston, TX    504    —      $ 3,800    $ 28,400    $ 56,300    4Q05

 

Disposition of Investments

 

For the six months ended June 30, 2003, United Dominion sold one community with 220 apartment homes and one commercial property for an aggregate sales price of approximately $12.2 million and recognized gains for financial reporting purposes of $0.9 million. Proceeds from the sales were used primarily to reduce debt.

 

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.

 

Financing Activities

 

Net cash provided by financing activities during the six months ended June 30, 2003 was $48.8 million compared to net cash provided by financing activities of $1.7 million for the six months ended June 30, 2002. 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 six months ended June 30, 2003:

 

  Repaid $7.7 million of secured debt and $207.3 million of unsecured debt.

 

  Sold 2.0 million shares of common stock at a public offering price of $15.71 per share under our $1 billion shelf registration statement in January 2003. We received net proceeds from this offering, after an underwriting discount, of $31.2 million, which were used to repay debt and for general corporate purposes.

 

  Sold $150 million aggregate principal amount of 4.50% medium-term notes due in March 2008 in February 2003 under a new $300 million medium-term note program. The net proceeds from the issuance of $149.3 million were used to repay amounts outstanding on our $375 million unsecured revolving credit facility.

 

  Negotiated a new $500 million unsecured revolving credit facility to replace United Dominion’s $375 million unsecured revolver and $100 million unsecured term loan in March 2003. The credit facility’s interest rate is 25 and 30 basis points lower than the previous unsecured revolver and term loan, respectively.

 

  Sold 3.0 million shares of common stock in April 2003 at a public offering price of $16.97 per share. The net proceeds from the offering of $49.2 million were ultimately used to acquire additional apartment communities.

 

  Underwriters purchased 100,000 shares of common stock, through their over-allotment option, in May 2003 at an offering price of $16.41. The net proceeds of $1.6 million were used for general corporate purposes.

 

  Exercised our right to redeem 2.0 million shares of our Series D Cumulative Redeemable Preferred Stock in May 2003 that were subsequently converted by the holder into 3,076,923 shares of common stock at a price of $16.25 per share.

 

 

Issued $56.9 million of a new convertible preferred stock, the “Series E” preferred stock, and 1,617,815 net Preferred Operating Partnership Units totaling $26.9 million in June 2003 as partial consideration for the purchase of four communities in Southern California. Each were priced at $16.61 per share and dividends on the Series E preferred stock and Preferred Operating Partnership Units carry a fixed coupon of 8.0% until such time as the common share dividend is equal to or exceeds this amount

 

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for four consecutive calendar quarters, at which time the Series E preferred stock will be entitled to receive the common share dividend on an as converted basis (initially one for one) for all future periods.

 

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 June 30, 2003, $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 June 30, 2003, $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 June 30, 2003, the aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities was $747.0 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 1.7%.

 

United Dominion has a $500 million three-year unsecured revolving credit facility that matures in March 2006. The credit facility replaces United Dominion’s $375 million unsecured revolver and $100 million unsecured term loan. If United Dominion receives commitments from additional lenders or if the initial lenders increase their commitments, we will be able to increase the credit facility to $650 million. At United Dominion’s option, the credit facility can be extended one year to March 2007. Based on our current credit ratings, the credit facility bears interest at a rate equal to LIBOR plus 90 basis points. As of June 30, 2003, $254 million was outstanding under the credit facility leaving $246 million of unused capacity.

 

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

 

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

 

     Three months ended
June 30, 2003


    Twelve months ended
December 31, 2002


 

Total line of credit

   $ 500,000     $ 475,000  

Borrowings outstanding at end of period

     254,000       275,800  

Weighted average daily borrowings during the period

     187,056       256,493  

Maximum daily borrowings outstanding during the period

     254,000       411,600  

Weighted average interest rate during the period

     2.2 %     3.0 %

Weighted average interest rate at end of period

     2.0 %     2.5 %

Weighted average interest rate at end of period, after giving effect to swap agreements

     5.4 %     6.8 %

 

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 the first half of 2003, the fair value of United Dominion’s derivative instruments has improved from an unfavorable value position of $9.6 million at December 31, 2002 to an unfavorable value position of $4.3 million at June 30, 2003. 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 7 to the consolidated financial statements).

