UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number 1-10524 UNITED DOMINION REALTY TRUST, INC. (Exact name of registrant as specified in its charter) Virginia 54-0857512 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 South Sixth Street, Richmond, Virginia 23219-3802 (Address of principal executive offices - zip code) (804) 780-2691 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to filing requirements for at least the past 90 days. Yes X No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 88,143,261 shares of common stock outstanding as of August 5, 1997
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands,except for share data) (Unaudited) <TABLE> <CAPTION> June 30, December 31, 1997 1996 -------------- ------------ <S> <C> Assets Real estate owned: Real estate held for investment (Note 3) $ 2,135,654 $ 2,007,612 Less: accumulated depreciation 181,662 173,291 ------------ ----------- 1,953,992 1,834,321 Real estate under development 62,716 37,855 Real estate held for disposition 85,431 39,556 Cash and cash equivalents 8,296 13,452 Other assets 33,220 41,720 ------------ ----------- Total assets $ 2,143,655 $ 1,966,904 ============ =========== Liabilities and shareholders' equity Notes payable-secured (Note 4) $ 389,106 $ 376,560 Notes payable-unsecured (Note 5) 626,242 668,275 Distributions payable to common shareholders 22,037 19,699 Accounts payable, accrued expenses and other liabilities 54,511 49,962 ------------ ----------- Total liabilities 1,091,896 1,114,496 Minority interest of unitholders in operating partnership 2,021 2,029 Shareholders' equity: Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized; 4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 105,000 6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 -- Common stock, $1 par value; 150,000,000 shares authorized 87,274,566 shares issued and outstanding (81,982,551 in 1996) 87,275 81,983 Additional paid-in-capital 882,257 814,795 Notes receivable from officer-shareholders (9,198) (5,926) Distributions in excess of net income (165,596) (147,529) Unrealized gain on securities available-for-sale -- 2,056 ------------ ----------- Total shareholders' equity 1,049,738 850,379 ------------ ----------- Total liabilities and shareholders' equity $ 2,143,655 $ 1,966,904 ============ =========== </TABLE> See accompanying notes. 2
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 --------- ---------- --------- ----------- <S> <C> Revenues Rental income $ 95,382 $ 57,197 $ 185,366 $ 112,036 Interest and other non-property income 137 445 388 795 --------- --------- --------- ----------- 95,519 57,642 185,754 112,831 Expenses Rental expenses: Utilities 5,658 3,857 12,124 8,385 Repairs and maintenance 14,206 10,597 26,179 19,136 Real estate taxes 7,796 4,209 14,907 8,189 Property management 3,297 1,247 6,074 2,748 Other rental expenses 10,000 5,279 19,289 10,453 Real estate depreciation 19,127 10,805 35,289 21,365 Interest 19,769 11,237 38,919 21,883 General and administrative 1,820 1,549 3,653 2,932 Other depreciation and amortization 395 276 845 560 Impairment loss on real estate held for disposition -- 290 -- 290 --------- --------- --------- ----------- 82,068 49,346 157,279 95,941 Income before gains (losses) on sales of investments and minority interest of unitholders in operating partnership 13,451 8,296 28,475 16,890 Gains on sales of investments 1,254 (129) 3,374 836 Minority interest of unitholders in operating partnership (28) (1) (59) (1) --------- --------- --------- ----------- Net income 14,677 8,166 31,790 17,725 Dividends to preferred shareholders 3,611 2,428 6,039 4,856 --------- --------- --------- ----------- Net income available to common shareholders $ 11,066 $ 5,738 $ 25,751 $ 12,869 ========= ========= ========= =========== Net income per common share $ .13 $ .10 $ .30 $ .23 ========= ========= ========= =========== Dividends declared per common share $ .2525 $ .24 $ .5050 $ .48 ========= ========= ========= =========== Weighted average number of common shares outstanding 86,877 56,666 85,967 56,566 </TABLE> See accompanying notes. 3
