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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission file number 1-10524
United Dominion Realty Trust, Inc.
(Exact name of registrant as specified in its charter)
     
Maryland
  54-0857512
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices, including zip code)
(720) 283-6120
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common Stock, $1 par value
  New York Stock Exchange
Preferred Stock Purchase Rights
  New York Stock Exchange
8.60% Series B Cumulative Redeemable Preferred Stock
  New York Stock Exchange
8.50% Monthly Income Notes Due 2008
  New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or other information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.     o
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o
      The aggregate market value of the shares of common stock held by non-affiliates on June 30, 2004 was approximately $2.4 billion. This calculation excludes shares of common stock held by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the registrant’s outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive for any other purpose. As of March 1, 2005 there were 137,023,872 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
      The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 3, 2005.
 
 


TABLE OF CONTENTS
             
        Page
         
 PART I.
   Business     2  
   Properties     17  
   Legal Proceedings     18  
   Submission of Matters to a Vote of Security Holders     18  
 
 PART II.
   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
   Selected Financial Data     21  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
   Quantitative and Qualitative Disclosures about Market Risk     39  
   Financial Statements and Supplementary Data     39  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     39  
   Controls and Procedures     39  
   Other Information     40  
 
 PART III.
   Directors and Executive Officers of the Registrant     40  
   Executive Compensation     41  
   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     41  
   Certain Relationships and Related Transactions     41  
   Principal Accounting Fees and Services     41  
 
 PART IV.
   Exhibits and Financial Statement Schedules     41  
 Amended and Restated Bylaws
 5.00% Medium-Term Notes due January 2012
 4.30% Medium-Term Note due July 2007
 5.25% Medium-Term Note due January 2015, issued November 1, 2004
 5.25% Medium-Term Note due January 2015, issued February 14, 2005
 5.25% Medium-Term Note due January 2015, issued March 8, 2005
 Employment Agreement of Richard A. Giannotti
 Compensation Summary
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Rule 13a-14(a) Certification of the Chief Executive Officer
 Rule 13a-14(a) Certification of the Chief Financial Officer
 Section 1350 Certification of the Chief Executive Officer
 Section 1350 Certification of the Chief Financial Officer


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PART I
Item 1. Business
General
      United Dominion Realty Trust, Inc. is a self administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. At December 31, 2004, our apartment portfolio included 273 communities located in 43 markets, with a total of 78,855 completed apartment homes. In addition, we had three apartment communities under development.
      We have elected to be taxed as a REIT under the Internal Revenue Code of 1986. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate, our income be derived primarily from real estate, and that we distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. As a qualified REIT, we generally will not be subject to federal income taxes on our REIT taxable income to the extent we distribute such income to our stockholders. In 2004, we declared total distributions of $1.17 per share to our stockholders, which represents our 28th year of consecutive dividend increases to our stockholders.
      We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our corporate headquarters is located at 400 East Cary Street, Richmond, Virginia. Our principal executive offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado. As of March 1, 2005, we had 1,943 full-time employees and 178 part-time employees.
      Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.
2004 Accomplishments
  •  We provided a total stockholder return of 37%.
 
  •  We increased our dividend for the 28th consecutive year.
 
  •  We lowered the weighted average interest rate on our debt from 5.2% at December 31, 2003 to 5.0% at December 31, 2004.
 
  •  We increased the size of our unencumbered pool of assets to $3.3 billion, valued on a historical cost basis.
 
  •  We completed over $1.8 billion of capital transactions in 2004.
 
  •  We were upgraded by Moody’s Investor Services on our unsecured debt rating to Baa2 from Baa3 and our preferred stock rating to Baa3 from Ba1 with a stable outlook.
 
  •  We acquired 8,060 apartment homes in 28 communities for approximately $1.0 billion.
 
  •  We completed the disposition of 19 apartment communities with 5,425 apartment homes for an aggregate sales price of approximately $270.1 million, exiting markets that no longer met our investment criteria. In addition, we sold 24 of 36 townhomes of a community for $7.3 million.

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Business Objectives and Operating Strategies
      Our principal business objective is to maximize the economic returns of our apartment communities to provide our stockholders with the greatest possible total return and value. To achieve this objective, we intend to continue to pursue the following goals and strategies:
  •  own and operate middle-market apartments across a national platform, thus enhancing stability and predictability of returns to our stockholders,
 
  •  manage real estate cycles by taking an opportunistic approach to buying, selling, and building apartment communities,
 
  •  empower site associates to manage our communities efficiently and effectively,
 
  •  measure and reward associates based on specific performance targets, and
 
  •  manage our capital structure to ensure predictability of earnings and dividends.
Acquisitions
      During 2004, using the proceeds from our disposition program, equity and debt offerings, we acquired 28 communities with 8,060 apartment homes at a total cost of approximately $1.0 billion, including the assumption of secured debt. In addition, we purchased one parcel of land for $16.3 million.
      When evaluating potential acquisitions, we consider:
  •  population growth, cost of alternative housing, overall potential for economic growth and the tax and regulatory environment of the community in which the property is located,
 
  •  geographic location, including proximity to our existing communities which can deliver significant economies of scale,
 
  •  construction quality, condition and design of the community,
 
  •  current and projected cash flow of the property and the ability to increase cash flow,
 
  •  potential for capital appreciation of the property,
 
  •  ability to increase the value and profitability of the property through upgrades and repositioning,
 
  •  terms of resident leases, including the potential for rent increases,
 
  •  occupancy and demand by residents for properties of a similar type in the vicinity,
 
  •  prospects for liquidity through sale, financing, or refinancing of the property, and
 
  •  competition from existing multifamily communities and the potential for the construction of new multifamily properties in the area.
      The following table summarizes our apartment acquisitions and our year-end ownership position for the past five years (dollars in thousands):
                                         
    2004   2003   2002   2001   2000
                     
Homes acquired
    8,060       5,220       4,611       1,304       267  
Homes owned at December 31
    78,855       76,244       74,480       77,567       77,219  
Total real estate owned, at carrying value
  $ 5,243,296     $ 4,351,551     $ 3,967,483     $ 3,907,667     $ 3,836,320  
Dispositions
      We regularly monitor and adjust our assets to increase portfolio profitability. During 2004, we sold over 5,400 of our slower growing, non-core apartment homes while exiting some markets in an effort to

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increase the quality and performance of our portfolio. Proceeds from the disposition program were used primarily to reduce debt and fund acquisitions.
      Factors we consider in deciding whether to dispose of a property include:
  •  current market price for an asset compared to projected economics for that asset,
 
  •  potential increases in new construction in the market area,
 
  •  areas where the economy is not expected to grow substantially, and
 
  •  markets where we do not intend to establish long-term concentration.
      At December 31, 2004, there were 12 apartment communities and one parcel of land classified as real estate held for disposition. We are in the market for replacement properties that will correspond with our expected sales activity to prevent dilution to earnings.
Upgrading and Development Activities
      During 2004, we continued to reposition properties in targeted markets where there was an opportunity to add value and achieve greater than inflationary increases in rents over the long term. In 2004, we spent $17.6 million on three development projects that are expected to be completed in the first half of 2006. In addition, revenue enhancing capital expenditures, including kitchen and bath renovations, and other extensive interior upgrades totaled $45.9 million or $599 per home for the year ended December 31, 2004.
      The following wholly-owned projects were under development as of December 31, 2004:
                                                 
    Number of   Completed           Estimated   Expected
    Apartment   Apartment   Cost to Date   Budgeted Cost   Cost   Completion
    Homes   Homes   (In thousands)   (In thousands)   Per Home   Date
                         
2000 Post Phase III San Francisco, CA
    24           $ 2,754     $ 7,000     $ 291,700       1Q06  
Verano at Town Square Rancho Cucamonga, CA
    414             27,648       66,300       160,100       2Q06  
Mandalay on the Lake Irving, TX
    369             9,840       30,900       83,700       2Q06  
                                     
      807           $ 40,242     $ 104,200     $ 129,100          
                                     
      In addition, we owned eight parcels of land held for future development aggregating $25.5 million at December 31, 2004. Four of the eight parcels represent additional phases to existing communities.
Financing Activities
      As part of our plan to strengthen our capital structure, we utilized proceeds from dispositions, equity offerings and refinancings to extend maturities, pay down existing debt, and acquire apartment communities. The following is a list of our major financing activities in 2004:
  •  Repaid $131.8 million of secured debt and $46.6 million of unsecured debt.
 
  •  Sold $125 million aggregate principal amount of 5.13% senior unsecured notes due January 2014 ($75 million in January and $50 million in March) under our medium-term note program. These notes represent a re-opening of the 5.13% senior unsecured notes due January 2014 that we issued in October 2003, and these notes constitute a single series of notes, bringing the aggregate principal amount outstanding of the 5.13% senior unsecured notes to $200 million. The net proceeds of $126.0 million were used to repay secured and unsecured debt obligations maturing in the first quarter of 2004 and to fund the acquisition of apartment homes.

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  •  Sold $50 million aggregate principal amount of 3.90% senior unsecured notes due March 2010 in March 2004 under our medium-term note program. The net proceeds of approximately $49.4 million were used to fund the acquisition of apartment communities.
 
  •  Replaced our previous $1.0 billion shelf registration statement in June 2004 with a new shelf registration statement that provides for the issuance of up to $1.5 billion in debt securities and preferred and common stock. The new $1.5 billion shelf registration statement includes $331.3 million of unissued securities carried forward from our previous shelf registration statement.
 
  •  Sold $50 million aggregate principal amount of 4.30% senior unsecured notes due July 2007 in June 2004 under our new $750 million medium-term note program. The net proceeds of approximately $49.8 million were used to fund the acquisition of apartment communities and repay amounts outstanding on our $500 million unsecured credit facility.
 
  •  Moody’s Investors Service upgraded our rating on our senior unsecured debt to Baa2 from Baa3 and our preferred stock to Baa3 from Ba1 with a stable outlook in July 2004.
 
  •  Sold $100 million of 5.00% senior unsecured notes due January 2012 and $25 million of 4.30% senior unsecured notes due July 2007 under our new $750 million medium-term note program in October 2004. The $25 million in notes represent a re-opening of the 4.30% senior unsecured notes due July 2007 that we issued in June 2004, and these notes constitute a single series of notes, bringing the aggregate principal amount outstanding of the 4.30% senior unsecured notes to $75 million. The net proceeds of $124.4 million were used to fund the acquisition of apartment communities.
 
  •  Sold $100 million aggregate principal amount of 5.25% senior unsecured notes due January 2015 under our new $750 million medium-term note program in October 2004. The net proceeds of $99.0 million were used to fund the acquisition of apartment communities.
 
  •  Sold 3.5 million shares of common stock at a public offering price of $20.50 per share under our $1.5 billion shelf registration statement in October 2004. We sold an additional 525,000 shares of common stock at a public offering price of $20.50 per share in connection with the exercise of the underwriter’s over-allotment option in October 2004. The net proceeds of $81.9 million were used to reduce outstanding debt balances under our $500 million unsecured revolving credit facility, which was used to fund the acquisition of apartment communities.
 
  •  Filed a prospectus supplement under the Securities Act of 1933 in October 2004, relating to the offering of up to 5 million shares of our common stock that we may issue and sell through an agent from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. Any sales of these shares will be made under our $1.5 billion shelf registration statement pursuant to a sales agreement that we entered into with the agent in July 2003. The sales price of the common stock that may be sold under the sales agreement will be no lower than the minimum price designated by us prior to the sale. As of December 31, 2004, we have sold a total of 472,000 shares of common stock pursuant to the sales agreement at a weighted average sales price of $20.36, for net proceeds to us of approximately $9.4 million.
 
  •  Exercised our right to redeem 2 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in December 2004. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,769 shares of common stock at a price of $16.25 per share.
 
  •  In conjunction with certain acquisitions, we assumed secured mortgages of $311.7 million with maturity dates ranging from September 2006 through June 2013.
Markets and Competitive Conditions
      At December 31, 2004, we owned 273 apartment communities in 43 markets in 17 states. Of those markets, 25 markets, or 61%, generated positive same community net operating income growth for the

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fourth quarter of 2004 when compared to the same period in the prior year. We have a geographically diverse portfolio and we believe that this diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of our earnings.
      We believe changing demographics will have a significant impact on the apartment industry over the next two decades. In particular, we believe the annual number of young people entering the workforce and creating households will be significantly higher over the next 10 to 15 years as compared to the number who entered the workforce over the past 10 years. The number of single people and single parent households continues to grow significantly. The immigrant population is also expected to grow at an accelerated pace. Each of these population segments has a high propensity to rent.
      Despite a strengthening United States economy, significant productivity growth has adversely affected employment growth, which is the primary driver of demand in our business. In addition, a sustained low mortgage interest rate environment, combined with government and builder incentives to first time home buyers, has further siphoned off what would traditionally be demand for apartment homes. To maintain occupancy levels during these economic conditions, we have reduced rents, increased our marketing expenses, and provided concessions to our residents.
      In most of our markets, competition for new residents is intense. Some competing communities offer features that our communities do not have. Competing communities frequently use concessions or lower rents to obtain temporary competitive advantages. Also, some competing communities are larger or newer than our communities. The competitive position of each community is different depending upon many factors including sub-market supply and demand. In addition, other real estate investors compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources, or lower capital costs, than we do.
      We believe that, in general, we are well-positioned to compete effectively for residents and investments. We believe our competitive advantages include:
  •  a fully integrated organization with property management, development, acquisition, marketing and financing expertise,
 
  •  scalable operating and support systems,
 
  •  purchasing power,
 
  •  geographic diversification with a presence in 43 markets across the country, and
 
  •  significant presence in many of our major markets that allows us to be a local operating expert.
      Moving forward, we will continue to emphasize aggressive lease management, improved expense control, increased resident retention efforts and the realignment of employee incentive plans tied to our bottom line performance. We believe this plan of operation, coupled with the portfolio’s strengths in targeting the middle-market of renters across a geographically diverse platform, should position us for continued operational improvement.
Communities
      At December 31, 2004, our apartment portfolio included 273 communities having a total of 78,855 completed apartment homes. In addition, we had three apartment communities under development. The overall quality of our portfolio has significantly improved since 2001 with the disposition of non-core apartment homes and our upgrade program. The upgrading of the portfolio provides several key benefits related to portfolio profitability. It enables us to raise rents more significantly and to attract residents with higher levels of disposable income who are more likely to accept the transfer of expenses, such as water

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and sewer costs, from the landlord to the resident. In addition, it potentially reduces recurring capital expenditures per apartment home, and therefore increases cash flow.
Same Communities
      For 2004, same community property operating income decreased 1.2% or $3.9 million compared to 2003. The overall decrease in property operating income was primarily attributable to a 0.5% or $2.3 million increase in revenues from rental and other income that was offset by a 3.2% or $6.2 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 7.7% or $2.8 million decrease in vacancy loss and a 14.3% or $2.1 million increase in utility reimbursement income. These increases in income were offset by a 0.7% or $3.6 million decrease in rental rates. Physical occupancy increased 0.8% to 93.8%.
      The increase in property operating expenses was primarily driven by a 5.4% or $2.8 million increase in personnel costs, a 4.7% or $1.5 million increase in repair and maintenance costs, a 3.5% or $1.1 million increase in utilities expense, and a 1.6% or $0.8 million increase in property taxes.
Customers
      We focus on the broad middle-market segment of the apartment market that generally consists of renters-by-necessity. This group includes young professionals, blue-collar families, single parent households, older singles, immigrants, non-related parties and families renting while waiting to purchase a home. We believe this segment provides the highest profit potential in terms of rent growth, stability of occupancy and investment opportunities.
      We believe there will be a significant increase in the number of younger renters over the next 10 to 15 years, and that the immigrant population will remain a significant and growing part of the renter base. Accordingly, we plan to target some of our incremental investments to communities that will be attractive to younger households or to the immigrant populations. These communities will often be located close to where these residents work, shop and play.
Tax Matters
      We have elected to be taxed as a REIT under the Internal Revenue Code. To continue to qualify as a REIT, we must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate, our income be derived primarily from real estate and that we distribute at least 90% of our taxable income (other than our net capital gain) to our stockholders. Provided we maintain our qualification as a REIT, we will generally not be subject to federal income taxes at the corporate level on our net income to the extent net income is distributed to our stockholders.
Inflation
      Substantially all of our leases are for a term of one year or less, which may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Such short-term leases generally minimize the risk to us of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. Short-term leases and relatively consistent demand allow rents, and therefore cash flow from the portfolio, to provide an attractive hedge against inflation.
Environmental Matters
      To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. However, in the past, the issue has been raised regarding the presence of asbestos and other hazardous materials in existing real estate properties. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we own. In