 

Funds from Operations

 

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 real estate depreciation and amortization, and after

 

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Table of Contents

adjustments for unconsolidated partnerships and joint ventures. United Dominion computes FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trust’s (“NAREIT”) October 1, 1999 White Paper. Adjusted funds from operations (“AFFO”) is defined as FFO less recurring capital expenditures for our stabilized portfolio of an estimated $435 per home in 2003 and an actual $425 per home in 2002. The 2003 per home charge will be adjusted at year-end to reflect actual expenditures. United Dominion considers FFO and AFFO in evaluating property acquisitions and its operating performance, and believes that FFO and AFFO should be considered along with, but not as an alternative to, net income as a measure of United Dominion’s operating performance and liquidity. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.

 

Historical cost accounting for real estate assets in accordance with generally accepted accounting principles implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical costs depreciation, among other items, from net income based on generally accepted accounting procedures. The use of FFO, combined with the required presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We generally consider FFO to be a useful measure for reviewing our comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. We believe that FFO and AFFO are the best measures of economic profitability for real estate investment trusts.

 

The following table outlines United Dominion’s FFO calculation and reconciliation to generally accepted accounting principles pursuant to Regulation G, as adopted by the Securities and Exchange Commission, for the three and six months ended June 30, (dollars in thousands):

 

     Three Months Ended
June 30,


   

Six Months Ended

June 30,


 
     2003

    2002

    2003

    2002

 

Net income

   $ 15,484     $ 27,388     $ 28,924     $ 25,727  

Adjustments:

                                

Distributions to preferred shareholders

     (6,532 )     (6,875 )     (13,478 )     (13,751 )

Real estate depreciation, net of outside partners’ interest

     38,706       36,111       77,107       70,686  

Minority interests of unitholders in operating partnership

     63       369       368       (353 )

Real estate depreciation related to unconsolidated entities

     52       206       84       377  

Discontinued Operations:

                                

Real estate depreciation

     848       3,113       1,555       7,433  

Minority interests of unitholders in operating partnership

     70       984       227       1,127  

Impairment loss on real estate

     —         —         —         2,301  

Loss/(gains) on sales of depreciable property

     111       (11,825 )     (933 )     (12,744 )
    


 


 


 


Funds from operations (“FFO”)—basic

   $ 48,802     $ 49,471     $ 93,854     $ 80,803  
    


 


 


 


Adjustment:

                                

Distribution to preferred shareholders—Series D and E (Convertible)

   $ 3,621     $ 3,964     $ 7,656     $ 7,929  
    


 


 


 


Funds from operations—diluted

   $ 52,423     $ 53,435     $ 101,510     $ 88,732  
    


 


 


 


Adjustment:

                                

Recurring capital expenditures

   $ (7,983 )   $ (8,155 )   $ (15,952 )   $ (16,288 )
    


 


 


 


Adjusted funds from operations (“AFFO”)—diluted

   $ 44,440     $ 45,280     $ 85,558     $ 72,444  
    


 


 


 


Weighted average number of common shares and OP Units outstanding—basic

     119,754       114,297       117,294       112,655  

Weighted average number of common shares, OP Units, and common stock equivalents outstanding—diluted

     134,211       128,620       132,048       126,857  

 

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In the computation of diluted FFO, OP Units, out-performance partnership shares, and the shares of Series D and Series E convertible preferred stock are dilutive; therefore, they are included in the diluted share count.

 

FFO also does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by generally accepted accounting principles, as a measure of liquidity. Additionally, it is not necessarily indicative of cash availability to fund cash needs. A presentation of cash flow metrics based on generally accepted accounting principles is as follows (dollars in thousands):

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2003

    2002

    2003

    2002

 

Net cash provided by operating activities

   $ 69,992     $ 73,004     $ 107,056     $ 116,942  

Net cash used in investing activities

     (152,182 )     (63,779 )     (157,351 )     (117,664 )

Net cash provided by (used in) financing activities

     79,304       (11,675 )     48,770       1,660  

 

Results of Operations

 

The following discussion includes the results of both continuing and discontinued operations for the periods presented.