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 1997 1996 - ------------------------------------------------------------------------------------ -------------- ----------- <S> <C> Operating Activities Net income $ 31,790 $ 17,725 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 36,134 21,925 Minority interest of unitholders in operating partnership 59 1 Impairment loss on real estate held for disposition -- 290 Gains on sales of investments (3,374) (836) Amortization of deferred financing costs 810 617 Changes in operating assets and liabilities: Increase in operating liabilities 2,473 8,555 Increase in operating assets (4,572) (1,184) ---------- -------- Net cash provided by operating activities 63,320 47,093 Investing Activities Acquisition of real estate, net of debt and liabilities assumed (150,615) (77,723) Capital expenditures (45,966) (24,856) Development of real estate assets (24,861) (2,955) Net proceeds from sales of investments 27,089 15,794 Proceeds from interest rate hedge transaction 1,538 -- Payments on notes receivable 2,142 2 ---------- -------- Net cash used in investing activities (190,673) (89,738) Financing Activities Net proceeds from the issuance of common stock 59,670 1,141 Net proceeds from the sale of preferred stock 145,275 -- Net proceeds from the sale of common stock through the dividend reinvestment and stock purchase plan 14,538 3,733 Gross proceeds from the issuance of unsecured notes payable 125,000 111 Net borrowings (repayments) of short-term bank borrowings (104,750) 82,400 Distributions paid to preferred shareholders (4,856) (4,856) Distributions paid to common shareholders (41,482) (26,257) Distributions paid to minority interest unitholders (67) -- Scheduled mortgage principal payments (2,773) (1,213) Mortgage financing proceeds released from construction funds -- 2,665 Payments on unsecured notes (63,414) (10,000) Non-scheduled payments on secured notes payable (3,350) (77) Payment of financing costs (1,594) (314) ---------- -------- Net cash provided by financing activities 122,197 47,333 Net increase (decrease) in cash and cash equivalents (5,156) 4,688 Cash and cash equivalents, beginning of period 13,452 2,904 ---------- -------- Cash and cash equivalents, end of period $ 8,296 $ 7,592 ========== ======== Supplemental Information Interest paid during the period $ 37,628 $ 22,087 Secured debt assumed through the acquisition of properties 22,063 15,748 </TABLE> See accompanying notes. 4
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (In thousands, except share and per share amounts) (unaudited) <TABLE> <CAPTION> Common Stock, $1 Par Value Preferred Stock -------------------------- ------------------------ Number Number of Shares Amount of Shares Amount - ------------------------------------------------------------------------------------------------------------------------- <S> <C> Balance at December 31, 1996 81,982,551 $81,983 4,200,000 $105,000 Common shares issued in public offering 4,000,000 4,000 - - Preferred shares-Series B issued in public offering - - 6,000,000 150,000 Exercise of common share options 30,697 30 - - Common shares purchased by officers, net of repayments 230,000 230 - - Common shares issued through dividend reinvestment and stock purchase plan 1,030,680 1,031 - - Common shares issued through employee stock purchase plan 638 1 - - Net income - - - - Preferred stock-Series A distributions declared ($1.16 per share) - - - - Preferred stock-Series B distributions declared ($.56 per share) - - - - Common stock distributions declared ($.5050 per share) - - - - Realized gain on securities available-for-sale - - - - =========== ============ ============ ============= Balance at June 30, 1997 87,274,566 $87,275 10,200,000 $255,000 ========== ============ ============ ============= </TABLE> UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 (In thousands, except share and per share amounts) (unaudited) <TABLE> <CAPTION> Unrealized Gain on Additional Receivable Distributions Securities Total Paid-in from Officer in Excess of Available- Shareholders' Capital Shareholders Net Income for-Sale Equity - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> Balance at December 31, 1996 $814,795 ($5,926) ($147,529) $2,056 $850,379 Common shares issued in public offering 55,420 - - - 59,420 Preferred shares-Series B issued in public offering (4,908) - - - 145,092 Exercise of common share options 284 - - - 314 Common shares purchased by officers, net of repayments 3,149 (3,272) - - 107 Common shares issued through dividend reinvestment and stock purchase plan 13,507 - - - 14,538 Common shares issued through employee stock purchase plan 10 - - - 11 Net income - - 31,790 - 31,790 Preferred stock-Series A distributions declared ($1.16 per share) - - (4,856) - (4,856) Preferred stock-Series B distributions declared ($.56 per share) - - (1,183) - (1,183) Common stock distributions declared ($.5050 per share) - - (43,818) - (43,818) Realized gain on securities available-for-sale - - - (2,056) (2,056) ========= ========== ============== ============ ============== Balance at June 30, 1997 $882,257 ($9,198) ($165,596) $0 $1,049,738 ========= ========== ============== ============ ============== </TABLE> See accompanying notes. 5