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addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a conservative posture toward accepting known risk, we can minimize our exposure to potential liability associated with environmental hazards.
      Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.
      We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.
Insurance
      We carry comprehensive general liability coverage on our communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. We are also insured, in all material respects, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.
Factors Affecting Our Business and Prospects
      There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of some of the important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or desired.
      Unfavorable Changes in Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels and Rental Rates. Market and economic conditions in the metropolitan areas in which we operate may significantly affect our occupancy levels and rental rates and, therefore, our profitability. Factors that may adversely affect these conditions include the following:
  •  a reduction in jobs and other local economic downturns,
 
  •  declines in mortgage interest rates, making alternative housing more affordable,
 
  •  government or builder incentives which enable first time homebuyers to put little or no money down, making alternative housing decisions easier to make,
 
  •  oversupply of, or reduced demand for, apartment homes,
 
  •  declines in household formation, and

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  •  rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.
      The strength of the United States economy has become increasingly susceptible to global events and threats of terrorism. At the same time, productivity enhancements and the increased exportation of labor have resulted in limited job growth despite an improving economy. Continued weakness in job creation, or any worsening of current economic conditions, generally and in our principal market areas, could have a material adverse effect on our occupancy levels, our rental rates and our ability to strategically acquire and dispose of apartment communities. This may impair our ability to satisfy our financial obligations and pay distributions to our stockholders.
      Acquisitions or New Development May Not Achieve Anticipated Results. We intend to continue to selectively acquire apartment communities that meet our investment criteria. Our acquisition activities and their success are subject to the following risks:
  •  an acquired community may fail to perform as we expected in analyzing our investment, or a significant exposure related to the acquired property may go undetected during our due diligence procedures,
 
  •  when we acquire an apartment community, we often invest additional amounts in it with the intention of increasing profitability. These additional investments may not produce the anticipated improvements in profitability, and
 
  •  new developments may not achieve pro forma rents or occupancy levels, or problems with construction or local building codes may delay initial occupancy dates for all or a portion of a development community.
      Possible Difficulty of Selling Apartment Communities Could Limit Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but market conditions could change and purchasers may not be willing to pay prices acceptable to us. A weak market may limit our ability to change our portfolio promptly in response to changing economic conditions. Furthermore, a significant portion of the proceeds from our overall property sales may be held by intermediaries in order for some sales to qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code, so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash flow generated from our property sales. In addition, federal tax laws limit our ability to profit on the sale of communities that we have owned for fewer than four years, and this limitation may prevent us from selling communities when market conditions are favorable.
      Increased Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain Rents. Our apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities and single-family rental homes, as well as owner occupied single-and multi-family homes. Competitive housing in a particular area could adversely affect our ability to lease apartment homes and increase or maintain rents.
      Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. We cannot assure you that sufficient cash flow will be available to make all required principal payments and still satisfy our distribution requirements to maintain our status as a REIT, nor can we assure you that the full limits of our line of credit will be available to us if our operating performance falls outside the constraints of our debt covenants. Additionally, we are likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so.

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      Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient net rental income to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to our stockholders will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:
  •  the national and local economies,
 
  •  local real estate market conditions, such as an oversupply of apartment homes,
 
  •  tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located,
 
  •  our ability to provide adequate management, maintenance and insurance, and
 
  •  rental expenses, including real estate taxes and utilities.
      Expenses associated with our investment in a community, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from that community. If a community is mortgaged to secure payment of debt and we are unable to make the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgage holder.
      Debt Level May Be Increased. Our current debt policy does not contain any limitations on the level of debt that we may incur, although our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.
      Financing May Not Be Available and Could be Dilutive. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. Debt or equity financing may not be available in sufficient amounts, or on favorable terms or at all. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.
      Development and Construction Risks Could Impact Our Profitability. We intend to continue to develop and construct apartment communities. Development activities may be conducted through wholly-owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities may be exposed to the following risks:
  •  we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased development costs and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations,
 
  •  if we are unable to find joint venture partners to help fund the development of a community or otherwise obtain acceptable financing for the developments, our development capacity may be limited,
 
  •  we may abandon development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring such opportunities,
 
  •  we may be unable to complete construction and lease-up of a community on schedule, or incur development or construction costs that exceed our original estimates, and we may be unable to charge rents that would compensate for any increase in such costs,
 
  •  occupancy rates and rents at a newly-developed community may fluctuate depending on a number of factors, including market and economic conditions, preventing us from meeting our profitability goals for that community, and

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  •  when we sell to third parties homes or properties that we developed or renovated, we may be subject to warranty or construction defect claims that are uninsured or exceed the limits of our insurance.
      Construction costs have been increasing in our existing markets, and the costs of upgrading acquired communities have, in some cases, exceeded our original estimates. We may experience similar cost increases in the future. Our inability to charge rents that will be sufficient to offset the effects of any increases in these costs may impair our profitability.
      Failure to Succeed in New Markets May Limit Our Growth. We may from time to time make acquisitions outside of our existing market areas if appropriate opportunities arise. We may be exposed to a variety of risks if we choose to enter new markets, and we may not be able to operate successfully in new markets. These risks include, among others:
  •  inability to accurately evaluate local apartment market conditions and local economies,
 
  •  inability to obtain land for development or to identify appropriate acquisition opportunities,
 
  •  inability to hire and retain key personnel, and
 
  •  lack of familiarity with local governmental and permitting procedures.
      Changing Interest Rates Could Increase Interest Costs and Could Affect the Market Price of Our Securities. We currently have, and expect to incur in the future, interest-bearing debt at rates that vary with market interest rates. Therefore, if interest rates increase, our interest costs will rise to the extent our variable rate debt is not hedged effectively. In addition, an increase in market interest rates may lead our security holders to demand a higher annual yield, which could adversely affect the market price of our common and preferred stock and debt securities.
      Limited Investment Opportunities Could Adversely Affect Our Growth. We expect that other real estate investors will compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources than we do. As a result, we may not be able to make attractive investments on favorable terms, which could adversely affect our growth.
      Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies. To grow successfully, we must be able to apply our experience in managing our existing portfolio of apartment communities to a larger number of properties. In addition, we must be able to integrate new management and operations personnel as our organization grows in size and complexity. Failures in either area will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
      Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From time to time when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do this to increase the predictability of our financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit our exposure under variable rate debt to unfavorable changes in market interest rates. If the terms of new debt securities are not within the parameters of, or market interest rates fall below that which we incur under a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges.
      Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under various federal, state and local environmental laws, as a current or former owner or operator of real estate, we could be required to investigate and remediate the effects of contamination of currently or formerly owned real estate by hazardous or toxic substances, often regardless of our knowledge of or responsibility

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

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      Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in Our Stockholders’ Best Interests. Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our company and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 662/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that 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.
      Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders. One of the requirements for maintenance of our qualification as a REIT for federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our amended and restated articles of incorporation contain ownership and transfer restrictions relating to our stock primarily to assist us in complying with this requirement. These restrictions include a provision that generally limits a person from beneficially owning or constructively owning shares of our outstanding equity stock in excess of a 9.9% ownership interest, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.
      Under the terms of our shareholder rights plan, our board of directors can, in effect, prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock. Unless our board of directors approves the person’s purchase, after that person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person. Our board of directors, however, can prevent the shareholder rights plan from operating in this manner. This gives our board of directors significant discretion to approve or disapprove a person’s efforts to acquire a large interest in us.

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Executive Officers of the Company
      The following table sets forth information about our executive officers as of March 1, 2005. The executive officers listed below serve in their respective capacities at the discretion of the board of directors.
                     
Name   Age   Office   Since
             
Thomas W. Toomey
    44     Chief Executive Officer, President and Director     2001  
W. Mark Wallis
    54     Senior Executive Vice President     2001  
Christopher D. Genry
    44     Executive Vice President & Chief Financial Officer     2001  
Richard A. Giannotti
    49     Executive Vice President — Asset Quality     1985  
Martha R. Carlin
    42     Senior Vice President, Director of Property Operations     2001  
Lester C. Boeckel
    56     Senior Vice President — Dispositions & Acquisitions     2001  
Patrick S. Gregory
    55     Senior Vice President, Chief Information Officer     1997  
Michael J. Kelly
    37     Senior Vice President — Acquisitions     2004  
Rodney A. Neuheardt
    43     Senior Vice President — Finance & Treasurer     2001  
Scott A. Shanaberger
    36     Senior Vice President, Chief Accounting Officer & Assistant Secretary     1994  
Thomas A. Spangler
    44     Senior Vice President — Business Development & Chief Risk Officer     1998  
Moises V. Vela, Jr. 
    43     Senior Vice President, Multicultural Strategy     2005  
Mark E. Wood
    52     Senior Vice President — Development     1994  
Mary Ellen Norwood
    50     Vice President — Legal Administration & Secretary     2001  
      Set forth below is certain biographical information about each of our executive officers.
      Mr. Toomey joined us as Chief Executive Officer, President and a director in February 2001. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company, or AIMCO, a publicly traded real estate investment trust, where he served as Chief Operating Officer for two years and Chief Financial Officer for four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from 34,000 apartment units to 360,000 units. He has also served as a Senior Vice President at Lincoln Property Company, a national real estate development, property management and real estate consulting company, from 1990 to 1995. He currently serves as a member of the board of the National Association of Real Estate Investment Trusts and the National MultiHousing Council and he serves as Co-Chairman of the Homeland Security Task Force of the Real Estate Roundtable.
      Mr. Wallis joined us in March 2001 as Senior Executive Vice President responsible for legal, acquisitions, dispositions, and development. Prior to joining us, Mr. Wallis was the President of Golden Living Communities, a company he established in 1995, involved in the development of assisted and independent living communities. Prior to founding Golden Living, Mr. Wallis was Executive Vice President of Finance and Administration of Lincoln Property Company.
      Mr. Genry joined us in March 2001 as Executive Vice President and Chief Financial Officer. Mr. Genry had been Chief Financial Officer of Centex Construction Group, a $1 billion subsidiary of the New York Stock Exchange listed Centex Corporation. As Chief Financial Officer, he provided strategic leadership in the development and management of all financial and information systems, the redesign and oversight of internal audit functions, and the identification and evaluation of acquisition opportunities. Prior to joining Centex, he was with Arthur Andersen & Co. in Dallas.
      Mr. Giannotti joined us as Director of Development and Construction in September 1985. He was elected Assistant Vice President in 1988, Vice President in 1989, and Senior Vice President in 1996. In 1998, Mr. Giannotti was elected Director of Development-East, and was promoted to Executive Vice President — Asset Quality in 2003.

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      Ms. Carlin joined us in March 2001 as a Senior Vice President responsible for operational efficiencies and revenue enhancement and was promoted to Senior Vice President, Director of Property Operations in 2004. Ms. Carlin was previously Senior Vice President of Operations for opsXchange, Inc., a real estate procurement technology developer. Previously, she served as Senior Vice President of Ancillary Services at AIMCO and as a member of Arthur Andersen’s Real Estate Services Group.
      Mr. Boeckel joined us in July 2001 as Vice President of Dispositions and Acquisitions and was promoted to Senior Vice President in February 2002. Prior to joining United Dominion, Mr. Boeckel was the Senior Vice President of Asset Management at AIMCO. Before becoming the Senior Vice President of Asset Management, Mr. Boeckel was a Regional Vice President with operating responsibility for a portfolio of 12,000 apartment homes. Prior to joining AIMCO, Mr. Boeckel had over ten years of real estate experience with various firms including a regional investment banking firm, a regional financial planning firm, and a national apartment syndication firm.
      Mr. Gregory joined us in 1997 as Vice President and Chief Information Officer and was promoted to Senior Vice President in 1999. From 1976 to 1997, Mr. Gregory was employed by Crestar Bank as a New Technology Analyst.
      Mr. Kelly joined us in 2003 as Senior Vice President — Acquisitions. Prior to joining United Dominion, Mr. Kelly was Senior Vice President in charge of national apartment acquisitions for Urdang & Associates, a Philadelphia based pension fund advisor. During his tenure he purchased over 4,100 units. Prior to Urdang, Mr. Kelly was a Principal with Lend Lease focusing on national apartment acquisitions. From 1993 to 1998, Mr. Kelly was Vice President and part owner of Apartment Realty Advisors, an apartment brokerage company.
      Mr. Neuheardt joined us in June 2001 as Vice President, Finance and was promoted to Senior Vice President, Finance in February 2003, and Treasurer in 2004. Prior to joining us, Mr. Neuheardt was Controller and Treasurer of Sunrise Housing, Ltd., a privately owned apartment development company that manufactures modular units for the construction of affordable apartment communities. Previously, Mr. Neuheardt served as controller of several private energy companies, including Continental Emsco Company. Prior to that, Mr. Neuheardt was a Senior Manager in KPMG, LLP’s audit practice.
      Mr. Shanaberger joined us in 1994 as an Accounting Manager and was promoted to Assistant Vice President and Assistant Treasurer in 1997. In 2000, Mr. Shanaberger was promoted to Vice President Corporate Controller and Chief Accounting Officer and was promoted to Senior Vice President in 2002. Prior to joining United Dominion, Mr. Shanaberger was employed by Ernst & Young LLP.
      Mr. Spangler joined us as Assistant Vice President, Operational Planning and Asset Management in August 1998 and was promoted to Vice President, Director of Operational Planning and Asset Management that same year. Mr. Spangler was promoted to Senior Vice President — Business Development in February 2003, and Chief Risk Officer in September 2003. Prior to joining United Dominion, Mr. Spangler was an Asset Manager for Summit Enterprises, Inc. of Virginia, a private investment management firm for nine years.
      Mr. Vela joined us as Senior Vice President, Multicultural Strategy in February 2005. Prior to joining us, Mr. Vela served as executive director of the National Association of Hispanic Real Estate Professionals and as president of Diverse Directions LLC, a consulting firm that he established in 2000. At Diverse Directions, he advised clients on marketing strategies, government issues and media relations targeting the Hispanic community. From 2002 to 2004, Mr. Vela was of counsel at the law firm of Hebson, Liddon & Slate, P.C. in Birmingham, Alabama.
      Mr. Wood joined us as Vice President of Construction in connection with the merger of SouthWest in 1996. He was promoted to Senior Vice President and Director of Development — West in 2000.
      Ms. Norwood joined us in 2001 as Vice President — Legal Administration and Secretary. Prior to joining us, Ms. Norwood was employed by Centex Corporation for 15 years, most recently as its Legal Administrator. Centex is a New York Stock Exchange listed company that operates in the home building,

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

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Item 2. Properties
      At December 31, 2004, our apartment portfolio included 273 communities located in 43 markets, with a total of 78,855 completed apartment homes. In addition, we had three apartment communities under development. We own approximately 53,000 square feet of office space in Richmond, Virginia, for our corporate offices and we lease approximately 11,000 square feet of office space in Highlands Ranch, Colorado, for our principal executive offices. The table below sets forth a summary of our real estate portfolio by geographic market at December 31, 2004.
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2004
                                                                                             
                                Average           Average
        Number   Percentage                   Collections           Home
    Number of   of   of   Carrying   Encumbrances           per           Size
    Apartment   Apartment   Carrying   Value (in   (in   Cost Per   Physical   Occupied       Resident   (Square
    Communities   Homes   Value   thousands)   thousands)   Home   Occupancy   Home(a)   Concessions(b)   Turnover(c)   Feet)
                                             