 

Net Income Available to Common Shareholders

 

Net income available to common shareholders was $2.7 million ($0.02 per common share) for the quarter ended June 30, 2003, compared to $20.5 million ($0.19 per common share) for the same period in the prior year. The decrease for the quarter ended June 30, 2003 resulted primarily from a $5.4 million decrease in operating results and a $6.3 million premium recognized by United Dominion to convert 2.0 million shares of our Series D cumulative convertible redeemable preferred stock into common stock during the current period. The premium amount recognized to convert these shares represents the difference between the face value of the preferred stock and the value at which it was recorded at the time of acquisition. In addition, United Dominion recognized $11.9 million less in gains from the sale of depreciable property during the current quarter when compared to the same period in the prior year. These decreases in income were partially offset by a $3.6 million decrease in interest expense for the three month period ended June 30, 2003 when compared to the same period in the prior year.

 

For the six months ended June 30, 2003, net income available to common shareholders decreased $2.8 million ($0.03 per common share) compared to the same period in the prior year. The decrease in net income available to common shareholders for the six months ended June 30, 2003 resulted primarily from a $11.2 million decrease in operating results and the $6.3 million premium recognized by United Dominion on the conversion of 2.0 million shares of our Series D cumulative convertible redeemable preferred stock into common stock. In addition, United Dominion recognized $11.8 million less in gains from the sale of depreciable property for the six months ended June 30, 2003 when compared to the same period in the prior year. These decreases in income were partially offset by a $4.5 million decrease in interest expense, and a $1.9 million decrease in general and administrative expenses for the six month period ended June 30, 2003 when compared to the same period in the prior year. Furthermore, United Dominion paid $16.8 million in prepayment penalties in connection with the refinancing of mortgage debt and the early payoff of loans on the sale of properties, and took a $2.3 million impairment charge related to a portfolio in Memphis, Tennessee during the first six months of 2002.

 

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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):

 

     Three Months Ended June, 30,

    Six Months Ended June 30,

 
     2003

    2002

    % Change

    2003

    2002

    % Change

 

Property rental income

   $ 152,751     $ 158,156     -3.4 %   $ 304,675     $ 316,717     -3.8 %

Property operating expense*

     (57,301 )     (57,325 )   0.0 %     (115,075 )     (115,940 )   -0.7 %
    


 


 

 


 


 

Property operating income

   $ 95,450     $ 100,831     -5.3 %   $ 189,600     $ 200,777     -5.6 %
    


 


 

 


 


 

Weighted average number of homes

     73,806       77,921     -5.3 %     73,717       77,831     -5.3 %

Physical occupancy**

     93.6 %     93.4 %   0.2 %     93.5 %     93.4 %   0.1 %

*   Excludes depreciation, amortization, and property management expenses.
**   Based upon weighted average number of homes.

 

The decrease in property operating income provided by the same communities, development communities, and acquisition communities since June 30, 2002 is primarily due to an overall decrease in same community property operating income and the overall decrease in the size of United Dominion’s apartment community portfolio.

 

Same Communities

 

United Dominion’s same communities (those communities acquired, developed, and stabilized prior to January 1, 2002 and held on June 30, 2003, which consisted of 67,560 apartment homes) provided 90% of our property operating income for the six month period ended June 30, 2003.

 

For the second quarter of 2003, same community property operating income decreased 3.8% or $3.4 million compared to the same period in 2002 as a result of a 1.2% or $1.7 million decrease in revenues from rental and other income and a 3.5% or $1.8 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 2.4% or $3.6 million decrease in rental rates. This decrease in income was partially offset by a 23.0% or $0.8 million increase in sub-meter, gas, and trash reimbursements, a 9.2% or $0.5 million decrease in concession expense, and a 3.7% or $0.4 million decrease in vacancy loss. Physical occupancy for the quarter increased 0.3% to 93.6% for the quarter. The increase in property operating expenses was primarily driven by a 12.8% or $1.0 million increase in repair and maintenance expense, a 6.2% or $0.5 million increase in utilities expense, a 6.4% or $0.3 million increase in administrative and marketing expense, a 1.9% or $0.2 million increase in personnel costs, and a 1.4% or $0.2 million increase in taxes. These increases were partially offset by a 9.5% or $0.3 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 1.7% to 62.6%.