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of presentation The accompanying consolidated financial statements include the accounts of United Dominion Realty Trust, Inc. and its wholly owned subsidiaries, including United Dominion Realty, L.P., its Operating Partnership, (collectively, the "Company"). The financial statements of the Company include the minority interest of unitholders in the operating partnership. All significant inter-company accounts and transactions have been eliminated in consolidation. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position at June 30, 1997 and results of operations for the interim periods ended June 30, 1997 and 1996. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in the Company's December 31, 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. Reclassifications Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. 3. Real estate held for investment The following table summarizes real estate held for investment: June 30, December 31, Dollars in thousands 1997 1996 - ---------------------------------------------------------------------- Land and land improvements $ 376,185 $ 353,092 Buildings and improvements 1,631,006 1,537,387 Furniture, fixtures and equipment 124,215 115,308 Construction in progress 4,248 1,825 ----------- ------------ Real estate held for investment $ 2,135,654 $ 2,007,612 =========== =========== 4. Notes payable - secured Notes payable-secured, which encumber $756.6 million or 33% of the Company's real estate owned ($1.6 billion or 67% of the Company's real estate owned is unencumbered) consist of the following at June 30, 1997: <TABLE> <CAPTION> Principal Weighted Average Weighted Average No. Communities Dollars in thousands Balance Interest Rate Years to Maturity Encumbered - ----------------------------------------------------------------------------------------------------- <S> <C> Fixed-Rate Mortgage Notes $ 122,132 8.3% 3.7 20 Fixed-Rate Tax-Exempt Notes 116,732 6.9% 23.8 17 Fixed-Rate REMIC Financings 90,022 7.8% 3.5 27 Fixed-Rate Secured Notes (a) 45,000 7.3% 2.1 6 ------------------------------------------------------------------- Total Fixed-Rate Notes 373,886 7.7% 10.9 70 Variable-Rate Secured Notes 13,020 6.3% 2.2 2 Variable-Rate Tax-Exempt Notes 2,200 5.4% 5.4 1 ------------------------------------------------------------------- Total Variable-Rate Notes 15,220 6.2% 2.6 3 ------------------------------------------------------------------- Total notes payable - secured $ 389,106 7.7% 9.5 73 =================================================================== </TABLE> (a) Variable-rate secured notes payable which have been effectively swapped to a fixed-rate at June 30, 1997 consist of a $40 million variable-rate secured senior credit facility which encumbers six apartment communities and a $5 million variable-rate construction note payable. The interest rate swap agreements have an aggregate notional value of $45 million under which the Company pays a fixed-rate of interest and receives a variable-rate on the notional amounts. The interest rate swap agreements effectively change the Company's interest rate exposure on $45 million from a variable-rate to a weighted average fixed-rate of approximately 7.3%. 6
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Notes payable - unsecured A summary of notes payable - unsecured is as follows: <TABLE> <CAPTION> June 30, December 31, Dollars in thousands 1997 1996 ------------- ------------ <S> <C> Commercial Banks Borrowings outstanding under revolving credit facilities and other bank debt $ 20,500 (a) $ 125,250 Insurance Companies--Senior Unsecured Notes 7.98% due March, 1997-2003 44,571 (b) 52,000 8.72% due November, 1996-1998 (c) 4,000 4,000 --------- --------- 48,571 56,000 Other (d) 7,171 6,040 Senior Unsecured Notes - Other 7.00% Note due January 15, 1997 (e) -- 55,985 7.25% Notes due April 1, 1999 75,000 75,000 8.50% Debentures due September 15, 2024 (f) 150,000 150,000 7.95% Medium-Term Notes due July 12, 2006 125,000 125,000 7.25% Notes due January 15, 2007 125,000 -- 7.07% Medium-Term Notes due November 15, 2006 25,000 25,000 7.02% Medium-Term Notes due November 15, 2005 50,000 50,000 --------- --------- 550,000 480,985 --------- --------- Total Unsecured Notes Payable $ 626,242 $ 668,275 ========= ========= </TABLE> (a) The weighted average balance outstanding for the three months ended June 30, 1997 was $78.9 million and carried a weighted average daily interest rate of 6.2%. The weighted average balance outstanding for the six months ended June 30, 1997 was $75.1 million and carried a weighted average daily interest rate of 6.2%. The weighted average interest rate at June 30, 1997 was 6.4%. (b) Payable in six equal annual principal installments of $7.4 million. (c) Payable in two equal annual principal installments of $2 million. (d) Includes $6.7 million and $5.6 million at June 30, 1997 and December 31, 1996, respectively, of deferred gain from the termination of interest rate hedge transactions. (e) Represents an unsecured note assumed in connection with the South West Property Trust Inc. statutory merger (the "South West Merger") on December 31, 1996. The note was repaid on January 3, 1997. (f) Debentures include an investor put feature which grants a one time option to redeem debentures in September 2004. 