Southern California
    26       7,070       18.9 %   $ 993,486     $ 244,148     $ 140,521       94.5 %   $ 1,132       1.4 %     30.5 %     832  
Houston, TX
    21       6,034       5.2 %     271,403       29,382       44,979       91.0 %     625       2.4 %     60.3 %     828  
Tampa, FL
    12       4,314       4.7 %     244,944       60,275       56,779       93.8 %     726       3.5 %     54.8 %     978  
Northern California
    7       2,024       4.1 %     217,004       71,038       107,215       94.4 %     1,126       2.9 %     50.7 %     795  
Orlando, FL
    14       4,140       4.1 %     216,721       72,150       52,348       94.7 %     710       1.5 %     64.8 %     937  
Metropolitan DC
    7       2,245       4.1 %     213,611       82,058       95,150       96.2 %     1,065       2.3 %     39.0 %     962  
Raleigh, NC
    11       3,663       4.0 %     212,412       76,116       57,989       93.6 %     637       2.9 %     65.4 %     957  
Dallas, TX
    11       3,590       3.8 %     198,027       62,530       55,161       96.0 %     644       2.4 %     61.9 %     829  
Phoenix, AZ
    10       2,779       3.3 %     174,341       31,670       62,735       91.7 %     669       11.3 %     70.5 %     945  
Baltimore, MD
    10       2,118       3.1 %     162,396       17,836       76,674       96.2 %     919       1.2 %     45.8 %     925  
Columbus, OH
    6       2,530       3.0 %     155,494       45,864       61,460       91.8 %     668       3.2 %     64.9 %     904  
Nashville, TN
    9       2,580       2.9 %     152,312       39,299       59,036       94.3 %     679       1.5 %     60.9 %     950  
Monterey Peninsula, CA
    8       1,580       2.6 %     139,333             88,185       91.5 %     919       1.1 %     62.5 %     726  
Richmond, VA
    9       2,636       2.6 %     137,496       62,207       52,161       93.9 %     750       2.3 %     64.7 %     968  
Charlotte, NC
    9       2,378       2.6 %     136,790       11,784       57,523       92.1 %     593       1.6 %     58.0 %     977  
Arlington, TX
    8       2,656       2.4 %     127,009       25,865       47,820       93.1 %     630       2.1 %     57.9 %     811  
Greensboro, NC
    8       2,123       2.1 %     107,913             50,830       93.3 %     588       0.9 %     60.2 %     981  
Seattle, WA
    6       1,575       1.9 %     99,829       40,774       63,383       93.0 %     758       4.4 %     67.3 %     891  
Denver, CO
    3       1,484       1.9 %     99,179             66,832       93.1 %     641       17.3 %     59.4 %     938  
Wilmington, NC
    6       1,868       1.8 %     93,902             50,269       95.8 %     647       1.4 %     73.1 %     952  
Portland, OR
    6       1,490       1.8 %     91,943       15,726       61,707       92.2 %     698       5.3 %     41.5 %     879  
Austin, TX
    5       1,425       1.6 %     82,080       5,391       57,600       93.6 %     631       4.0 %     63.2 %     805  
Atlanta, GA
    6       1,426       1.4 %     75,604       16,886       53,018       91.7 %     615       2.0 %     62.0 %     908  
Columbia, SC
    6       1,584       1.2 %     64,985             41,026       92.9 %     601       2.7 %     77.4 %     838  
Jacksonville, FL
    3       1,157       1.2 %     61,251       12,455       52,939       93.3 %     701       1.5 %     71.8 %     896  
Norfolk, VA
    6       1,438       1.1 %     60,184       9,118       41,853       96.3 %     782       1.2 %     73.7 %     1,016  
Other Southwestern
    12       4,100       4.0 %     209,653       50,677       51,135       92.9 %     630       1.4 %     62.5 %     828  
Other Florida
    6       1,737       2.3 %     118,006       44,873       67,937       91.1 %     712       2.1 %     46.3 %     944  
Other North Carolina
    8       1,893       1.5 %     78,669       12,434       41,558       95.9 %     620       0.7 %     83.6 %     895  
Other Mid-Atlantic
    6       1,156       1.1 %     56,377       16,770       48,769       94.1 %     816       1.3 %     79.8 %     922  
Other Virginia
    3       820       0.9 %     47,271       14,671       57,648       92.6 %     926       2.4 %     76.8 %     942  
Other Southeastern
    2       798       0.8 %     40,989       16,368       51,365       94.4 %     502       1.1 %     54.6 %     811  
Other Midwestern
    3       444       0.4 %     23,520       5,767       52,973       93.9 %     684       3.1 %     63.1 %     955  
Real Estate Under
                                                                                       
Development
    n/a       n/a       0.8 %     40,241       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
Land
    n/a       n/a       0.6 %     29,449       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
                                                                                         
 
Total Apartments(d)
    273       78,855       99.8 %   $ 5,233,824     $ 1,194,132     $ 66,373       93.6 %   $ 728       2.8 %     58.9 %     895  
                                                                                         
Commercial Property
    n/a       n/a       0.1 %     3,256             n/a       n/a       n/a       n/a       n/a       n/a  
Richmond — Corporate
    n/a       n/a       0.1 %     6,216       3,792       n/a       n/a       n/a       n/a       n/a       n/a  
                                                                                         
   
Total Real Estate Owned
    273       78,855       100.0 %   $ 5,243,296     $ 1,197,924     $ 66,373       93.6 %   $ 728       2.8 %     58.9 %     895  
                                                                                         
 
(a) Average Collections per Occupied Home represents net rental and fee income per weighted average number of homes occupied.
 
(b) Concessions disclosed as a percentage of gross potential rent.
 
(c) Resident Turnover represents the percentage of homes that would be turned in the course of the year if the average weekly move-outs experienced throughout the most recent quarter were duplicated for the entire year.
 
(d) Includes real estate held for disposition, real estate under development, and land, but excludes commercial property.

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Item 3. Legal Proceedings
      We are subject to various legal proceedings and claims arising in the ordinary course of business. We cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. We believe that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
      No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2004.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
      Our common stock is traded on the New York Stock Exchange under the symbol “UDR.” The following tables set forth the quarterly high and low sale prices per common share reported on the NYSE for each quarter of the last two years. Distribution information for common stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
                         
            Distributions
    High   Low   Declared
             
2004
                       
1st Quarter
  $ 19.70     $ 17.85     $ .2925  
2nd Quarter
    19.99       17.10       .2925  
3rd Quarter
    21.38       18.83       .2925  
4th Quarter
    24.80       19.51       .2925  
 
2003
                       
1st Quarter
  $ 16.76     $ 15.13     $ .2850  
2nd Quarter
    17.72       15.98       .2850  
3rd Quarter
    18.96       17.07       .2850  
4th Quarter
    19.53       17.39       .2850  
      On March 1, 2005, the closing sale price of our common stock was $22.35 per share on the NYSE and there were 6,779 holders of record of the 137,023,872 outstanding shares of our common stock.
      We have determined that, for federal income tax purposes, approximately 66% of the distributions for each of the four quarters of 2004 represented ordinary income, 17% represented long-term capital gain, 7% represented unrecaptured section 1250 gain, and 10% represented return of capital to our stockholders.
      We pay regular quarterly distributions to holders of shares of our common stock. Future distributions will be at the discretion of our board of directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, and other factors. The annual distribution payment for calendar year 2004 necessary for us to maintain our status as a REIT was approximately $0.69 per share. We declared total distributions of $1.17 per share of common stock for 2004.
      A covenant in our $500 million unsecured revolving credit facility prohibits the payment of dividends and distributions on our common stock in excess of 95% of our “Funds From Operations,” as defined in the credit facility, during any period of four consecutive fiscal quarters. Despite this covenant but except as provided in the following sentence, we may pay dividends required to maintain our qualification as a REIT

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under the Internal Revenue Code. However, if certain defaults or events of default exist under such facility, this covenant prohibits the payment of dividends and distributions in all circumstances.
Series B Preferred Stock
      The Series B Cumulative Redeemable Preferred Stock has no stated par value and a liquidation preference of $25 per share. The Series B has no voting rights except as required by law. The Series B has no stated maturity and is not subject to any sinking fund or mandatory redemption and is not convertible into any of our other securities. The Series B is not redeemable prior to May 29, 2007. On or after this date, the Series B may be redeemed for cash at our option, in whole or in part, at a redemption price of $25 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the sale proceeds of our other capital stock. All dividends due and payable on the Series B have been accrued or paid as of the end of each fiscal year.
      Distributions declared on the Series B in 2004 were $2.15 per share or $0.5375 per quarter. The Series B is listed on the NYSE under the symbol “UDRpb.” At December 31, 2004, a total of 5,416,009 shares of the Series B were outstanding.
Series D Preferred Stock
      All of the remaining outstanding shares of our Series D Cumulative Convertible Redeemable Preferred Stock have been converted by the holder into shares of our common stock. The Series D had no stated maturity, no stated par value, no voting rights except as required by law, and a liquidation preference of $25 per share. The Series D was convertible at any time into 1.5385 shares of common stock, subject to certain adjustments, at the option of the holder of the Series D. We had the option to redeem at any time all or part of the Series D at a price per share of $25, payable in cash, plus all accrued and unpaid dividends, provided that the current market price of our common stock was at least equal to the conversion price, initially set at $16.25 per share.
      In 2004, we exercised our right to redeem the remaining 2 million shares of our Series D that were outstanding. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,769 shares of common stock at a price of $16.25 per share. In 2003, we exercised our right to redeem 6 million shares of our Series D. Upon receipt of our redemption notice, the 6 million shares to be redeemed were converted by the holder into 9,230,923 shares of common stock at a price of $16.25 per share. Because the shares of common stock that were issued upon conversion of the Series D were issued in transactions not involving a public offering, the transactions are exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act.
      Distributions declared on the Series D in 2004 were $2.09 per share or $0.5223 per quarter. The Series D was not listed on any exchange. At December 31, 2004, there were no outstanding shares of the Series D.
Series E Preferred Stock
      The Series E Cumulative Convertible Preferred Stock has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time and from time to time at the holder’s option into one share of our common stock. The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption.
      In 2004, Series E holders converted a total of 621,405 shares of Series E into 621,405 shares of our common stock. Because the shares of common stock that were issued upon conversion of the Series E were issued in transactions not involving a public offering, the transactions are exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act.

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      Distributions declared on the Series E in 2004 were $1.33 per share or $0.3322 per quarter. The Series E is not listed on any exchange. At December 31, 2004 a total of 2,803,812 shares of the Series E were outstanding.
Dividend Reinvestment and Stock Purchase Plan
      We have a Dividend Reinvestment and Stock Purchase Plan under which holders of our common stock and our Series B preferred stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Stockholders who do not participate in the plan continue to receive dividends as declared. As of March 1, 2005, there were 3,749 participants in the plan.
Operating Partnership Units
      From time to time we issue shares of our common stock in exchange for operating partnership units, or OP Units, tendered to our operating partnerships, United Dominion Realty, L.P. and Heritage Communities L.P., for redemption in accordance with the provisions of their respective partnership agreements. At December 31, 2004, there were 10,024,380 OP Units (of which 1,791,329 and 0 are owned by the holders of the Series A OPPS and the Series B OPPS, respectively (see Notes 1 and 9 in the Notes to Consolidated Financial Statements)) and 355,255 OP Units in United Dominion Realty, L.P. and Heritage Communities L.P., respectively, that were owned by limited partners. The holder of the OP Units has the right to require United Dominion Realty, L.P. to redeem all or a portion of the OP Units held by the holder in exchange for a cash payment based on the market value of our common stock at the time of redemption. However, United Dominion Realty, L.P.’s obligation to pay the cash amount is subject to the prior right of the company to acquire such OP Units in exchange for either the cash amount or shares of our common stock. Heritage Communities L.P. OP Units are convertible into common stock in lieu of cash, at our option, once the holder elects to convert, at an exchange ratio of 1.575 shares for each OP Unit. During 2004, we issued a total of 170,209 shares of common stock in exchange for OP Units.
Purchases of Equity Securities
      On June 3, 1999, our board of directors authorized the repurchase in open market transactions, in block transactions, or otherwise, of up to 5.5 million shares of common stock. On December 5, 2000, our board of directors authorized the purchase of up to an additional 5.5 million shares of common stock in open market transactions, in block purchases or otherwise. As of December 31, 2004, we have repurchased a total of 8,749,763 shares of common stock under this program. As disclosed in the table below, we did not purchase any shares of our common stock during the quarter ended December 31, 2004.
                                   
                Maximum Number
            Total Number of Shares   of Shares that May
    Total Number   Average   Purchased as Part of   Yet Be Purchased
    of Shares   Price Per   Publicly Announced   Under the Plans or
Period   Purchased   Share   Plans or Programs   Programs
                 
October 1, 2004 through
October 31, 2004
    0       N/A       0       2,250,237  
November 1, 2004 through November 30, 2004
    0       N/A       0       2,250,237  
December 1, 2004 through December 31, 2004
    0       N/A       0       2,250,237  
 
Total
    0       N/A       0       2,250,237  

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Item 6. Selected Financial Data
      The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended December 31, 2004. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.
UNITED DOMINION REALTY TRUST, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data and apartment homes owned)
                                             
    Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
Operating Data(c)
                                       
 
Rental income
  $ 604,270     $ 542,894     $ 520,939     $ 494,709     $ 507,112  
 
Income/(loss) before minority interests and discontinued operations
    32,446       33,089       (4,957 )     9,693       13,382  
 
Income from discontinued operations, net of minority interests
    65,331       37,055       57,520       52,519       63,041  
 
Net income
    97,152       70,404       53,229       61,828       76,615  
 
Distributions to preferred stockholders
    19,531       26,326       27,424       31,190       36,891  
 
Net income available to common stockholders
    71,892       24,807       25,805       27,142       42,653  
 
Common distributions declared
    152,203       134,876       118,888       108,956       110,225  
 
Weighted average number of common shares outstanding — basic
    128,097       114,672       106,078       100,339       103,072  
 
Weighted average number of common shares outstanding — diluted
    129,080       114,672       106,078       100,339       103,072  
 
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    145,842       136,975       127,838       120,728       123,005  
 
Per share — basic:
                                       
   
Income/(loss) from continuing operations available to common stockholders, net of minority interests
  $ 0.05     $ (0.10 )   $ (0.30 )   $ (0.25 )   $ (0.20 )
   
Income from discontinued operations, net of minority interests
    0.51       0.32       0.54       0.52       0.61  
   
Net income available to common stockholders
    0.56       0.22       0.24       0.27       0.41  
 
Per share — diluted:
                                       
   
Income/(loss) from continuing operations available to common stockholders, net of minority interests
    0.05       (0.10 )     (0.30 )     (0.25 )     (0.20 )
   
Income from discontinued operations, net of minority interests
    0.51       0.32       0.54       0.52       0.61  
   
Net income available to common stockholders
    0.56       0.22       0.24       0.27       0.41  
 
Common distributions declared
    1.17       1.14       1.11       1.08       1.07  

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    Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
Balance Sheet Data(c)
                                       
 
Real estate owned, at carrying value
  $ 5,243,296     $ 4,351,551     $ 3,967,483     $ 3,907,667     $ 3,836,320  
 
Accumulated depreciation
    1,007,887       896,630       748,733       646,366       509,405  
 
Total real estate owned, net of accumulated depreciation
    4,235,409       3,454,921       3,218,750       3,261,301       3,326,915  
 
Total assets
    4,332,001       3,543,643       3,276,136       3,348,091       3,453,957  
 
Secured debt
    1,197,924       1,018,028       1,015,740       974,177       866,115  
 
Unsecured debt
    1,682,058       1,114,009       1,041,900       1,090,020       1,126,215  
 
Total debt
    2,879,982       2,132,037       2,057,640       2,064,197       1,992,330  
 
Stockholders’ equity
    1,195,451       1,163,436       1,001,271       1,042,725       1,218,892  
 
Number of common shares outstanding
    136,430       127,295       106,605       103,133       102,219  
Other Data
                                       
Cash Flow Data
                                       
 
Cash provided by operating activities
  $ 251,747     $ 234,945     $ 229,001     $ 224,411     $ 224,160  
 
Cash (used in)/provided by investing activities
    (595,966 )     (304,217 )     (67,363 )     (64,055 )     58,705  
 
Cash provided by/(used in) financing activities
    347,299       70,944       (163,127 )     (166,020 )     (280,238 )
Funds from Operations(a)
                                       
 
Funds from operations — basic
  $ 210,468     $ 192,938     $ 153,016     $ 159,202     $ 162,930  
 
Funds from operations — diluted
    218,355       207,619       168,795       174,630       178,230  
 
Funds from operations with gains on the disposition of real estate developed for sale — diluted(b)
    219,557       208,431       168,795       174,630       178,230  
Apartment Homes Owned
                                       
   
Total apartment homes owned at December 31
    78,855       76,244       74,480       77,567       77,219  
   
Weighted average number of apartment homes owned during the year
    76,873       74,550       76,567       76,487       80,253  
 
(a) Funds from operations (“FFO”) is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s definition issued in April 2002. We consider FFO in evaluating property acquisitions and our operating performance and believe that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of our activities in accordance with generally accepted accounting principles. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. For 2004, FFO includes a charge of $5.5 million to cover hurricane related expenses. For 2001, FFO includes a charge of $8.6 million related to workforce reductions, other severance costs, executive office relocation costs, and the write down of seven undeveloped land sites along with our investment in an online apartment leasing company. For 2000, FFO includes a charge of $3.7 million related to the settlement of litigation and an organizational charge. For the years ended December 31, 2004 and 2003, distributions to preferred stockholders exclude $5.7 million and $19.3 million, respectively, related to premiums on preferred stock conversions.
 
(b) Gains on the disposition of real estate investments developed for sale is defined as net sales proceeds less a tax provision (such development by REITs must be conducted in a taxable REIT subsidiary) and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains (or losses) on real estate development for sale to be a meaningful supplemental measure of performance because of the short-term use of funds to produce a profit which differs from the traditional long-term investment in real estate for REITs.
 