 

For the six months ended June 30, 2003, same community property operating income decreased 4.3% or $7.6 million compared to the same period in 2002 as a result of a 1.7% or $4.8 million decrease in revenues from rental and other income and a 2.8% or $2.8 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 2.2% or $6.3 million decrease in rental rates and a 21.7% or $0.3 million increase in bad debt expense. These decreases in income were partially offset by a 21.2% or $1.4 million increase in sub-meter, gas, and trash reimbursements, a 1.6% or $0.3 million decrease in vacancy loss, and a 1.6% or $0.1 million decrease in concession expense. Physical occupancy for six months ended June 30, 2003 increased 0.1% to 93.5% compared to the same period in the prior year. The increase in property operating expenses was primarily driven by a 7.1% or $1.1 million increase in repair and maintenance expense, a 4.3% or $0.7 million increase in utilities expense, a 7.6% or $0.7 million increase in administrative and marketing expense, a 2.7% or $0.7 million increase in personnel costs, and a 2.4% or $0.6 million increase in taxes. These increases were partially offset by an 11.1% or $0.7 million decrease in insurance costs and a 41.2% or $0.3 million decrease in incentive compensation.

 

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As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property operating income divided by property rental income) decreased 1.7% to 62.3%.

 

Non-Mature Communities

 

The remaining 10% of United Dominion’s property operating income during the first six months of 2003 was generated from its non-mature communities (those communities acquired or developed during 2002 and 2003, sold properties, and those properties classified as real estate held for disposition). The 15 communities with 4,954 apartment homes acquired by United Dominion during 2002 and 2003 provided $11.6 million of property operating income. In addition, United Dominion’s development communities, which included 854 apartment homes constructed since January 1, 2002, provided $2.4 million of property operating income during 2003, the seven communities with 2,063 apartment homes classified as real estate held for disposition provided $4.3 million of property operating income, and other non-mature communities provided $0.9 million of property operating income for the six months ended June 30, 2003.

 

Real Estate Depreciation

 

For the three and six months ended June 30, 2003, real estate depreciation on both continuing and discontinued operations remained relatively constant compared to the same period in 2002 regardless of the decrease in the weighted average number of apartment homes experienced from June 30, 2002 to June 30, 2003, primarily due to the newly acquired properties having a significantly higher per home cost compared to those properties that have been disposed of, and other capital expenditures.

 

Interest Expense

 

For the three months ended June 30, 2003, interest expense on both continuing and discontinued operations decreased $3.6 million or 10.8% from the same period in 2002 primarily due to debt refinancings, decreasing interest rates, and an overall decrease in the weighted average level of debt outstanding. For the quarter ended June 30, 2003, the weighted average amount of debt outstanding decreased 5.4% or $115.5 million when compared to the same period in the prior year and the weighted average interest rate decreased from 6.0% to 5.5% in 2003. The weighted average amount of debt employed during 2003 is lower than 2002 primarily due to the high acquisition volume at the beginning of 2002 that was subsequently mitigated by high disposition activity in the second half of 2002. The decrease in the average interest rate during 2003 reflects the ability of United Dominion to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.

 

For the six months ended June 30, 2003, interest expense on both continuing and discontinued operations decreased $4.5 million or 6.9% from the same period in 2002 primarily due to debt refinancings, decreasing interest rates, and an overall decrease in the weighted average level of debt outstanding. For the six months ended June 30, 2003, the weighted average amount of debt outstanding decreased 0.3% or $5.4 million compared to the same period in the prior year and the weighted average interest rate decreased from 6.2% to 5.6% during the first six months of 2003. The weighted average amount of debt employed during 2003 is lower than 2002 primarily due to the high acquisition volume at the beginning of 2002 that was subsequently mitigated by high disposition activity in the second half of 2002. The decrease in the average interest rate during 2003 reflects the ability of United Dominion to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.