6. Accounting Pronouncements During the first quarter of 1997, the Financial Accounting Standards Board issued a new statement on the calculation of earnings per share (SFAS No. 128) which is effective beginning in the fourth quarter of 1997. Early adoption is prohibited. Under the new statement, primary and fully dilutive earnings per share are replaced with basic and diluted earnings per share. The Company's basic earnings per share and diluted earnings per share for the three month and six month periods ended June 30, 1997 and 1996 according to the new statements would not change from the reported amounts. 7. Subsequent Events On August 1, 1997, the Company sold a portfolio of six apartment communities containing 1,204 apartment homes which had a weighted average age of 26 years for an aggregate sales price of approximately $34.7 million. For financial reporting purposes, the Company will recognize an approximate $9.6 million gain on the sale. The transaction was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, so the related capital gains can be deferred for federal income tax purposes. A seventh property included in the portfolio is scheduled to close in September 1997. 7
PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company considers portions of this information to be 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. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. The Company is an owner and operator of primarily middle income apartment communities across the Sunbelt. The communities are located in 22 major markets dispersed throughout a 15 state area extending from Delaware to Nevada where it seeks to be a market leader by operating a sufficiently sized portfolio of apartments within each market. The Company believes this market diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies. The Company's investment strategy focuses on acquiring apartment communities in its major markets where it can add value. The following table summarizes the Company's major apartment market information: <TABLE> <CAPTION> Three Months Ended Six Months Ended As of June 30, 1997 June 30, 1997 June 30, 1997 ----------------------------------------- ------------------------ ---------------------- Average Average Number of Number of % of Monthly Monthly Apartment Apartment Apartment Economic Rental Economic Rental Market Communities Homes Homes Occupancy** Rates* Occupancy** Rates - ----------------------------------------------------------- ------------------------ ---------------------- <S> <C> Held for investment Dallas, TX 22 8,117 14% 93.7% $ 544 93.4% $ 538 Richmond, VA 10 3,253 5% 91.5% 551 90.8% 547 Columbia, SC 11 3,234 5% 92.5% 498 90.9% 498 Raleigh, NC 10 2,951 5% 94.0% 649 94.9% 646 Charlotte, NC 13 2,915 5% 94.5% 573 93.2% 570 Tampa, FL 10 2,913 5% 93.4% 572 93.9% 568 Orlando, FL 9 2,816 5% 96.5% 570 95.3% 568 Eastern NC 10 2,530 4% 95.9% 560 95.5% 558 Greensboro, NC 9 2,222 4% 84.2% 545 84.7% 544 Nashville, TN 8 2,116 4% 91.6% 584 91.6% 581 San Antonio, TX 5 1,983 3% 92.7% 614 92.5% 614 Baltimore, MD 7 1,614 3% 92.0% 656 92.4% 653 Greenville, SC 7 1,566 3% 85.6% 526 85.5% 525 Atlanta, GA 6 1,462 2% 90.2% 600 89.2% 600 Houston, TX 4 1,450 2% 91.1% 465 90.5% 464 Hampton Roads, VA 6 1,428 2% 90.3% 556 89.8% 554 Jacksonville, FL 3 1,157 2% 85.2% 596 86.3% 595 Washington, DC 5 1,113 2% 86.3% 736 86.6% 734 Ft. Lauderdale, FL 4 960 2% 94.1% 786 94.3% 783 Memphis, TN 4 935 2% 89.3% 514 90.3% 511 Austin, TX 3 867 1% 87.7% 533 88.9% 532 Phoenix, AZ 3 712 1% 91.4% 643 90.6% 643 Other 33 7,624 13% 91.4% 559 91.1% 558 ----------------------------------- ---------------------- -------------------- 202 55,938 94% 91.9% 572 91.7% 570 Held for disposition 16 3,499 6% 91.4% 506 91.2% 504 --------------------------------- ---------------------- -------------------- Total 218 59,437 100% 91.9% $568 91.6% $566 ================================= ====================== ==================== </TABLE> * Average monthly rental rates represent potential rent collections (gross potential rents less market adjustments), which approximate net effective rents. These figures exclude 1997 acquisitions. ** Economic occupancy is defined as rental income (gross potential rent less vacancy loss, management units, units held out of service, move-in concessions and credit loss) divided by potential collections (gross potential rent less management units, units held out of service and move-in concessions) for the period, expressed as a percentage. These figures exclude 1997 acquisitions. 8