(c) Reclassified to conform to current year presentation in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as described in Note 3 to the consolidated financial statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
      This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause 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 us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
Business Overview
      We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.
      At December 31, 2004, our portfolio included 273 communities with 78,855 apartment homes nationwide. The following table summarizes our market information by major geographic markets

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(includes real estate held for disposition, real estate under development, and land, but excludes commercial properties):
                                                   
                    Year Ended
        December 31, 2004
    As of December 31, 2004    
            Average
    Number of   Number of   Percentage   Carrying   Average   Collections
    Apartment   Apartment   of Carrying   Value (in   Physical   per Occupied
    Communities   Homes   Value   thousands)   Occupancy   Home
                         
Southern California
    26       7,070       19.0 %   $ 993,486       94.5 %   $ 1,132  
Houston, TX
    21       6,034       5.2 %     271,403       91.0 %     625  
Tampa, FL
    12       4,314       4.7 %     244,944       93.8 %     726  
Northern California
    7       2,024       4.1 %     217,004       94.4 %     1,126  
Orlando, FL
    14       4,140       4.1 %     216,721       94.7 %     710  
Metropolitan DC
    7       2,245       4.1 %     213,611       96.2 %     1,065  
Raleigh, NC
    11       3,663       4.0 %     212,412       93.6 %     637  
Dallas, TX
    11       3,590       3.8 %     198,027       96.0 %     644  
Phoenix, AZ
    10       2,779       3.3 %     174,341       91.7 %     669  
Baltimore, MD
    10       2,118       3.1 %     162,396       96.2 %     919  
Columbus, OH
    6       2,530       3.0 %     155,494       91.8 %     668  
Nashville, TN
    9       2,580       2.9 %     152,312       94.3 %     679  
Monterey Peninsula, CA
    8       1,580       2.7 %     139,333       91.5 %     919  
Richmond, VA
    9       2,636       2.6 %     137,496       93.9 %     750  
Charlotte, NC
    9       2,378       2.6 %     136,790       92.1 %     593  
Arlington, TX
    8       2,656       2.4 %     127,009       93.1 %     630  
Greensboro, NC
    8       2,123       2.1 %     107,913       93.3 %     588  
Seattle, WA
    6       1,575       1.9 %     99,829       93.0 %     758  
Denver, CO
    3       1,484       1.9 %     99,179       93.1 %     641  
Wilmington, NC
    6       1,868       1.8 %     93,902       95.8 %     647  
Portland, OR
    6       1,490       1.8 %     91,943       92.2 %     698  
Austin, TX
    5       1,425       1.6 %     82,080       93.6 %     631  
Atlanta, GA
    6       1,426       1.4 %     75,604       91.7 %     615  
Columbia, SC
    6       1,584       1.2 %     64,985       92.9 %     601  
Jacksonville, FL
    3       1,157       1.2 %     61,251       93.3 %     701  
Norfolk, VA
    6       1,438       1.1 %     60,184       96.3 %     782  
Other Southwestern
    12       4,100       4.0 %     209,653       92.9 %     630  
Other Florida
    6       1,737       2.3 %     118,006       91.1 %     712  
Other North Carolina
    8       1,893       1.5 %     78,669       95.9 %     620  
Other Mid-Atlantic
    6       1,156       1.1 %     56,377       94.1 %     816  
Other Virginia
    3       820       0.9 %     47,271       92.6 %     926  
Other Southeastern
    2       798       0.8 %     40,989       94.4 %     502  
Other Midwestern
    3       444       0.4 %     23,520       93.9 %     684  
Real Estate Under Development
                0.8 %     40,241              
Land
                0.6 %     29,449              
                                     
 
Total
    273       78,855       100.0 %   $ 5,233,824       93.6 %   $ 728  
                                     

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Liquidity and Capital Resources
      Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale or maturity of existing assets, or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes. We routinely use our unsecured bank credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities.
      We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings under credit arrangements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through long-term secured and unsecured borrowings, the disposition of properties, and the issuance of additional debt or equity securities. We believe that our net cash provided by operations will continue to be adequate to meet both operating requirements and the payment of dividends by the company in accordance with REIT requirements in both the short- and long-term. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations.
      We have a shelf registration statement filed with the Securities and Exchange Commission which provides for the issuance of up to an aggregate of $1.5 billion in common shares, preferred shares, and debt securities to facilitate future financing activities in the public capital markets. This shelf registration statement replaces our previous $1.0 billion shelf registration statement and includes $331.3 million of unissued securities carried forward from the previous $1.0 billion shelf registration statement. Throughout 2004, we completed various financing activities under our $1.5 billion shelf registration statement. These activities are summarized in the section titled “Financing Activities” that follows. As of December 31, 2004, approximately $1.1 billion of equity and debt securities remained available for use under the shelf registration statement. Access to capital markets is dependent on market conditions at the time of issuance.
      In July 2004, Moody’s Investors Service upgraded our rating on our senior unsecured debt to Baa2 from Baa3 and our preferred stock to Baa3 from Ba1 with a stable outlook.
      In October 2004, we filed a prospectus supplement under the Securities Act of 1933 relating to the offering of up to 5 million shares of our common stock that we may issue and sell through an agent from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. Any sales of these shares will be made under our $1.5 billion shelf registration statement pursuant to a sales agreement that we entered into with the agent in July 2003. The sales price of the common stock that may be sold under the sales agreement will be no lower than the minimum price designated by us prior to the sale. As of December 31, 2004, we have sold a total of 472,000 shares of common stock pursuant to the sales agreement at a weighted average sales price of $20.36, for net proceeds to us of approximately $9.4 million.
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 and/or unsecured debt, and by the reinvestment of proceeds from the sale of properties.

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      During 2005, we have approximately $27.9 million of secured debt and $71.1 million of unsecured debt maturing and we anticipate repaying that debt with proceeds from borrowings under our secured or unsecured credit facilities, or the issuance of new unsecured debt securities or equity.
Critical Accounting Policies and Estimates
      Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, and (3) real estate investment properties. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
Capital Expenditures
      In conformity with accounting principles generally accepted in the United States, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
      During 2004, $82.4 million or $1,075 per home was spent on capital expenditures for all of our communities, excluding development. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, siding, parking lots, and other non-revenue enhancing capital expenditures, which aggregated $36.3 million or $473 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, and other extensive interior upgrades totaled $45.9 million or $599 per home, and major renovations totaled $0.2 million or $3 per home for the year ended December 31, 2004.
      The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development for the periods presented:
                                                   
    Year Ended December 31,   Year Ended December 31,
    (dollars in thousands)   (per home)
         
    2004   2003   % Change   2004   2003   % Change
                         
Turnover capital expenditures
  $ 16,863     $ 15,044       12.1 %   $ 220     $ 202       8.9 %
Other recurring capital expenditures
    19,397       19,478       -0.4 %     253       262       -3.4 %
                                     
 
Total recurring capital expenditures
    36,260       34,522       5.0 %     473       464       1.9 %
Revenue enhancing improvements
    45,933       15,408       198.1 %     599       207       189.4 %
Major renovations
    197       3,216       -93.9 %     3       43       -93.0 %
                                     
 
Total capital improvements
  $ 82,390     $ 53,146       55.0 %   $ 1,075     $ 714       50.6 %
                                     
Repair and maintenance
    42,196       40,615       3.9 %     550       546       0.7 %
                                     
 
Total expenditures
  $ 124,586     $ 93,761       32.9 %   $ 1,625     $ 1,260       29.0 %
                                     
      Total capital improvements increased $29.2 million or $361 per home in 2004 compared to 2003. We will continue to selectively add revenue enhancing improvements which we believe will provide a return on investment substantially in excess of our cost of capital. Recurring capital expenditures during 2005 are currently expected to be approximately $510 per home.
Impairment of Long-Lived Assets
      We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market

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and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
Real Estate Investment Properties
      We purchase real estate investment properties from time to time and allocate the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining contractual lease period.
Statements of Cash Flow
      The following discussion explains the changes in net cash provided by operating and financing activities and net cash used in investing activities that are presented in our Consolidated Statements of Cash Flows.
      Operating Activities
      For the year ended December 31, 2004, our net cash flow provided by operating activities was $251.7 million compared to $234.9 million for 2003. During 2004, the increase in cash flow from operating activities resulted primarily from an increase in property operating income due to the overall increase in our apartment community portfolio (see discussion under “Apartment Community Operations”).
      Investing Activities
      For the year ended December 31, 2004, net cash used in investing activities was $596.0 million compared to $304.2 million for 2003. Changes in the level of investing activities from period to period reflects our strategy as it relates to our acquisition, capital expenditure, development, and disposition programs, as well as the impact of the capital market environment on these activities, all of which are discussed in further detail below.
      Acquisitions
      For the year ended December 31, 2004, we acquired 28 apartment communities with 8,060 apartment homes for an aggregate consideration of $1.0 billion and one parcel of land for $16.3 million. In 2003, we acquired 3,514 apartment homes in 11 communities for an aggregate consideration of $347.7 million and one parcel of land for $3.1 million. In addition, we purchased the remaining 47% joint venture partners’ ownership interest in nine communities with 1,706 apartment homes in Salinas and Pacific Grove, California, for $76.0 million in June 2003.
      Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in the fast growing Southern California, Florida, and Metropolitan DC markets over the past two years. During 2005, we plan to continue to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including past performance, expected job growth, current and anticipated housing supply and demand, and the ability to attract and support household formation.

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      Real Estate Under Development
      Development activity is focused in core markets in which we have strong operations in place. For the year ended December 31, 2004, we invested approximately $19.1 million in development projects, an increase of $5.5 million from our 2003 level of $13.6 million.
      The following projects were under development as of December 31, 2004:
                                                 
    Number of   Completed           Estimated   Expected
    Apartment   Apartment           Cost Per   Completion
    Homes   Homes   Cost to Date   Budgeted Cost   Home   Date
                         
            (In thousands)   (In thousands)        
2000 Post Phase III
San Francisco, CA
    24           $ 2,754     $ 7,000     $ 291,700       1Q06  
Verano at Town Square
Rancho Cucamonga, CA
    414             27,648       66,300       160,100       2Q06  
Mandalay on the Lake Irving, TX
    369             9,840       30,900       83,700       2Q06  
                                     
      807           $ 40,242     $ 104,200     $ 129,100          
                                     
      In addition, we own eight parcels of land that we continue to hold for future development that had a carrying value as of December 31, 2004 of $25.5 million. Four of the eight parcels represent additional phases to existing communities as we plan to add apartment homes adjacent to currently owned communities that are in improving markets.
      Disposition of Investments
      For the year ended December 31, 2004, we sold 19 communities with 5,425 apartment homes for an aggregate consideration of $270.1 million. In addition, we sold 24 of 36 townhomes of a community for $7.3 million. We recognized gains for financial reporting purposes of $52.9 million on these sales. Proceeds from the sales were used primarily to reduce debt.
      For the year ended December 31, 2003, we sold seven communities with 1,927 apartment homes for an aggregate consideration of $88.9 million, one parcel of land for $1.3 million, and two commercial properties for an aggregate consideration of $7.3 million. We recognized gains for financial reporting purposes of $15.9 million on these sales. Proceeds from the sales were used primarily to reduce debt.
      During 2005, we plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital into markets that would enhance future growth rates and economies of scale. We intend to use the proceeds from 2005 dispositions to reduce debt, acquire communities, and fund development activity.
      Financing Activities
      Net cash provided by financing activities during 2004 was $347.3 million compared to $70.9 million in 2003. As part of the plan to improve our balance sheet, we utilized proceeds from dispositions, equity and debt offerings, and refinancings to extend maturities, pay down existing debt, and purchase new properties.
      The following is a summary of our financing activities for the year ended December 31, 2004:
  •  Repaid $131.8 million of secured debt and $46.6 million of unsecured debt.
 
  •  Sold $125 million aggregate principal amount of 5.13% senior unsecured notes due January 2014 ($75 million in January and $50 million in March) under our medium-term note program. These notes represent a re-opening of the 5.13% senior unsecured notes due January 2014 that we issued in October 2003, and these notes constitute a single series of notes, bringing the aggregate principal amount outstanding of the 5.13% senior unsecured notes to $200 million. The net proceeds of

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  $126.0 million were used to repay secured and unsecured debt obligations maturing in the first quarter of 2004 and to fund the acquisition of apartment homes.
 
  •  Sold $50 million aggregate principal amount of 3.90% senior unsecured notes due March 2010 in March 2004 under our medium-term note program. The net proceeds of approximately $49.4 million were used to fund the acquisition of apartment communities.
 
  •  Replaced our previous $1.0 billion shelf registration statement in June 2004 with a new shelf registration statement that provides for the issuance of up to $1.5 billion in debt securities and preferred and common stock. The new $1.5 billion shelf registration statement includes $331.3 million of unissued securities carried forward from our previous shelf registration statement.
 
  •  Sold $50 million aggregate principal amount of 4.30% senior unsecured notes due July 2007 in June 2004 under our new $750 million medium-term note program. The net proceeds of approximately $49.8 million were used to fund the acquisition of apartment communities and repay amounts outstanding on our $500 million unsecured credit facility.
 
  •  Moody’s Investors Service upgraded our rating on our senior unsecured debt to Baa2 from Baa3 and our preferred stock to Baa3 from Ba1 with a stable outlook in July 2004.
 
  •  Sold $100 million of 5.00% senior unsecured notes due January 2012 and $25 million of 4.30% senior unsecured notes due July 2007 under our new $750 million medium-term note program in October 2004. The $25 million in notes represent a re-opening of the 4.30% senior unsecured notes due July 2007 that we issued in June 2004, and these notes constitute a single series of notes, bringing the aggregate principal amount outstanding of the 4.30% senior unsecured notes to $75 million. The net proceeds of $124.4 million were used to fund the acquisition of apartment communities.
 
  •  Sold $100 million aggregate principal amount of 5.25% senior unsecured notes due January 2015 under our new $750 million medium-term note program in October 2004. The net proceeds of $99.0 million were used to fund the acquisition of apartment communities.
 
  •  Sold 3.5 million shares of common stock at a public offering price of $20.50 per share under our $1.5 billion shelf registration statement in October 2004. We sold an additional 525,000 shares of common stock at a public offering price of $20.50 per share in connection with the exercise of the underwriter’s over-allotment option in October 2004. The net proceeds of $81.9 million were used to reduce outstanding debt balances under our $500 million unsecured revolving credit facility, which was used to fund the acquisition of apartment communities.
 
  •  Filed a prospectus supplement under the Securities Act of 1933 in October 2004, relating to the offering of up to 5 million shares of our common stock that we may issue and sell through an agent from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. Any sales of these shares will be made under our $1.5 billion shelf registration statement pursuant to a sales agreement that we entered into with the agent in July 2003. The sales price of the common stock that may be sold under the sales agreement will be no lower than the minimum price designated by us prior to the sale. As of December 31, 2004, we have sold a total of 472,000 shares of common stock pursuant to the sales agreement at a weighted average sales price of $20.36, for net proceeds to us of approximately $9.4 million.
 
  •  Exercised our right to redeem 2 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in December 2004. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,769 shares of common stock at a price of $16.25 per share.
 
  •  In conjunction with certain acquisitions, we assumed secured mortgages of $311.7 million with maturity dates ranging from September 2006 through June 2013.