 

General and Administrative

 

For the three months ended June 30, 2003, general and administrative expenses increased $0.3 million or 5.3% compared to the same period in 2002. For the six months ended June 30, 2003, general and administrative expenses decreased $1.9 million or 15.3% over the comparable period in 2002. The decrease for the six month period was primarily due to a provision made in the first quarter of 2002 for the pending buyout of certain long-term security monitoring contracts as well as a decrease in incentive compensation expense for the six months ended June 30, 2003.

 

Gains on Sales of Land and Depreciable Property

 

For the three and six months ended June 30, 2003, United Dominion recognized gains for financial reporting purposes of $0 and $1 million, respectively, compared to $11.8 million and $12.7 million for the comparable period in 2002. Changes in the level of gains

 

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

 

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

 

    The failure of acquisitions to achieve anticipated results.

 

    Possible difficulty in selling apartment communities.

 

    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.

 

For a discussion of these and other factors affecting our business and prospects, see “Item 1.—Business—Factors Affecting Our Business and Prospects” in our Annual Report on Form 10-K for the year ended December 31, 2002. In addition, the following factors may affect our business and prospects:

 

Increases in U.S. state and local taxes could adversely affect our cash available for distribution.

 

Many U.S. states and localities are considering increases in their income and/or real property tax rates (or increases in the assessments of real property) to cover the revenue shortfalls they are currently facing. We are subject to state and local income and property taxation in various jurisdictions in which we transact business and own property. Increases in income and/or property taxes in those jurisdictions could adversely affect our cash available for distribution to stockholders.

 

Maryland law may limit the ability of a third party to acquire control of us, which may not be in our stockholders’ best interest.

 

Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our company and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 66 2/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that represent 10% (and certain higher levels) of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote.

 

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Share ownership limitations may prevent takeovers that are beneficial to our stockholders.

 

Our amended and restated articles of incorporation contain ownership and transfer restrictions relating to our common stock. These restrictions include a provision that generally limits a person from beneficially owning or constructively owning shares of our outstanding equity stock in excess of a 9.9% ownership interest, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of delaying, deferring, or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.

 

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

 

See our Annual Report on Form 10-K for the year ended December 31, 2002 “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of June 30, 2003, our market risk has not changed materially from the amounts reported on our Annual Report on Form 10-K for the year ended December 31, 2002.

 

Item 4.   CONTROLS AND PROCEDURES

 

As of June 30, 2003, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. In addition, our Chief Executive Officer and our Chief Financial Officer concluded that during the quarter ended June 30, 2003, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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.

 

PART II

 

Item 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

 

On June 12, 2003, we issued 3,425,217 shares of our Series E Cumulative Convertible Preferred Stock, priced at $16.61 per share, as partial consideration for the acquisition of four apartment communities in Southern California. The Series E preferred shares were issued to the shareholders of Midlands Company, a Delaware corporation, which owned two of the apartment communities acquired in the transaction. We acquired the four apartment communities for approximately $137 million. In addition, we acquired a note receivable with a notional value of $5 million in this transaction. The total consideration paid by us in connection with the transaction included the $58.8 million of Series E preferred shares, 1,617,815 Operating Partnership Units totaling $26.9 million, and cash of approximately $56 million. A total of $37 million in debt will be placed on two of the apartment communities.

 

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Subject to certain adjustments and conditions, each share of the Series E Cumulative Convertible Preferred Stock is convertible at any time and from time to time at the holder’s option into one share of our common stock. Because the Series E preferred shares were sold in a transaction not involving a public offering, the sale of the shares is exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

 

On May 21, 2003, we issued 3,076,923 shares of our common stock to Security Capital Preferred Growth Incorporated at a price or $16.25 per share upon the conversion of 2,000,000 shares of our outstanding Series D Cumulative Convertible Redeemable Preferred Stock held by Security Capital. Because the shares of common stock were sold in a transaction not involving a public offering, the transaction is exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act.

 

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On May 6, 2003, United Dominion held its Annual Meeting of Shareholders. At the meeting, the shareholders voted on the election of directors, a proposal to change our state of incorporation from Virginia to Maryland, a proposal to approve the Series B Out-Performance Program, and a proposal to ratify the selection of Ernst & Young LLP to serve as our independent auditors for the year ending December 31, 2003.