Liquidity and Capital Resources As a qualified real estate investment trust ("REIT"), the Company distributes a substantial portion of its cash flow to its shareholders in the form of quarterly distributions. The Company seeks to retain sufficient cash to cover normal operating needs, including routine replacements and to help fund additional acquisitions and development activity. For the six months ended June 30, 1997, the Company's cash flow from operating activities exceeded cash distributions paid to preferred and common shareholders by approximately $17.0 million. The Company utilizes a variety of primarily external financing sources to fund portfolio growth, major capital improvement programs and balloon debt payments. The Company's bank lines of credit generally have been used to temporarily finance these expenditures and subsequently this short-term bank debt has been replaced with longer term debt or equity. Operating Activities For the six months ended June 30, 1997, the Company's cash flow from operating activities increased approximately $16.2 million over the same period last year. This increase was primarily a result of the significant expansion of the Company's portfolio of apartment communities as discussed below and under "Results of Operations". The Company considers its cash provided by operating activities adequate to meet its operating requirements and payments of distributions to both common and preferred shareholders. Investing Activities During the six months ended June 30, 1997, net cash used for investing activities was approximately $190.7 million compared to approximately $89.7 million for the same period last year. The level of investing activities primarily reflects the increased levels of the Company's acquisition, capital expenditure and development programs. Acquisitions The Company expects to purchase between 7,000 and 9,000 apartment homes at an aggregate purchase price between $300 million and $400 million during 1997. The Company's seeks to acquire apartment communities that can provide a first year weighted average return on average investment of approximately 9.7% which may vary depending on market conditions. During the first six months of 1997, the Company acquired 12 apartment communities containing 4,106 apartment homes and the second phase of an apartment community acquired in 1996 containing 100 apartment homes at a total cost of approximately $176.1 million, including closing costs. All of the apartment communities acquired were located in the Company's major markets. The apartment communities acquired were as follows: <TABLE> <CAPTION> Purchase Purchase No. Apt. Year Price Cost Date Name/Location Homes Built (000's) per Home - ---------------------------------------------------------------------------------------------- <S> <C> 02/19/97 Club at Hickory Hollow/Nashville, TN 406 1987 $17,371 $42,800 02/28/97 Stoney Pointe/ Charlotte, NC* 400 1991 17,355 43,400 02/28/97 Crosswinds/Wilmington, NC 380 1990 19,326 50,900 02/28/97 Dominion Trinity Park/ Raleigh, NC* 380 1994 22,155 58,300 03/25/97 Anderson Mill/Austin, TX 350 1984 14,305 40,900 03/27/97 Oak Ridge/Dallas, TX 486 1983 17,290 35,600 03/27/97 Breckenridge/Nashville, TN 190 1986 8,480 44,600 04/22/97 Northwinds II/Greensboro, NC** 100 1997 4,765 47,700 05/09/97 Green Oaks I/Houston, TX*** 440 1985 15,260 34,700 05/09/97 Skyhawk/Houston, TX 224 1984 9,456 42,200 06/06/97 Cambridge Woods/Tampa, FL 274 1985 8,957 32,700 06/18/97 Kelly Crossing/Dallas, TX 304 1984 11,653 38,300 06/25/97 Green Oaks II/Houston, TX*** 272 1985 9,680 35,600 ---------------------------------------- 1997 Total/Weighted Average 4,206 1987 $176,053 $41,900 ======================================== </TABLE> 9
* In connection with the acquisition of Dominion Trinity Park and Stoney Pointe, the Company assumed two mortgage notes payable aggregating $22 million with a weighted average interest rate of approximately 8.4%. ** This represents the second phase of an apartment community acquired by the Company in August, 1996. *** These two properties will be operated as one apartment community under the name Green Oaks Apartments. On July 1, 1997, the Company acquired a portfolio of five apartment communities containing 934 apartment homes for an aggregate purchase price of approximately $36.0 million, including closing costs. All of the properties are located in Florida. Real estate under development At June 30, 1997, the Company had 1,234 apartment homes under development