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      Credit Facilities
      We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million and one with Freddie Mac for $72 million. As of December 31, 2004, $656.3 million was outstanding under the Fannie Mae credit facilities leaving $203.7 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten years, bear interest at floating and fixed rates, and can be extended for an additional five years at our discretion. As of December 31, 2004, $20.7 million had been funded under the Freddie Mac credit facility leaving $51.3 million of unused capacity. The Freddie Mac credit facility is for an initial term of five years with an option for us to extend for an additional four-year term at the then market rate. As of December 31, 2004, aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities were $677 million. We have $288.9 million of the funded balance fixed at a weighted average interest rate of 6.4%. The remaining balance on these facilities is currently at a weighted average variable rate of 2.7%.
      We have a $500 million three-year unsecured revolving credit facility that matures in March 2006. If we receive 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 our 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 December 31, 2004, $278.1 million was outstanding under the credit facility leaving $221.9 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.
      Derivative Instruments
      As part of our overall interest rate risk management strategy, we have used derivatives as a means to fix the interest rates of variable rate debt obligations or to hedge anticipated financing transactions. Our derivative transactions used for interest rate risk management included various interest rate swaps with indices that related to the pricing of specific financial instruments of the company. We believe that we appropriately controlled our interest rate risk through the use of derivative instruments. During 2004, the fair value of our derivative instruments improved from an unfavorable $1.6 million at December 31, 2003, to $0 at December 31, 2004. This decrease was due to the normal progression of the fair market value of our derivative instruments towards zero as they matured. As of December 31, 2004, all of United Dominion’s interest rate swap agreements had matured.
      Interest Rate Risk
      We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. United Dominion does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. A large portion of our market risk is exposure to short-term interest rates from variable rate borrowings outstanding under our Fannie Mae and Freddie Mac credit facilities and our bank revolving credit facility, which totaled $388.1 million and $278.1 million, respectively, at December 31, 2004. The impact on our financial statements of refinancing fixed rate debt that matured during 2004 was immaterial.
      If market interest rates for variable rate debt average 100 basis points more in 2005 than they did during 2004, our interest expense would increase, and income before taxes would decrease by $7.4 million. Comparatively, if market interest rates for variable rate debt had averaged 100 basis points more in 2004 than in 2003, our interest expense would have increased, and net income would have decreased by $5.8 million. If market rates for fixed rate debt were 100 basis points higher at December 31, 2004, the fair value of fixed rate debt would have remained constant at $2.1 billion. If market interest rates for fixed

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rate debt were 100 basis points lower at December 31, 2004, the fair value of fixed rate debt would have increased from $2.1 billion to $2.3 billion.
      These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.
      Funds from Operations
      Funds from operations, or FFO, is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We compute FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trust’s (“NAREIT”) April 1, 2002 White Paper. We consider FFO in evaluating property acquisitions and our operating performance, and believe that FFO should be considered along with, but not as an alternative to, net income and cash flow as a measure of our activities in accordance with generally accepted accounting principles. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.
      Historical cost accounting for real estate assets in accordance with generally accepted accounting principles implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance and defines FFO as net income (computed in accordance with accounting principles generally accepted in the United States), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The use of FFO, combined with the required presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We generally consider FFO to be a useful measure for reviewing our comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. We believe that FFO is the best measure of economic profitability for real estate investment trusts.

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      The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three years ended December 31, 2004 (dollars in thousands):
                           
    2004   2003   2002
             
Net income
  $ 97,152     $ 70,404     $ 53,229  
Adjustments:
                       
 
Distributions to preferred stockholders
    (19,531 )     (26,326 )     (27,424 )
 
Real estate depreciation, net of outside partners’ interest
    171,781       145,271       132,619  
 
Minority interests of unitholders in operating partnership
    443       (874 )     (2,080 )
 
Real estate depreciation related to unconsolidated entities
    279       196       471  
Discontinued Operations:
                       
 
Real estate depreciation
    8,847       17,687       25,110  
 
Minority interests of unitholders in operating partnership
    4,400       2,521       3,789  
 
Net gains on sales of depreciable property
    (52,903 )     (15,941 )     (32,698 )
                   
Funds from operations — basic
  $ 210,468     $ 192,938     $ 153,016  
                   
 
Distributions to preferred stockholders — Series D and E (Convertible)
    7,887       14,681       15,779  
                   
Funds from operations — diluted
  $ 218,355     $ 207,619     $ 168,795  
                   
 
Gains on the disposition of real estate developed for sale
    1,202       812        
                   
FFO with gains on the disposition of real estate developed for sale — diluted
  $ 219,557     $ 208,431     $ 168,795  
                   
Weighted average number of common shares and OP Units outstanding — basic
    136,852       122,589       113,077  
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    145,842       136,975       127,838  
      In the computation of diluted FFO, OP Units, out-performance partnership shares, and the shares of Series D Cumulative Convertible Redeemable Preferred Stock and Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count. For the years ended December 31, 2004 and 2003, distributions to preferred stockholders exclude $5.7 million and $19.3 million, respectively, related to premiums on preferred stock conversions.
      Gains on the disposition of real estate investments developed for sale is defined as net sales proceeds less a tax provision (such development by REITs must be conducted in a taxable REIT subsidiary) and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains (or losses) on real estate developed for sale to be a meaningful supplemental measure of performance because of the short-term use of funds to produce a profit that differs from the traditional long-term investment in real estate for REITs.
      The following is a reconciliation of GAAP gains on the disposition of real estate developed for sale to gross gains on the disposition of real estate developed for sale for the three years ended December 31, 2004 (dollars in thousands):
                         
    2004   2003   2002
             
GAAP gains on the disposition of real estate developed for sale
  $ 1,278     $ 1,249     $  
Less: accumulated depreciation
    (76 )     (437 )      
                   
Gains on the disposition of real estate developed for sale
  $ 1,202     $ 812     $  
                   

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      The following table is our reconciliation of FFO share information to weighted average common shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for the three years ended December 31, 2004, (shares in thousands):
                           
    2004   2003   2002
             
Weighted average number of common shares and OP units outstanding — basic
    136,852       122,589       113,077  
Weighted average number of OP units outstanding
    (8,755 )     (7,917 )     (6,999 )
                   
 
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations
    128,097       114,672       106,078  
                   
Weighted average number of common shares, OP units, and common stock equivalents outstanding — diluted
    145,842       136,975       127,838  
Weighted average number of incremental shares from assumed stock option conversions
          (976 )     (885 )
Weighted average number of incremental shares from assumed restricted stock conversions
    86              
Weighted average number of OP units outstanding
    (8,755 )     (7,917 )     (6,999 )
Weighted average number of Series A OPPSs outstanding
    (1,791 )     (1,773 )     (1,568 )
Weighted average number of Series D preferred stock outstanding
    (2,892 )     (10,033 )     (12,308 )
Weighted average number of Series E preferred stock outstanding
    (3,410 )     (1,604 )      
                   
 
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations
    129,080       114,672       106,078  
                   
      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):
                         
    2004   2003   2002
             
Net cash provided by operating activities
  $ 251,747     $ 234,945     $ 229,001  
Net cash used in investing activities
    (595,966 )     (304,217 )     (67,363 )
Net cash provided by/(used in) financing activities
    347,299       70,944       (163,127 )
      Results of Operations
      The following discussion includes the results of both continuing and discontinued operations for the periods presented.
      Net Income Available to Common Stockholders
           2004-vs.-2003
      Net income available to common stockholders was $71.9 million ($0.56 per diluted share) for the year ended December 31, 2004, compared to $24.8 million ($0.22 per diluted share) for the year ended December 31, 2003, representing an increase of $47.1 million ($0.34 per diluted share). The increase for the year ended December 31, 2004, when compared to the same period in 2003, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
  •  $37.0 million more in gains recognized from the sale of depreciable property in 2004,
 
  •  a $19.2 million increase in operating results in 2004,
 
  •  a $13.5 million decrease in premiums paid on preferred stock conversions in 2004,

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  •  $6.8 million less in preferred stock distributions in 2004,
 
  •  a $1.5 million increase in non-property income in 2004,
 
  •  $1.4 million less in impairment loss on investments in 2004, and
 
  •  a $1.3 million decrease in general and administrative expense in 2004.
      These increases in income were partially offset by a $17.2 million increase in depreciation and amortization expense, a $6.6 million increase in interest expense, and a charge of $5.5 million for hurricane related expenses in 2004 when compared to 2003.
           2003-vs.-2002
      Net income available to common stockholders was $24.8 million ($0.21 per diluted share) for the year ended December 31, 2003, compared to $25.8 million ($0.24 per diluted share) for the year ended December 31, 2002, representing a decrease of $1.0 million ($0.03 per diluted share). The decrease for the year ended December 31, 2003, when compared to the same period in 2002, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
  •  a charge of $19.3 million in 2003 for a premium on preferred stock conversions,
 
  •  $16.8 million less in gains recognized from the sale of depreciable property in 2003,
 
  •  a $15.5 million decrease in property operating income in 2003,
 
  •  a $4.2 million increase in depreciation and amortization expense in 2003, and
 
  •  a $1.4 million impairment charge taken in 2003 for the write-off of our investment in Realeum, Inc., an unconsolidated development joint venture.
      These decreases in income were offset by $37.0 million less in prepayment penalties and premiums paid in 2003 for the refinancing of mortgage debt and the repurchase of unsecured debt, a $15.8 million decrease in interest expense in 2003, and a $2.3 million impairment charge taken in 2002 related to a portfolio of properties in Memphis, Tennessee.
      Apartment Community Operations
      Our net income is primarily generated from the operation of our apartment communities. The following table summarizes the operating performance of our total apartment portfolio for each of the periods presented (dollars in thousands):
                                                 
    Year Ended December 31,   Year Ended December 31,
         
    2004   2003   % Change   2003   2002   % Change
                         
Property rental income
  $ 649,952     $ 613,550       5.9 %   $ 613,550     $ 627,625       -2.2 %
Property operating expense*
    (251,697 )     (234,478 )     7.3 %     (234,478 )     (233,071 )     0.6 %
                                     
Property operating income
  $ 398,255     $ 379,072       5.1 %   $ 379,072     $ 394,554       -3.9 %
                                     
Weighted average number of homes
    76,873       74,550       3.1 %     74,550       76,567       -2.6 %
Physical occupancy**
    93.6 %     93.2 %     0.4 %     93.2 %     93.0 %     0.2 %
 
  Excludes depreciation, amortization, and property management expenses.
**  Based upon weighted average stabilized units.

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      The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the periods presented (dollars in thousands):
                           
    2004   2003   2002
             
Property operating income
  $ 398,255     $ 379,072     $ 394,554  
Commercial operating income
    513       733       618  
Non-property income
    2,608       1,068       1,806  
Depreciation and amortization
    (184,000 )     (166,577 )     (163,183 )
Interest
    (124,087 )     (117,416 )     (132,941 )
General and administrative and property management
    (37,197 )     (37,499 )     (36,583 )
Other operating expenses
    (1,314 )     (1,265 )     (1,351 )
Net gain on sale of depreciable property
    52,902       15,941       32,698  
Loss on early debt retirement
                (36,965 )
Impairment loss on real estate and investments
          (1,392 )     (2,301 )
Hurricane related expenses
    (5,503 )            
Minority interests
    (5,025 )     (2,261 )     (3,123 )
                   
 
Net income per the Consolidated Statements of Operations
  $ 97,152     $ 70,404     $ 53,229  
                   
           2004-vs.-2003
           Same Communities
      Our same communities (those communities acquired, developed, and stabilized prior to December 31, 2003 and held on December 31, 2004, which consisted of 62,497 apartment homes) provided 78% of our property operating income for the year ended December 31, 2004.
      For 2004, same community property operating income decreased 1.2% or $3.9 million compared to 2003. The overall decrease in property operating income was primarily attributable to a 0.5% or $2.3 million increase in revenues from rental and other income that was offset by a 3.2% or $6.2 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 7.7% or $2.8 million decrease in vacancy loss and a 14.3% or $2.1 million increase in utility reimbursement income. These increases in income were offset by a 0.7% or $3.6 million decrease in rental rates. Physical occupancy increased 0.8% to 93.8%.
      The increase in property operating expenses was primarily driven by a 5.4% or $2.8 million increase in personnel costs, a 4.7% or $1.5 million increase in repair and maintenance costs, a 3.5% or $1.1 million increase in utilities expense, and a 1.6% or $0.8 million increase in property taxes.
      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 1.0% to 61.0%.
           Non-Mature Communities
      The remaining 22% of our property operating income during 2004 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed during 2003 and 2004, sold properties, and those properties classified as real estate held for disposition). The 39 communities with 11,574 apartment homes that we acquired during 2003 and 2004 provided $45.8 million of property operating income. The 19 communities with 5,425 apartment homes sold during 2004 provided $14.4 million of property operating income. In addition, our development communities, which included 178 apartment homes constructed since January 1, 2003, provided $1.0 million of property operating income during 2004, the 12 communities with 2,635 apartment homes classified as real estate held for disposition provided $11.3 million of property operating income, and other non-mature communities provided $13.5 million of property operating income for the year ended December 31, 2004.

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           2003-vs.-2002
           Same Communities
      Our same communities (those communities acquired, developed, and stabilized prior to January 1, 2002 and held on December 31, 2003, which consisted of 67,814 apartment homes) provided 89% of our property operating income for the year ended December 31, 2003.
      For 2003, same community property operating income decreased 4.2% or $14.9 million compared to 2002. The overall decrease in property operating income was primarily attributable to a 1.8% or $9.9 million decrease in revenues from rental and other income and a 2.5% or $5.0 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 2.2% or $12.8 million decrease in rental rates. This decrease in income was partially offset by an 11.7% or $1.7 million increase in sub-meter, gas, trash, and utility reimbursements, a 5.5% or $1.0 million decrease in concession expense, and a 1.7% or $0.7 million decrease in vacancy loss. Physical occupancy remained constant at 93.2% for both 2003 and 2002.
      The increase in property operating expenses was primarily driven by a 17.6% or $1.7 million increase in insurance costs, a 4.3% or $1.4 million increase in utilities expense, a 2.4% or $0.9 million increase in repair and maintenance costs, a 3.9% or $0.8 million increase in administrative and marketing costs, a 0.7% or $0.4 million increase in personnel costs, and a 0.8% or $0.4 million increase in taxes, all of which were partially offset by a 17.6% or $0.2 million decrease in incentive compensation.
      As a result of the percentage changes in property rental income and property operating expenses, the operating margin decreased 1.6% to 61.7%.
           Non-Mature Communities
      The remaining 11% of our property operating income during 2003 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed during 2002 and 2003, sold properties, and those properties classified as real estate held for disposition). The 21 communities with 6,935 apartment homes that we acquired during 2002 and 2003 provided $30.6 million of property operating income. The seven communities with 1,927 apartment homes sold during 2003 provided $4.6 million of property operating income. In addition, our development communities, which included 972 apartment homes constructed since January 1, 2002, provided $4.8 million of property operating income during 2003, the one community with 100 apartment homes classified as real estate held for disposition provided $0.7 million of property operating income, and other non-mature communities provided $1.7 million of property operating income for the year ended December 31, 2003.
      Real Estate Depreciation and Amortization
      For the year ended December 31, 2004, real estate depreciation and amortization on both continuing and discontinued operations increased $17.2 million or 10.5% compared to 2003, primarily due to the overall increase in the weighted average number of apartment homes and a significant increase in the per home acquisition cost compared to the existing portfolio, and other capital expenditures.
      For the year ended December 31, 2003, real estate depreciation and amortization on both continuing and discontinued operations increased $4.2 million or 2.7% compared to 2002, regardless of the decrease in the weighted average number of apartment homes experienced from December 31, 2002 to December 31, 2003. The increase was primarily due to the newly acquired properties having a significantly higher per home cost compared to those properties that were disposed of, and other capital expenditures.
      Interest Expense
      For the year ended December 31, 2004, interest expense on both continuing and discontinued operations increased $6.6 million or 5.6% from 2003 primarily due to the issuance of debt. For the year ended December 31, 2004, the weighted average amount of debt outstanding increased 21.2% or

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$435.9 million compared to the prior year. However, this was partially offset by the weighted average interest rate declining from 5.4% to 5.0% during 2004. The weighted average amount of debt outstanding during 2004 is higher than 2003 as acquisition costs in 2004 have been funded, in most part, by the issuance of debt. The decrease in the weighted average interest rate during 2004 reflects our ability to take advantage of lower interest rates through refinancing and the utilization of variable rate debt.
      For the year ended December 31, 2003, interest expense on both continuing and discontinued operations decreased $15.8 million or 11.9% from 2002 primarily due to debt refinancings, decreasing interest rates, and an overall decrease in the weighted average level of debt outstanding. For the year ended December 31, 2003, the weighted average amount of debt outstanding decreased 1.1% or $23.9 million compared to the prior year and the weighted average interest rate decreased from 6.1% to 5.4% during 2003. The weighted average amount of debt outstanding 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. Furthermore, acquisition costs in 2003 that exceeded disposition proceeds were funded, in most part, by equity and OP Unit issuances. The decrease in the average interest rate during 2003 reflects our ability to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.
      General and Administrative
      For the year ended December 31, 2004, general and administrative expenses decreased $1.3 million or 6.4% over 2003. This decrease was primarily attributable to a decrease in investor relations, legal and consulting expenses.
      For the year ended December 31, 2003, general and administrative expenses increased $1.3 million or 6.6% over 2002 primarily due to an increase in restricted stock compensation. Over the past two years, United Dominion has shifted its long-term incentive reward system from stock options to restricted stock, the cost of which is expensed monthly during the vesting period.
      Hurricane Related Expenses
      In 2004, we recognized a $5.5 million charge to cover expenses associated with the damage in Florida caused by hurricanes Charley, Frances, and Jeanne. United Dominion reported that 25 of its 34 Florida communities were affected by the hurricanes.
      Impairment Loss on Real Estate and Investments
      In 2003, we recognized a $1.4 million charge for the write-off of our investment in Realeum, Inc., an unconsolidated development joint venture created to develop web-based solutions for multifamily property and portfolio management.
      Gains on Sales of Land and Depreciable Property
      For the years ended December 31, 2004 and 2003, we recognized gains for financial reporting purposes of $52.9 million and $15.9 million, respectively. Changes in the level of gains recognized from period to period reflect the changing level of our divestiture activity from period to period as well as the extent of gains related to specific properties sold.
      Premium on Preferred Stock Conversions
      In the fourth quarter of 2004, we exercised our right to redeem 2 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,769 shares of common stock at a price of $16.25 per share. As a result, we recognized a $5.7 million premium on preferred stock conversions.
      In the second quarter of 2003, we exercised our right to redeem 2 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock. Upon receipt of our redemption notice, the shares to