 

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

 

Name

  Votes For

  Votes Withheld

Robert P. Freeman

  99,771,694   2,736,991

Jon A. Grove

  101,411,915   1,096,770

James D. Klingbeil

  101,370,699   1,137,986

Robert C. Larson

  101,390,468   1,118,217

John P. McCann

  101,363,641   1,145,044

Thomas R. Oliver

  101,402,384   1,106,301

Lynne B. Sagalyn

  99,742,381   2,766,304

Mark J. Sandler

  101,403,192   1,105,493

Robert W. Scharar

  99,775,298   2,733,387

Thomas W. Toomey

  101,418,570   1,090,115

 

The shareholders approved the proposal to change our state of incorporation from Virginia to Maryland by the indicated vote:

 

Votes For

  Votes Against

  Votes Abstained

74,134,384

  3,209,386   1,991,935

 

The shareholders approved the proposal to approve the Series B Out-Performance Program by the indicated vote:

 

Votes For

  Votes Against

  Votes Abstained

69,144,620

  9,027,790   1,163,293

 

The shareholders approved the proposal to ratify the selection of Ernst & Young LLP to serve as independent auditors for the year ending December 31, 2003, by the indicated vote:

 

Votes For

  Votes Against

  Votes Abstained

96,477,440

  4,246,132   1,785,113

 

There were 23,172,980 broker non-votes.

 

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Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

 

(a)   Exhibits.

 

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

 

(b)   Reports on Form 8-K.

 

We filed or furnished the following Current Reports on Form 8-K during the quarter ended June 30, 2003. The information provided under Item 9. Regulation FD Disclosure (Item 12. Results of Operations and Financial Condition) is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

 

Current Report on Form 8-K dated March 14, 2003, filed with the Securities and Exchange Commission on April 3, 2003, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

Current Report on Form 8-K dated April 16, 2003, filed with the Securities and Exchange Commission on April 16, 2003, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

Current Report on Form 8-K dated April 24, 2003, filed with the Securities and Exchange Commission on April 28, 2003, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

Current Report on Form 8-K dated April 28, 2003, furnished to the Securities and Exchange Commission on April 29, 2003, under Item 9. Regulation FD Disclosure (Item 12. Results of Operations and Financial Conditions).

 

Current Report on Form 8-K dated May 14, 2003, filed with the Securities and Exchange Commission on May 14, 2003, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

Current Report on Form 8-K dated June 11, 2003, filed with the Securities and Exchange Commission on June 11, 2003, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

       

UNITED DOMINION REALTY TRUST, INC.

       

                        (registrant)

Date: August 13, 2003

     

/s/    CHRISTOPHER D. GENRY        


        Christopher D. Genry
       

Executive Vice President and

Chief Financial Officer

Date: August 13, 2003

     

/s/    SCOTT A. SHANABERGER        


        Scott A. Shanaberger
       

Senior Vice President and

Chief Accounting Officer

 

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EXHIBIT INDEX

 

Exhibit

  

Description


  2.1    Articles of Merger between UDRT Maryland, Inc., a Maryland corporation, and United Dominion Realty Trust, Inc., a Virginia corporation, filed with the State Department of Assessments and Taxation of the State of Maryland. *
  2.2    Articles of Merger between UDRT Maryland, Inc., a Maryland corporation, and United Dominion Realty Trust, Inc., a Virginia corporation, filed with the State Corporation Commission of the Commonwealth of Virginia.*
  3.1    Amended and Restated Articles of Incorporation of United Dominion Realty Trust, Inc., a Maryland corporation, (attached as Exhibit A to Exhibit 2.01 to the Registrant’s Current Report on Form 8-K dated and filed June 11, 2003 and incorporated herein by reference).*
  3.2    Bylaws of United Dominion Realty Trust, Inc., a Maryland corporation.*
12    Computation of Ratio of Earnings to Fixed Charges.
31.1    Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2    Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1    Section 1350 Certification of the Chief Executive Officer.
32.2    Section 1350 Certification of the Chief Financial Officer.

*   Incorporated by reference to Registrant’s Current Report on Form 8-K dated June 11, 2003, filed with the Securities and Exchange Commission on June 11, 2003 (Commission File No. 1-10524).