as outlined below (dollars in thousands): <TABLE> <CAPTION> Total Development Estimated Expected No. Apt. Completed Costs Development Cost Completion Property Location Homes Apt. Homes to Date Cost per Home Date - -------------------------------------------------------------------------------------------------------------------- <S> <C> Apartment Communities Providence Court Charlotte, NC 420 326 $ 27,801 $ 29,698 $ 70,700 4Q `97 Dominion Franklin Nashville, TN 360 -- 2,888 23,236 64,500 4Q `98 ------------------------------------------------------------ 780 326 30,689 52,934 67,900 Additional Phases England Run II Fredericksburg, VA 168 -- 6,139 10,740 63,900 3Q `97 Brantley Pines II Ft. Myers, FL 96 96 6,637 6,755 70,400 2Q `97 Oak Park II Dallas, TX 80 80 4,332 4,581 57,300 1Q `97 Oak Forest II Dallas, TX 260 24 7,948 10,612 40,800 1Q `98 Steeplechase II Greensboro, NC 176 -- 4,325 11,616 66,000 3Q `97 Greenway Park II Phoenix, AZ 20 -- 641 1,282 64,100 4Q `97 Mill Creek II Wilmington, NC 180 -- 1,357 11,719 65,100 3Q `98 Other -- -- 648 -- -- ------------------------------------------------------------ 980 200 32,027 57,305 $ 58,500 ------------------------------------------------------------ 1,760 526 $ 62,716 $110,239 $ 62,600 ============================================================= </TABLE> Consistent with the Company's acquisition strategy, development activity is expected to be focused primarily in its major markets. During the first six months of 1997, the Company invested approximately $24.9 million in nine properties currently under development, which includes two apartment communities and seven additional phases to existing apartment communities. The Company expects to spend in excess of $60 million on development activity during 1997. At various times during the first six months of 1997, 421 apartment homes were completed and became available for occupancy, including the completion of the additional phase at Oak Park Apartments and Brantley Pines Apartments. Development activity is generally progressing on schedule and on budget. Absorption at the completed apartment homes in Charlotte, North Carolina and Ft. Myers, Florida has been slower than projected year to date, however, absorption has been very good at the Dallas, Texas property. These additions did not have a material impact on results of operations for the quarter or six months ended June 30, 1997. Capital Expenditures During the six months ended June 30, 1997, the Company spent approximately $46.0 million on capital improvements to its apartment portfolio. The Company has a policy of capitalizing expenditures related to acquisitions and the enhancement of the value, or the substantial extenuation of the useful life of an existing asset. Some of these capital expenditures relate to an upgrade program that began in 1996 to modernize certain of the Company's older apartment communities. These upgrades primarily involve updating kitchens and bathrooms and are designed to enhance rent growth and add value to the apartment communities. In addition, the Company has several initiatives in place such as: (i) submetering of water and sewer to residents where local and state regulations allow the cost to be passed to the resident, (ii) gating and fencing apartment communities, (iii) installing monitoring devices such as intrusion alarms or controlled access devices, (iv) enlarging fitness centers and (v) adding business centers. Capital expenditures 10
during 1997 are expected to be similar to 1996 levels with the Company spending approximately $400 per mature apartment home on revenue enhancing expenditures and $400 to $500 per unit on recurring capital expenditures. Disposition of investments Securities available-for-sale During the first quarter of 1997, the Company sold its investment in the preferred stock of First Washington Realty Trust, Inc. obtained as partial consideration in the 1995 sale of four commercial properties. The Company received approximately $9.9 million in cash proceeds from the sale of the stock and recognized approximately a $2.1 million gain on the sale for financial reporting purposes. Real estate held for disposition During the first quarter of 1997, the Company transferred seven apartment communities aggregating $33.7 million, net of accumulated depreciation, from real estate held for investment to real estate held for disposition. During the second quarter of 1997, the Company transferred six apartment communities aggregating $29.6 million net of accumulated depreciation, from real estate held for investment to real estate held for disposition. These six properties are encumbered by tax-exempt bonds and are being offered for sale in a portfolio transaction. On August 7, 1997, the