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be redeemed were converted by the holder into 3,076,923 shares of common stock at a price of $16.25 per share. In December 2003, we exercised our right to redeem an additional 4 million shares of our Series D. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 6,154,000 shares of common stock at a price of $16.25 per share. As a result, we recognized a $19.3 million premium on preferred stock conversions during 2003.
      The premium amount recognized to convert these shares represents the cumulative accretion to date between the conversion value of the preferred stock and the value at which it was recorded at the time of issuance.
      eBay Purchase of Rent.com
      On December 16, 2004, eBay (Nasdaq: EBAY) announced that it had agreed to acquire privately held Rent.com, a leading Internet listing web site in the apartment and rental housing industry, for approximately $415 million plus acquisition costs, net of Rent.com’s cash on hand. On February 23, 2005, eBay announced that it had completed the acquisition. We own shares in Rent.com, and as a result of the transaction, we recorded a one-time pre-tax gain of $12.3 million on the sale.
      Inflation
      We believe that the direct effects of inflation on our operations have been immaterial. Substantially all of our leases are for a term of one year or less which generally minimizes our risk from the adverse effects of inflation.
      Off-Balance Sheet Arrangements
      We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.
      Contractual Obligations
      The following table summarizes United Dominion’s contractual obligations as of December 31, 2004 (dollars in thousands):
                                         
    Payments Due by Period
     
Contractual Obligations   Total   2005   2006-2007   2008-2009   Thereafter
                     
Long-Term Debt Obligations
  $ 2,879,982     $ 99,002     $ 732,444     $ 566,477     $ 1,482,059  
Capital Lease Obligations
                             
Operating Lease Obligations
    28,645       1,709       2,505       2,128       22,303  
Purchase Obligations
                             
Other Long-Term Liabilities Reflected on the Balance Sheet Under GAAP
                             
      During 2004, we incurred interest costs of $124.1 million, of which $1.0 million was capitalized.
      Factors Affecting Our Business and Prospects
      There are many factors that affect our business and the results of our operations, some of which are beyond our control. These factors include:
  •  unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates,
 
  •  the failure of acquisitions to achieve anticipated results,
 
  •  possible difficulty in selling apartment communities,

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  •  the timing and closing of planned dispositions under agreement,
 
  •  competitive factors that may limit our ability to lease apartment homes or increase or maintain rents,
 
  •  insufficient cash flow that could affect our debt financing and create refinancing risk,
 
  •  failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders,
 
  •  development and construction risks that may impact our profitability,
 
  •  potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs,
 
  •  delays in completing developments and lease-ups on schedule,
 
  •  our failure to succeed in new markets,
 
  •  changing interest rates, which could increase interest costs and affect the market price of our securities,
 
  •  potential liability for environmental contamination, which could result in substantial costs, and
 
  •  the imposition of federal taxes if we fail to qualify as a REIT in any taxable year.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
      Information required by this item is included in and incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report.
Item 8. Financial Statements and Supplementary Data
      The consolidated financial statements and related financial information required to be filed are attached to this Report. Reference is made to page 43 of this Report for the Index to Consolidated Financial Statements and Schedule.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      None.
Item 9A. Controls and Procedures
      Controls and Procedures
      As of December 31, 2004, 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 year ended December 31, 2004, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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      It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.
      Management’s Report on Internal Control over Financial Reporting
      United Dominion’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, United Dominion’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO).
      Based on United Dominion’s evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2004. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Item 9B. Other Information
      On March 17, 2005, the board of directors will consider and is expected to approve the recommendations of the Compensation Committee as to the final compensation of our executive officers for the year ended 2004. Information with regard to the 2004 and 2005 compensation of the executive officers who will be named in the Summary Compensation Table in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005 is set forth in Exhibit 10.25 to this Report and is incorporated in this Item 9B by reference to such exhibit.
PART III
Item 10. Directors and Executive Officers of the Registrant
      The information required by this item is incorporated by reference to the information set forth under the headings “Election of Directors,” “Audit Committee Report”, “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005.
      Information required by this item regarding our executive officers is included in Part I of this Report in the section entitled “Business-Executive Officers of the Company.”
      We have a code of ethics for senior financial officers that applies to our principal executive officer, all members of our finance staff, including the principal financial officer, the principal accounting officer, the treasurer and the controller, our director of investor relations, our corporate secretary, and all other company officers. We also have a code of business conduct and ethics that applies to all of our employees. Information regarding our codes is available on our website, www.udrt.com, and is incorporated by reference to the information set forth under the heading “Corporate Governance Matters” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by posting such amendment or waiver on our website.

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Item 11. Executive Compensation
      The information required by this item is incorporated by reference to the information set forth under the heading “Compensation of Executive Officers” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
      The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005.
Item 13. Certain Relationships and Related Transactions
      The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Certain Business Relationships” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005.
Item 14. Principal Accounting Fees and Services
      The information required by this item is incorporated by reference to the information set forth under the headings “Audit Fees” and “Pre-Approval of Audit and Non-Audit Services” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 3, 2005.
PART IV
Item 15. Exhibits and Financial Statement Schedules
      (a) The following documents are filed as part of this Report:
        1. Financial Statements. See Index to Consolidated Financial Statements and Schedule on page 43 of this Report.
 
        2. Financial Statement Schedule. See Index to Consolidated Financial Statements and Schedule on page 43 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
 
        3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index.

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SIGNATURES
      Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
  UNITED DOMINION REALTY TRUST, INC.
  By:  /s/ Thomas W. Toomey
 
 
  Thomas W. Toomey
  Chief Executive Officer and President
Date: March 14, 2005
      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 14, 2005 by the following persons on behalf of the registrant and in the capacities indicated.
         
 
/s/ Thomas W. Toomey
 
Thomas W. Toomey
  Chief Executive Officer, President, and Director
 
/s/ Christopher D. Genry
 
Christopher D. Genry
  Executive Vice President and Chief Financial Officer
 
/s/ Scott A. Shanaberger
 
Scott A. Shanaberger
  Senior Vice President and Chief Accounting Officer
 
/s/ Robert C. Larson
 
Robert C. Larson
  Chairman of the Board
 
/s/ James D. Klingbeil
 
James D. Klingbeil
  Vice Chairman of the Board
 
/s/ Eric J. Foss
 
Eric J. Foss
  Director
 
/s/ Robert P. Freeman
 
Robert P. Freeman
  Director
 
/s/ Jon A. Grove
 
Jon A. Grove
  Director
 
/s/ Thomas R. Oliver
 
Thomas R. Oliver
  Director
 
/s/ Lynne B. Sagalyn
 
Lynne B. Sagalyn
  Director
 
/s/ Mark J. Sandler
 
Mark J. Sandler
  Director
 
/s/ Robert W. Scharar
 
Robert W. Scharar
  Director

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
UNITED DOMINION REALTY TRUST, INC.
         
    Page
     
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
    44  
 
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
       
Report of Independent Registered Public Accounting Firm
    45  
Consolidated Balance Sheets at December 31, 2004 and 2003
    46  
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2004
    47  
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004
    48  
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2004
    49  
Notes to Consolidated Financial Statements
    52  
 
SCHEDULE FILED AS PART OF THIS REPORT
       
Schedule III — Summary of Real Estate Owned
    75  
      All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.

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Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
Board of Directors and Stockholders
United Dominion Realty Trust, Inc.
      We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting included at Item 9A, that United Dominion Realty Trust, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 of United Dominion Realty Trust, Inc. and our report dated March 2, 2005 expressed an unqualified opinion thereon.
  Ernst & Young LLP
Richmond, Virginia
March 2, 2005

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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
United Dominion Realty Trust, Inc.
      We have audited the accompanying consolidated balance sheets of United Dominion Realty Trust, Inc. (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Dominion Realty Trust, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2005 expressed an unqualified opinion thereon.
  Ernst & Young LLP
Richmond, Virginia
March 2, 2005

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
                     
    December 31,
     
    2004   2003
         
ASSETS
Real estate owned:
               
 
Real estate held for investment
  $ 5,029,516     $ 3,900,573  
   
Less: accumulated depreciation
    (978,651 )     (809,524 )
             
      4,050,865       3,091,049  
 
Real estate under development
    65,758       29,715  
 
Real estate held for disposition (net of accumulated depreciation of $29,236 and $87,106)
    118,786       334,157  
             
 
Total real estate owned, net of accumulated depreciation
    4,235,409       3,454,921  
Cash and cash equivalents
    7,904       4,824  
Restricted cash
    6,086       7,540  
Deferred financing costs, net
    25,151       21,425  
Investment in unconsolidated development joint venture
    458       1,673  
Funds held in escrow from 1031 exchanges pending the acquisition of real estate
    17,039       14,447  
Notes receivable
    5,000       13,000  
Other assets
    34,347       25,247  
Other assets — real estate held for disposition
    607       566  
             
 
Total assets
  $ 4,332,001     $ 3,543,643  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt
  $ 1,197,924     $ 1,018,028  
Unsecured debt
    1,682,058       1,114,009  
Real estate taxes payable
    31,356       29,776  
Accrued interest payable
    18,773       12,892  
Security deposits and prepaid rent
    25,168       21,412  
Distributions payable
    44,624       40,623  
Accounts payable, accrued expenses, and other liabilities
    50,217       44,749  
Other liabilities — real estate held for disposition
    2,837       4,512  
             
 
Total liabilities
    3,052,957       2,286,001  
Minority interests
    83,593       94,206  
Stockholders’ 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 2003)
    135,400       135,400  
   
0 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (2,000,000 in 2003)
          44,271  
   
2,803,812 shares 8.00% Series E Cumulative Convertible issued and outstanding (3,425,217 in 2003)
    46,571       56,893  
 
Common stock, $1 par value; 250,000,000 shares authorized 136,429,592 shares issued and outstanding (127,295,126 in 2003)
    136,430       127,295  
 
Additional paid-in capital
    1,614,916       1,458,983  
 
Distributions in excess of net income
    (731,808 )     (651,497 )
 
Deferred compensation — unearned restricted stock awards
    (6,058 )     (5,588 )
 
Notes receivable from officer-stockholders
          (459 )
 
Accumulated other comprehensive loss
          (1,862 )
             
   
Total stockholders’ equity
    1,195,451       1,163,436  
             
 
Total liabilities and stockholders’ equity
  $ 4,332,001     $ 3,543,643  
             
See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share data)
                               
    Years ended December 31,
     
    2004   2003   2002
             
REVENUES
                       
   
Rental income
  $ 604,270     $ 542,894     $ 520,939  
   
Non-property income
    2,608       1,068       1,806  
                   
     
Total revenues
    606,878       543,962       522,745  
EXPENSES
                       
   
Rental expenses:
                       
     
Real estate taxes and insurance
    71,055       62,329       56,959  
     
Personnel
    63,878       55,252       52,611  
     
Utilities
    36,625       32,244       29,397  
     
Repair and maintenance
    38,409       34,909       32,352  
     
Administrative and marketing
    21,299       19,793       18,913  
     
Property management
    17,881       16,873       17,240  
     
Other operating expenses
    1,226       1,205       1,203  
   
Real estate depreciation and amortization
    171,781       145,706       134,045  
   
Interest
    124,087       117,457       128,522  
   
General and administrative
    19,316       20,626       19,343  
   
Other depreciation and amortization
    3,372       3,087       3,956  
   
Hurricane related expenses
    5,503              
   
Impairment loss on investments
          1,392        
   
Loss on early debt retirement
                33,161  
                   
     
Total expenses
    574,432       510,873       527,702  
                   
Income/(loss) before minority interests and discontinued operations
    32,446       33,089       (4,957 )
Minority interests of outside partnerships
    (182 )     (614 )     (1,414 )
Minority interests of unitholders in operating partnerships
    (443 )     874       2,080  
                   
Income/(loss) before discontinued operations, net of minority interests
    31,821       33,349       (4,291 )
Income from discontinued operations, net of minority interests
    65,331       37,055       57,520  
                   
Net income
    97,152       70,404       53,229  
Distributions to preferred stockholders — Series B
    (11,644 )     (11,645 )     (11,645 )
Distributions to preferred stockholders — Series D (Convertible)
    (3,473 )     (12,178 )     (15,779 )
Distributions to preferred stockholders — Series E (Convertible)
    (4,414 )     (2,503 )      
Premium on preferred stock conversions
    (5,729 )     (19,271 )      
                   
Net income available to common stockholders
  $ 71,892     $ 24,807     $ 25,805  
                   
Earnings per common share — basic and diluted:
                       
 
Income/(loss) from continuing operations available to common stockholders, net of minority interests
  $ 0.05     $ (0.10 )   $ (0.30 )
 
Income from discontinued operations, net of minority interests
  $ 0.51     $ 0.32     $ 0.54  
 
Net income available to common stockholders
  $ 0.56     $ 0.22     $ 0.24  
Common distributions declared per share
  $ 1.17     $ 1.14     $ 1.11  
Weighted average number of common shares outstanding – basic
    128,097       114,672       106,078  
Weighted average number of common shares outstanding – diluted
    129,080       114,672       106,078  
See accompanying notes to consolidated financial statements

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                               
    Years ended December 31,
     
    2004   2003   2002
             
Operating Activities
                       
 
Net income
  $ 97,152     $ 70,404     $ 53,229  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization
    184,088       166,637       163,328  
   
Impairment loss on real estate and investments
          1,392       2,301  
   
Gains on sales of land and depreciable property
    (52,903 )     (15,941 )     (32,698 )
   
Minority interests
    5,025       2,261       3,122  
   
Loss on early debt retirement
                36,965  
   
Amortization of deferred financing costs and other
    7,206       6,148       5,256  
   
Changes in operating assets and liabilities:
                       
     
(Increase)/decrease in operating assets
    (1,769 )     (2,560 )     12,763  
     
Increase/(decrease) in operating liabilities
    12,948       6,604       (15,265 )
                   
Net cash provided by operating activities
    251,747       234,945       229,001  
Investing Activities
                       
 
Proceeds from sales of real estate investments, net
    265,691       93,613       282,533  
 
Acquisition of real estate assets, net of liabilities assumed and equity
    (755,966 )     (314,739 )     (282,600 )
 
Development of real estate assets
    (19,131 )     (13,640 )     (22,763 )
 
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (82,390 )     (53,146 )     (42,827 )
 
Capital expenditures — non-real estate assets
    (1,578 )     (1,858 )     (1,706 )
 
Increase in funds held in escrow from tax free exchanges pending the acquisition of real estate
    (2,592 )     (14,447 )      
                   
Net cash used in investing activities
    (595,966 )     (304,217 )     (67,363 )
Financing Activities
                       
 
Proceeds from the issuance of secured debt
          37,415       324,282  
 
Scheduled principal payments on secured debt
    (36,814 )     (22,442 )     (11,176 )
 
Non-scheduled principal payments and prepayment penalties on secured debt
    (95,011 )     (17,549 )     (294,662 )
 
Proceeds from the issuance of unsecured debt
    475,775       323,382       198,476  
 
Payments and prepayment premiums on unsecured debt
    (46,585 )     (214,591 )     (210,413 )
 
Net borrowing/(repayment) of revolving bank debt
    140,200       (37,900 )     (54,400 )
 
Payment of financing costs
    (8,849 )     (6,463 )     (5,510 )
 
Issuance of note receivable
          (8,000 )      
 
Proceeds from the issuance of common stock
    99,461       179,811       60,252  
 
Proceeds from the repayment of officer loans
    459       2,171        
 
Proceeds from the issuance of performance shares
    (50 )     657        
 
Distributions paid to minority interests
    (13,553 )     (9,756 )     (8,926 )
 
Distributions paid to preferred stockholders
    (20,347 )     (27,532 )     (27,424 )
 
Distributions paid to common stockholders
    (147,387 )     (128,188 )     (117,116 )
 
Repurchases of common and preferred stock
          (71 )     (16,510 )
                   
Net cash provided by/(used in) financing activities
    347,299       70,944       (163,127 )
Net increase/(decrease) in cash and cash equivalents
    3,080       1,672       (1,489 )
Cash and cash equivalents, beginning of year
    4,824       3,152       4,641  
                   
Cash and cash equivalents, end of year
  $ 7,904     $ 4,824     $ 3,152  
                   
Supplemental Information:
                       
 
Interest paid during the period
  $ 115,519     $ 116,057     $ 135,223  
 
Non-cash transactions:
                       
   
Conversion of operating partnership minority interests to common stock (170,209 shares in 2004, 216,983 shares in 2003, and 92,159 shares in 2002)
    2,035       2,206       1,252  
   
Issuance of restricted stock awards
    3,250       5,297       2,904  
   
Issuance of preferred stock in connection with acquisitions
          58,811        
   
Issuance of preferred operating partnership units in connection with acquisitions
          26,872        
   
Issuance of operating partnership units in connection with acquisitions
          7,135        
   
Cancellation of a note receivable with the acquisition of a property
    8,000              
   
Secured debt assumed with the acquisition of properties
    311,714       4,865       41,636  
   
Reduction in secured debt from the disposition of properties
                35,885  
   
Receipt of a note receivable in connection with sales of real estate investments
    75,586              
See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
                                                                                     
                            Deferred   Notes        
                    Compensation —   Receivable   Accumulated    
    Preferred Stock   Common Stock       Distributions   Unearned   from   Other    
            Paid-in   in Excess of   Restricted   Officer-   Comprehensive    
    Shares   Amount   Shares   Amount   Capital   Net Income   Stock Awards   Stockholders   Loss   Total
                                         
Balance, December 31, 2001
    13,416,009     $ 310,400       103,133,279     $ 103,133     $ 1,098,029     $ (448,345 )   $ (1,312 )   $ (4,309 )   $ (14,871 )   $ 1,042,725  
                                                             
Comprehensive Income
                                                                               
 
Net income
                                            53,229                               53,229  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    4,913       4,913  
                                                             
 
Comprehensive income
                                            53,229                       4,913       58,142  
                                                             
 
Issuance of common shares to employees, officers, and director-stockholders
                    1,000,592       1,001       10,782                                       11,783  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    152,343       152       2,347                                       2,499  
 
Issuance of common shares through public offering
                    3,166,800       3,167       41,139                                       44,306  
 
Purchase of common stock
                    (1,145,412 )     (1,146 )     (15,369 )                                     (16,515 )
 
Issuance of restricted stock awards
                    205,498       205       2,699               (2,904 )                      
 
Cash purchase and conversion of minority interests of unitholders in operating partnerships
                    92,159       93       1,159                                       1,252  
 
Principal repayments on notes receivable from officer-stockholders
                                                            1,679               1,679  
 
Common stock distributions declared ($1.11 per share)
                                            (118,888 )                             (118,888 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,645 )                             (11,645 )
 
Preferred stock distributions declared — Series D ($1.98 per share)
                                            (15,779 )                             (15,779 )
 
Amortization of deferred compensation
                                                    1,712                       1,712  
                                                             

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)
(In thousands, except share data)
                                                                                     
                            Deferred   Notes        
                    Compensation —   Receivable   Accumulated    
    Preferred Stock   Common Stock       Distributions   Unearned   from   Other    
            Paid-in   in Excess of   Restricted Stock   Officer-   Comprehensive    
    Shares   Amount   Shares   Amount   Capital   Net Income   Awards   Stockholders   Loss   Total
                                         
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
                                            70,404                               70,404  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    8,096       8,096  
                                                             
 
Comprehensive income
                                            70,404                       8,096       78,500  
                                                             
 
Issuance of common shares to employees, officers, and director-stockholders
                    1,117,399       1,118       12,185                                       13,303  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    91,190       91       1,520                                       1,611  
 
Issuance of common shares through public offering
                    9,700,000       9,700       154,936                                       164,636  
 
Issuance of 8.00% Series E Cumulative Convertible shares
    3,425,217       56,893                       1,905                                       58,798  
 
Purchase of common stock
                    (4,564 )     (5 )     (66 )                                     (71 )
 
Issuance of restricted stock awards
                    337,936       338       4,959               (5,297 )                      
 
Conversion of minority interests of unitholders in operating partnerships
                    216,983       217       1,989                                       2,206  
 
Principal repayments on notes receivable from officer-stockholders
                                                            2,171               2,171  
 
Accretion of premium on Series D conversions
            19,271                               (19,271 )                              
 
Conversion of 7.50% Series D Cumulative Convertible Redeemable shares
    (6,000,000 )     (150,000 )     9,230,923       9,231       140,769                                        
 
Common stock distributions declared ($1.14 per share)
                                            (134,876 )                             (134,876 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,645 )                             (11,645 )
 
Preferred stock distributions declared — Series D ($2.04 per share)
                                            (12,178 )                             (12,178 )
 
Preferred stock distributions declared — Series E ($0.84 per share)
                                            (2,503 )                             (2,503 )
 
Amortization of deferred compensation
                                                    2,213                       2,213  
                                                             

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)
(In thousands, except share data)
                                                                                     
                            Deferred   Notes        
                    Compensation —   Receivable   Accumulated    
    Preferred Stock   Common Stock       Distributions   Unearned   from   Other    
            Paid-in   in Excess of   Restricted Stock   Officer-   Comprehensive    
    Shares   Amount   Shares   Amount   Capital   Net Income   Awards   Stockholders   Loss   Total
                                         
Balance, December 31, 2003
    10,841,226     $ 236,564       127,295,126     $ 127,295     $ 1,458,983     $ (651,497 )   $ (5,588 )   $ (459 )   $ (1,862 )   $ 1,163,436  
                                                             
Comprehensive Income
                                                                               
 
Net income
                                            97,152                               97,152  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    1,862       1,862  
                                                             
 
Comprehensive income
                                            97,152                       1,862       99,014  
                                                             
 
Issuance of common shares to employees, officers, and director-stockholders
                    549,606       550       5,396                                       5,946  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    111,941       112       2,102                                       2,214  
 
Issuance of common shares through public offering
                    4,497,000       4,497       86,804                                       91,301  
 
Issuance of restricted stock awards
                    107,536       107       3,143               (3,250 )                      
 
Conversion of minority interests of unitholders in operating partnerships
                    170,209       170       1,865                                       2,035  
 
Principal repayments on notes receivable from officer-stockholders
                                                            459               459  
 
Accretion of premium on Series D conversions
            5,729                               (5,729 )                              
 
Conversion of 7.50% Series D Cumulative Convertible Redeemable shares
    (2,000,000 )     (50,000 )     3,076,769       3,077       46,923                                        
 
Conversion of 8.00% Series E Cumulative Convertible shares
    (621,405 )     (10,322 )     621,405       622       9,700                                        
 
Common stock distributions declared ($1.17 per share)
                                            (152,203 )                             (152,203 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,644 )                             (11,644 )
 
Preferred stock distributions declared — Series D ($2.09 per share)
                                            (3,473 )                             (3,473 )
 
Preferred stock distributions declared — Series E ($1.33 per share)
                                            (4,414 )                             (4,414 )
 
Amortization of deferred compensation
                                                    2,780                       2,780  
                                                             
Balance, December 31, 2004
    8,219,821     $ 181,971       136,429,592     $ 136,430     $ 1,614,916     $ (731,808 )   $ (6,058 )   $     $     $ 1,195,451  
                                                             
See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and formation
      United Dominion Realty Trust, Inc., a Maryland corporation, was formed in 1972. United Dominion operates within one defined business segment with activities related to the ownership, management, development, acquisition, renovation, and disposition of multifamily apartment communities nationwide. At December 31, 2004, United Dominion owned 273 communities with 78,855 completed apartment homes and had three communities with 807 apartment homes under development.
Basis of presentation
      The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P., (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”), (collectively, “United Dominion”). As of December 31, 2004, there were 166,061,749 units in the Operating Partnership outstanding, of which 156,037,369 units or 94.0% were owned by United Dominion and 10,024,380 units or 6.0% were owned by limited partners (of which 1,791,329 and 0 are owned by the holders of the Series A OPPS and the Series B OPPS, respectively, see below and Note 9). As of December 31, 2004, there were 5,542,200 units in the Heritage OP outstanding, of which 5,186,945 units or 93.6% were owned by United Dominion and 355,255 units or 6.4% were owned by limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the Operating Partnership and the Heritage OP. All significant intercompany accounts and transactions have been eliminated in consolidation.
Income taxes
      United Dominion is operated as, and elects to be taxed as, a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Generally, a REIT complies with the provisions of the Code if it meets certain requirements concerning its income and assets, as well as if it distributes at least 90% of its REIT taxable income to its stockholders and will not be subject to U.S. federal income taxes if it distributes at least 100% of its income. Accordingly, no provision has been made for federal income taxes of the REIT. United Dominion’s taxable REIT subsidiaries are subject to federal corporate income taxes, based upon their respective taxable incomes. The taxable REIT subsidiaries have no material permanent or temporary differences that would require a provision for federal income tax. Additionally, United Dominion is subject to certain state and local excise or franchise taxes, for which provision has been made.
      The differences between net income available to common stockholders for financial reporting purposes and taxable income before dividend deductions relate primarily to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets. The aggregate cost of our real estate assets for federal income tax purposes was approximately $4.5 billion at December 31, 2004.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following table reconciles United Dominion’s net income to REIT taxable income for the three years ended December 31, 2004 (dollars in thousands):
                         
    2004   2003   2002
             
Net income
  $ 97,152     $ 70,404     $ 53,229  
Minority interest expense
    (1,950 )     (3,364 )     (1,137 )
Depreciation and amortization expense
    46,916       44,108       49,513  
(Loss)/gain on the disposition of properties
    (10,029 )     2,363       (186 )
Revenue recognition timing differences
    (195 )     1,750       1,272  
Investment loss, not deductible for tax
    (593 )            
Other expense timing differences
    (2,192 )     (1,090 )     (3,914 )
                   
REIT taxable income before dividends
  $ 129,109     $ 114,171     $ 98,777  
                   
Dividend deduction
  $ 153,409     $ 132,722     $ 111,965  
                   
      For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, and return of capital, or a combination thereof. For the three years ended December 31, 2004, distributions declared per common share were taxable as follows:
                         
    2004   2003   2002
             
Ordinary income
  $ 0.77     $ 0.82     $ 0.55  
Long-term capital gain
    0.20       0.10       0.14  
Unrecaptured section 1250 gain
    0.08       0.02       0.11  
Return of capital
    0.12       0.20       0.31  
                   
    $ 1.17     $ 1.14     $ 1.11  
                   
Use of estimates
      The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real estate
      Real estate assets held for investment are carried at historical cost less accumulated depreciation and any recorded impairment losses.
      Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to the acquisition and/or improvement of real estate assets are capitalized at cost and depreciated over their estimated useful lives if the value of the existing asset will be materially enhanced or the life of the related asset will be substantially extended beyond the original life expectancy.
      United Dominion recognizes impairment losses on long-lived assets used in operations when there is an event or change in circumstance that indicates an impairment in the value of an asset and the undiscounted future cash flows are not sufficient to recover the asset’s carrying value. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. If such indicators of impairment are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
      United Dominion purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. United Dominion determines the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining contractual lease period. United Dominion determines the fair value of in-place leases by considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period.
      For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Properties classified as real estate held for disposition generally represent properties that are under contract for sale. Real estate held for disposition is carried at the lower of cost, net of accumulated depreciation, or fair value, less the cost to dispose, determined on an asset by asset basis. Expenditures for ordinary repair and maintenance costs on held for disposition properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held for disposition properties are capitalized at cost. Depreciation is not recorded on real estate held for disposition.
      Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which is 35 years for buildings, 10 to 35 years for major improvements, and 3 to 10 years for furniture, fixtures, equipment, and other assets. The value of acquired in-place leases is amortized over the remaining term of each acquired in-place lease.
      All development projects and related carrying costs are capitalized and reported on the Consolidated Balance Sheet as “Real estate under development.” As each building in a project is completed and becomes available for lease-up, the total cost of the building is transferred to real estate held for investment and the assets are depreciated over their estimated useful lives. The cost of development projects includes interest, real estate taxes, insurance, and allocated development overhead during the construction period.
      Interest, real estate taxes, and incremental labor and support costs for personnel working directly on the development site are capitalized as part of the real estate under development to the extent that such charges do not cause the carrying value of the asset to exceed its net realizable value. During 2004, 2003, and 2002, total interest capitalized was $1.0 million, $1.8 million, and $0.9 million, respectively.
Cash equivalents
      Cash equivalents include all cash and liquid investments with maturities of three months or less when purchased.
Restricted cash
      Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and replacement reserves, and security deposits.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred financing costs
      Deferred financing costs include fees and other external costs incurred to obtain debt financings and are generally amortized on a straight-line basis, which approximates the effective interest method, over a period not to exceed the term of the related debt. Unamortized financing costs are written-off when debt is retired before its maturity date. During 2004, 2003, and 2002, amortization expense was $5.1 million, $4.7 million, and $4.5 million, respectively.
Investments in unconsolidated development joint ventures
      Investments in unconsolidated joint ventures are accounted for using the equity method when major business decisions require approval by the other partners and United Dominion does not have control of the assets. Investments are recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. United Dominion eliminates intercompany profits on sales of services that are provided to joint ventures. Differences between the carrying value of investments and the underlying equity in net assets of the investee are due to capitalized interest on the investment balance and capitalized development and leasing costs that are recovered by United Dominion through fees during construction.
Revenue recognition
      United Dominion’s apartment homes are leased under operating leases with terms generally of one year or less. Rental income is recognized after it is earned and collectibility is reasonably assured.
Advertising costs
      All advertising costs are expensed as incurred and reported on the Consolidated Statements of Operations within the line item “Administrative and marketing.” During 2004, 2003, and 2002, total advertising expense was $10.5 million, $10.6 million, and $11.0 million, respectively.
Interest rate swap agreements
      United Dominion accounts for its derivative instruments in accordance with Statements of Financial Accounting Standards No. 133 and No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” At December 31, 2004, United Dominion has no derivative financial instruments reported on its Consolidated Balance Sheet. Prior to their maturity, United Dominion’s derivative financial instruments consisted of interest rate swap agreements that were designated as cash flow hedges of debt with variable interest rate features, and as qualifying hedges for financial reporting purposes. For a derivative instrument that qualifies as a cash flow hedge, 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.
      As part of United Dominion’s overall interest rate risk management strategy, we used derivative financial instruments as a means to artificially fix variable rate debt or to hedge anticipated financing transactions. United Dominion’s derivative transactions used for interest rate risk management included various interest rate swaps with indices that related to the pricing of specific financial instruments of United Dominion. Because of the close correlation between the hedging instrument and the underlying cash flow exposure being hedged, fluctuations in the value of the derivative instruments were generally offset by changes in the cash flow of the underlying exposures. As a result, United Dominion appropriately controlled the risk so that derivatives used for interest rate risk management would not have a material

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unintended effect on consolidated earnings. United Dominion does not enter into derivative financial instruments for trading purposes.
      The fair value of United Dominion’s derivative instruments were reported on the balance sheet at their current fair value. The estimated fair value for our interest rate swaps relied on prevailing market interest rates. The interest rate swap agreements were designated with all or a portion of the principal balance and term of a specific debt obligation. Each interest rate swap involved the periodic exchange of payments over the life of the related agreement. An amount received or paid on the interest rate swap was 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 amount payable to and receivable from counterparties was included in other liabilities and other assets, respectively.
      When the terms of the underlying transaction were modified, or when the underlying hedged item ceased to exist, all changes in the fair value of the instrument were marked-to-market with changes in value included in net income each period until the instrument matured, unless the instrument was redesignated as a hedge of another transaction. If a derivative instrument was terminated or the hedging transaction was no longer determined to be effective, amounts held in accumulated other comprehensive income were reclassified into earnings over the term of the future cash outflows on the related debt.
Comprehensive income
      Comprehensive income, which is defined as all changes in equity during each period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Statements of Stockholders’ Equity. Other comprehensive income consists of unrealized gains or losses from derivative financial instruments.
Stock-based employee compensation plans
      United Dominion adopted the fair-value-based method of accounting for share-based payments effective January 1, 2004 using the prospective method described in FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Currently, United Dominion uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of Statement 123R on July 1, 2005. Because Statement 123R must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because United Dominion adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123R. However, had United Dominion adopted Statement 123R in prior periods, the impact of the standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 8 to our consolidated financial statements.
Minority interests in operating partnerships
      Interests in operating partnerships held by limited partners are represented by operating partnership units (“OP Units”). The operating partnerships’ income is allocated to holders of OP Units based upon net income available to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the individual partnership agreements. OP Units can be exchanged for cash or shares of United Dominion’s common stock on a one-for-one basis, at the option of United Dominion. OP Units, as a percentage of total OP