Company executed a contingent contract to sell these communities at an aggregate sales price of $47.9 million. There is no assurance that transaction will be consummated. The Company continually undertakes portfolio review analyses with the objective of identifying properties that do not meet the long-term investment objectives of the Company which are then to be sold. The Company does not anticipate any losses from the sales of any of these properties. Real estate held for disposition included in the Consolidated Balance Sheet in the aggregate amount of $85.4 million, net of accumulated depreciation and valuation allowance includes: (i) 16 apartment communities containing 3,499 apartment homes aggregating $72.6 million, (ii) two shopping centers aggregating $8.8 million, (iii) three other commercial properties aggregating $2.4 million and (iv) one parcel of land in the amount of $1.6 million. Real estate held for disposition contributed net rental income (rental income less rental expenses and depreciation expense) in the aggregate amount of approximately $3.2 million and $6.8 million for the three and six months ended June 30, 1997, respectively. The Company expects to dispose of these properties within the next twelve months. During the second quarter of 1997, the Company sold three apartment communities containing 822 apartment homes and one shopping center for an aggregate sales price of $20.8 million and received net cash proceeds of approximately $17.1 million. For financial reporting purposes, the Company recognized an approximate $1.3 million gain on the sale of investments in connection with these sales. One of these properties was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, so the related capital gain was deferred for federal income tax purposes. On August 1, 1997, the Company sold a portfolio of six apartment communities containing 1,204 apartment homes which had a weighted average age of 26 years for an aggregate sales price of approximately $34.7 million. For financial reporting purposes, the Company will recognize an approximate $9.6 million gain on the sale. The transaction was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, so the related capital gains can be deferred for federal income tax purposes. A seventh property included in the portfolio is scheduled to close in September 1997. 11
Financing Activities Financial Structure The following table outlines the Company's financial structure at June 30, 1997: <TABLE> <CAPTION> Balance at Weighted Average Capitalization June 30, 1997 Interest Rate Percentage ------------- ---------------- -------------- <S> <C> Fixed Rate Secured Debt $ 373,886 7.7% 14.9% Fixed Rate Unsecured Debt 605,742 7.5% 24.1% ------------- ---- ----- 979,628 7.6% 39.0% Variable Rate Secured Debt 15,220 6.2% 0.6% Variable Rate Unsecured Debt 20,500 6.4% 0.8% ------------- ---- ----- 35,720 6.3% 1.4% ------------- ---- ----- Total Debt 1,015,348 7.6% 40.4% Preferred stock at market 260,952 8.9%* 10.3% Common stock at market 1,238,497 n/a 49.3% ------------- ----- Equity capitalization at market 1,499,449 n/a 59.6% ------------- ---- ----- Total market capitalization (debt & equity) $ 2,514,797 n/a 100.0% ============= ====== </TABLE> *Represents the weighted average dividend rate. Net cash provided by financing activities during the six months ended June 30, 1997 was approximately $122.2 million compared to $47.3 million for the same period last year, reflecting the significant debt and equity financing activities during the first six months of 1997. On January 28, 1997, the Company issued 4,000,000 shares of its common stock at $15.75 per share for an aggregate value of approximately $63 million. Net proceeds of approximately $59.7 million were used to repay an unsecured credit facility assumed in connection with the South West Merger. The Company also received approximately $14.5 million under its Dividend Reinvestment and Stock Purchase Plan (the "Plan") during the six months ended June 30, 1997 which included approximately $10.4 million in optional cash investments and $4.1 million of reinvested dividends. The Company expects to generate in excess of $35 million in proceeds from the Plan during 1997. In anticipation of the issuance of unsecured debt in early 1997, the Company entered into a $100 million (notional amount) Treasury rate lock agreement in November 1996. On January 27, 1997, the Company issued $125 million of 7.25% Notes due January 15, 2007 under its $462.5 million shelf registration statement. The Notes were priced to yield 7.31% which was 79 basis points over the 10 year Treasury at the time of issuance. The interest rate protection agreement was terminated simultaneously with the $125 million Note issuance and