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Units and shares outstanding, were 6.3% at December 31, 2004, 6.4% at December 31, 2003, and 6.2% at December 31, 2002.
      During 2003, we issued 1,617,815 Preferred Operating Partnership Units (“Preferred OP Units”) totaling $26.9 million as partial consideration for the purchase of four communities. The Preferred OP Units carry a fixed coupon of 8.0% until such time as the common share dividend is equal to or exceeds this amount for four consecutive quarters, at which time the Preferred OP Units will be entitled to receive dividends equivalent to the dividend paid to holders of common stock.
Minority interests in other partnerships
      United Dominion has limited partners in certain real estate partnerships acquired in certain merger transactions. Net income for these partnerships is allocated based upon the percentage interest owned by these limited partners in each respective real estate partnership.
Earnings per share
      Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on United Dominion’s average stock price.
      The following table sets forth the computation of basic and diluted earning per share (dollars in thousands, except per share amounts):
                           
    2004   2003   2002
             
Numerator for basic and diluted earnings per share —
Net income available to common stockholders
  $ 71,892     $ 24,807     $ 25,805  
Denominator:
                       
Denominator for basic earnings per share —
Weighted average common shares outstanding
    128,711       115,109       106,257  
 
Non-vested restricted stock awards
    (614 )     (437 )     (179 )
                   
      128,097       114,672       106,078  
                   
Effect of dilutive securities:
                       
Employee stock options and non-vested restricted stock awards
    983              
                   
Denominator for dilutive earnings per share
    129,080       114,672       106,078  
                   
Basic earnings per share
  $ 0.56     $ 0.22     $ 0.24  
                   
Diluted earnings per share
  $ 0.56     $ 0.22     $ 0.24  
                   
      The effect of the conversion of the operating partnership units, Series A Out-Performance Partnership Units, and convertible preferred stock is not dilutive and is therefore not included as a dilutive security in the earnings per share computation. The weighted average effect of the conversion of the operating partnership units for the years ended December 31, 2004, 2003, and 2002 was 10,460,639 shares, 9,690,883 shares, and 8,577,918 shares, respectively. The weighted average effect of the conversion of the Series A Out-Performance Partnership Units for the years ended December 31, 2004, 2003, and 2002 was 1,791,329 shares, 1,853,204 shares, and 1,568,000 shares, respectively. The weighted average effect of the conversion

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of the convertible preferred stock for the years ended December 31, 2004, 2003, and 2002 was 6,301,821 shares, 11,636,293 shares, and 12,307,692 shares, respectively.
2.     REAL ESTATE OWNED
      United Dominion operates in 43 markets dispersed throughout 17 states. At December 31, 2004, our largest apartment market was Southern California, where we owned 18.5% of our apartment homes, based upon carrying value. Excluding Southern California, United Dominion did not own more than 4.9% of its apartment homes in any one market, based upon carrying value.
      The following table summarizes real estate held for investment at December 31, (dollars in thousands):
                 
    2004   2003
         
Land and land improvements
  $ 1,195,201     $ 777,280  
Buildings and improvements
    3,602,996       2,922,395  
Furniture, fixtures, and equipment
    231,319       200,898  
             
Real estate held for investment
    5,029,516       3,900,573  
Accumulated depreciation
    (978,651 )     (809,524 )
             
Real estate held for investment, net
  $ 4,050,865     $ 3,091,049  
             
      The following is a reconciliation of the carrying amount of real estate held for investment at December 31, (dollars in thousands):
                         
    2004   2003   2002
             
Balance at beginning of year
  $ 3,900,573     $ 3,437,898     $ 3,858,579  
Real estate acquired
    1,032,065       399,425 (a)     323,990  
Capital expenditures
    103,878       51,093       48,923  
Transfers from development
          12,157       29,816  
Transfers to held for disposition, net
    (7,000 )           (823,410 )
                   
Balance at end of year
  $ 5,029,516     $ 3,900,573     $ 3,437,898  
                   
 
(a)  In connection with one of our acquisitions in 2003, United Dominion acquired a note receivable for $5 million that is due October 2011. The note bears interest of 9.0% that is payable in annual installments.
      The following is a reconciliation of accumulated depreciation for real estate held for investment at December 31, (dollars in thousands):
                         
    2004   2003   2002
             
Balance at beginning of year
  $ 809,524     $ 664,268     $ 646,366  
Depreciation expense for the year(b)
    169,127       145,256       135,245  
Transfers to held for disposition, net
                (117,343 )
                   
Balance at end of year
  $ 978,651     $ 809,524     $ 664,268  
                   
 
(b)  Includes $0.8 million, $1.0 million, and $1.2 million for 2004, 2003, and 2002, respectively, related to depreciation on non-real estate assets located at United Dominion’s apartment communities, classified as “Other depreciation and amortization” on the Consolidated Statements of Operations. Excludes

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$3.4 million and $1.3 million in 2004 and 2003, respectively, of amortization expense on the fair market value of in-place leases at the time of acquisition.
      The following is a summary of real estate held for investment by major geographic markets (in order of carrying value, excluding real estate held for disposition and real estate under development) at December 31, 2004 (dollars in thousands):
                                         
    Number of   Initial            
    Apartment   Acquisition   Carrying   Accumulated    
    Communities   Cost   Value   Depreciation   Encumbrances
                     
Southern California
    25     $ 905,367     $ 930,593     $ 26,645     $ 244,148  
Tampa, FL
    12       211,505       244,944       48,428       60,275  
Houston, TX
    16       185,408       244,898       56,175       29,382  
Northern California
    7       203,385       217,004       33,318       71,038  
Orlando, FL
    14       167,524       216,721       69,727       72,150  
Metropolitan DC
    7       197,245       213,611       21,650       82,058  
Raleigh, NC
    11       179,935       212,412       59,990       76,116  
Dallas, TX
    11       174,750       198,027       40,136       62,530  
Baltimore, MD
    10       145,985       162,396       28,924       17,836  
Columbus, OH
    6       111,315       155,494       33,490       45,864  
Nashville, TN
    9       111,844       152,312       35,316       39,299  
Richmond, VA
    9       106,136       137,496       45,034       62,207  
Charlotte, NC
    9       114,895       136,790       35,809       11,784  
Monterey Peninsula, CA
    7       85,324       136,665       17,670        
Phoenix, AZ
    7       109,487       135,856       32,518       31,670  
Arlington, TX
    8       109,305       127,009       30,439       25,865  
Greensboro, NC
    8       85,362       107,913       30,300        
Seattle, WA
    6       93,152       99,829       18,997       40,774  
Denver, CO
    3       92,333       99,179       17,362        
Wilmington, NC
    6       64,213       93,902       30,851        
Portland, OR
    6       88,187       91,943       10,019       15,726  

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                         
    Number of   Initial            
    Apartment   Acquisition   Carrying   Accumulated    
    Communities   Cost   Value   Depreciation   Encumbrances
                     
Austin, TX
    5       75,778       82,080       15,310       5,391  
Atlanta, GA
    6       57,669       75,604       25,435       16,886  
Columbia, SC
    6       52,795       64,985       24,552        
Jacksonville, FL
    3       44,788       61,251       21,629       12,455  
Norfolk, VA
    6       42,741       60,184       24,567       9,118  
Other Southwestern
    10       166,469       196,114       48,179       50,677  
Other Florida
    6       107,122       118,006       15,523       44,873  
Other North Carolina
    8       61,677       78,669       31,419       12,434  
Other Mid-Atlantic
    6       46,136       56,377       17,890       16,770  
Other Virginia
    3       30,946       47,271       12,980       14,671  
Other Southeastern
    2       29,840       40,989       11,710       16,368  
Other Midwestern
    3       20,241       23,520       4,825       5,767  
Richmond Corporate
          6,597       6,216       1,259       3,792  
Commercial
          3,255       3,256       575        
                               
      261     $ 4,288,711     $ 5,029,516     $ 978,651     $ 1,197,924  
                               
      The following is a summary of real estate held for disposition by major category at December 31, 2004 (dollars in thousands):
                                         
    Number   Initial            
    of   Acquisition   Carrying   Accumulated    
    Properties   Cost   Value   Depreciation   Encumbrances
                     
Apartments
    12     $ 119,246     $ 144,090     $ 29,236     $
Land
    1       3,932       3,932            
                             
            $ 123,178     $ 148,022     $ 29,236     $
                             
      The following is a summary of real estate under development by major category at December 31, 2004 (dollars in thousands):
                                         
    Number   Initial            
    of   Acquisition   Carrying   Accumulated    
    Properties   Cost   Value   Depreciation   Encumbrances
                     
Apartments
    3     $ 24,814     $ 40,241     $     $  
Land
    8       25,516       25,517              
                               
            $ 50,330     $ 65,758     $     $  
                               
Total Real Estate Owned
          $ 4,462,219     $ 5,243,296     $ 1,007,887     $ 1,197,924  
                               
      In 2004, United Dominion recognized a $5.5 million charge to cover expenses associated with the damage in Florida caused by hurricanes Charley, Frances, and Jeanne. United Dominion reported that 25 of its 34 Florida communities were affected by the hurricanes.
      In 2003, United Dominion recognized a $1.4 million charge for the write-off of its investment in Realeum, Inc., an unconsolidated development joint venture created to develop web-based solutions for multifamily property and portfolio management.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      United Dominion is pursuing its strategy of exiting markets where it views long-term growth prospects as limited and believes the redeployment of capital would enhance future growth rates and economies of scale. During the first quarter of 2002, United Dominion placed nine assets, with an aggregate net book value of $89.3 million, under contract for sale and reclassified them as real estate held for disposition. These sales closed in the second quarter of 2002 and resulted in our withdrawal from Naples, Florida; Tucson, Arizona; Las Vegas, Nevada; and substantially all of Memphis, Tennessee. Although these sales resulted in an aggregate net gain of $11.5 million, certain of these assets were sold at net selling prices below their net book values at March 31, 2002. As a result, United Dominion recorded an aggregate $2.3 million impairment loss in 2002 for the write down of a portfolio of five apartment communities in Memphis, Tennessee.
3. INCOME FROM DISCONTINUED OPERATIONS
      United Dominion adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (FAS 144) as of January 1, 2002. FAS 144 requires, among other things, that the primary assets and liabilities and the results of operations of United Dominion’s real properties which have been sold subsequent to January 1, 2002, or are held for disposition subsequent to January 1, 2002, be classified as discontinued operations and segregated in United Dominion’s Consolidated Statements of Operations and Balance Sheets. Properties classified as real estate held for disposition generally represent properties that are under contract for sale and are expected to close within the next twelve months. For purposes of these financial statements, FAS 144 results in the presentation of the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through December 31, 2004, as discontinued operations for all periods presented. The adoption of FAS 144 does not have an impact on net income available to common stockholders. FAS 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through December 31, 2004 within the Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets as of December 31, 2004 and 2003.
      For the year ended December 31, 2004, United Dominion sold 19 communities with a total of 5,425 apartment homes, 24 townhomes from a community of 36 townhomes, and one parcel of land. At December 31, 2004, United Dominion had 12 communities with a total of 2,635 apartment homes and a net book value of $114.9 million and one parcel of land with a net book value of $3.9 million included in real estate held for disposition. During 2003, United Dominion sold seven communities with a total of 1,927 apartment homes and two commercial properties. During 2002, United Dominion sold 25 communities with a total of 6,990 apartment homes, one parcel of land, and one commercial property. 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.”

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following is a summary of income from discontinued operations for the years ended December 31, (dollars in thousands):
                         
    2004   2003   2002
             
Rental income
  $ 46,223     $ 71,675     $ 107,932  
Rental expenses
    20,460       30,196       43,465  
Real estate depreciation
    8,847       17,687       25,110  
Interest
                4,420  
Loss on early debt retirement
                3,805  
Impairment loss on real estate
                2,301  
Other expenses
    88       157       220  
                   
      29,395       48,040       79,321  
Income before net gain on sale of land and depreciable property, and minority interests
    16,828       23,635       28,611  
Net gain on the sale of land and depreciable property
    52,903       15,941       32,698  
                   
Income before minority interests
    69,731       39,576       61,309  
Minority interests on income from discontinued operations
    (4,400 )     (2,521 )     (3,789 )
                   
Income from discontinued operations, net of minority interests
  $ 65,331     $ 37,055     $ 57,520  
                   
4. SECURED DEBT
      Secured debt on continuing and discontinued operations of United Dominion’s real estate portfolio, which encumbers $1.9 billion or 36% of real estate owned ($3.3 billion or 64% of United Dominion’s real estate owned is unencumbered) consists of the following as of December 31, 2004 (dollars in thousands):
                                         
            Weighted   Weighted   Number of
        Average   Average   Properties
    Principal Outstanding   Interest Rate   Years to Maturity   Encumbered
                 
    2004   2003   2004   2004   2004
                     
Fixed Rate Debt
                                       
Mortgage notes payable
  $ 428,223     $ 174,520       5.76 %     5.8       21  
Tax-exempt secured notes payable
    39,160       42,540       6.14 %     16.9       4  
Fannie Mae credit facilities
    288,875       288,875       6.40 %     6.2       9  
Fannie Mae credit facilities — swapped
          17,000       n/a       n/a       n/a  
                               
Total fixed rate secured debt
    756,258       522,935       6.03 %     6.5       34  

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                         
            Weighted   Weighted   Number of
        Average   Average   Properties
    Principal Outstanding   Interest Rate   Years to Maturity   Encumbered
                 
    2004   2003   2004   2004   2004
                     
Variable Rate Debt
                                       
Mortgage notes payable
    45,758       46,185       3.01 %     7.1       4  
Tax-exempt secured note payable
    7,770       7,770       1.72 %     23.5       1  
Fannie Mae credit facilities
    367,469       370,469       2.67 %     7.6       47  
Freddie Mac credit facility
    20,669       70,669       2.64 %     2.2       8  
                               
Total variable rate secured debt
    441,666       495,093       2.68 %     7.6       60  
                               
Total secured debt
  $ 1,197,924     $ 1,018,028       4.79 %     6.9       94  
                               
Fixed Rate Debt
      Mortgage notes payable Fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2005 through July 2027 and carry interest rates ranging from 4.10% to 8.50%.
      Tax-exempt secured notes payable Fixed rate mortgage notes payable that secure tax-exempt housing bond issues mature at various dates from May 2008 through March 2031 and carry interest rates ranging from 5.30% to 6.75%. Interest on these notes is generally payable in semi-annual installments.
      Secured credit facilities At December 31, 2004, United Dominion’s fixed rate secured credit facilities consisted of $288.9 million of the $656.3 million outstanding on an $860 million aggregate commitment under four revolving secured credit facilities with Fannie Mae. 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.
Variable Rate Debt
      Mortgage notes payable Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from January 2005 through July 2013. As of December 31, 2004, these notes had interest rates ranging from 2.83% to 4.03%.
      Tax-exempt secured note payable The variable rate mortgage note payable that secures tax-exempt housing bond issues matures in July 2028. As of December 31, 2004, this note had an interest rate of 1.72%. Interest on this note is payable in monthly installments.
      Secured credit facilities At December 31, 2004, United Dominion’s variable rate secured credit facilities consisted of $367.5 million outstanding on the Fannie Mae credit facilities and $20.7 million outstanding on the Freddie Mac credit facility. As of December 31, 2004, the variable rate Fannie Mae credit facilities had a weighted average floating rate of interest of 2.67% and the Freddie Mac credit facility had a weighted average floating rate of interest of 2.64%.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The aggregate maturities of secured debt for the fifteen years subsequent to December 31, 2004 are as follows (dollars in thousands):
                                                             
    Fixed   Variable    
             
    Mortgage   Tax-Exempt   Credit   Mortgage   Tax-Exempt   Credit    
Year   Notes   Notes   Facilities   Notes   Notes   Facilities   TOTAL
                             
  2005     $ 22,945     $ 305     $     $ 4,642     $     $     $ 27,892  
  2006       63,879       320             3,701                   67,900  
  2007       87,481       345                         20,669       108,495  
  2008       8,538       5,145                               13,683  
  2009       26,768       245                               27,013  
  2010       71,084       265       138,875                         210,224  
  2011       11,759       280       50,000                   114,513       176,552  
  2012       58,834       300       100,000                   52,956       212,090  
  2013       61,751       315             37,415             200,000       299,481  
  2014       651       340                               991  
  2015       703