the Company received $1.5 million in cash. This had the economic effect of lowering the interest rate on the Notes to approximately 7.14%. Net proceeds of approximately $124 million were used to curtail bank debt and purchase apartment communities. On May 29, 1997, the Company sold 6,000,000 shares of 8.60% Series B Redeemable Preferred Stock at $25 per share. Net proceeds of approximately $145.3 million were primarily used to repay short-term bank debt. Derivative Instruments The Company has, from time to time, used derivative instruments to synthetically alter on-balance sheet liabilities or to hedge anticipated financing transactions. Derivative contracts did not have a material impact on the results of operations during the three and six months ended June 30, 1997 and 1996. 12
On May 1, 1997, the Company terminated an interest rate swap agreement with a commercial lender with notional amounts from $79 million to $83 million which effectively changed the Company's interest exposure from a variable rate to a weighted average fixed rate of 6.45%. No gain or loss was recognized on this termination. Credit facilities At June 30, 1997, the Company had the following credit facilities: <TABLE> <CAPTION> Three Months Ended June 30, 1997 Six Months Ended June 30, 1997 ----------------------------------- ---------------------------------- Weighted Average Weighted Average Weighted Average Interest Rate Weighted Average Interest Rate Amount of Amount Three Months Amount Six Months Credit facility facility Outstanding June 1997 Outstanding June 1997 - ----------------------------- ----------------------------------- ---------------------------------- <S> <C> Revolving credit $ 70,000 $ 46,465 6.2% $ 52,107 6.2% Line of credit 33,500 -- -- -- -- Interim credit 75,000 32,516 6.2% 22,954 6.2% ----------- ----------------------------------- ---------------------------------- $ 178,500 $ 78,981 6.2% $ 75,061 6.2% =========== =================================== ================================== </TABLE> On August 4, 1997, the Company closed on a new $200 million three year revolving credit facility and a $50 million one year unsecured line of credit. Under the new facility, pricing is based upon the higher of the Company's senior unsecured debt ratings from S & P and Moody's which are currently BBB+ and Baa1, respectively. At these rating levels, contractual interest under the new revolving credit facility is LIBOR plus 42 1/2 basis points. The credit facility also includes a $100 million competitive bid option which allows the Company to solicit bids from participating banks at rates below the contractual rate. The Company's liquidity and capital resources are believed to be more than adequate to meet its cash requirements for the next several years. The Company expects to meet its short- and long-term capital requirements, such as balloon debt maturities, property acquisitions, development activity and significant capital improvements, primarily through the public and private sale of capital stock and the issuance of medium and long-term unsecured notes payable. The Company may also fund its capital requirements through (i) the assumption of mortgage indebtedness, (ii) sales of properties, (iii) common shares sold through the Company's Dividend Reinvestment and Stock Purchase Plan, (iv) retained operating cash flow and (v) the issuance of operating partnership units. The Company's senior debt is currently rated BBB+ by Standard & Poor's and Baa1 by Moody's. As a result of its investment grade debt ratings, the Company expects to use unsecured debt as its primary debt funding source. Depending upon the volume and timing of acquisition activity, the Company anticipates raising additional debt and equity capital during the next twelve months to finance capital requirements while striving to minimize the overall cost of capital. During the second quarter of 1997, the Company filed a shelf registration statement for approximately $675 million of debt and preferred and common equity securities. Funds from Operations Funds from operations ("FFO") is defined as income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary items (computed in accordance with generally accepted accounting principles) plus real estate depreciation, less preferred dividends and after adjustment for significant non-recurring items, if any. The Company computes FFO in accordance with the recommendations set forth by the National Association of Real Estate Investment Trusts ("NAREIT"). The Company considers FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company's operating performance and liquidity. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. 13
For the three months ended June 30, 1997, FFO increased 70.8% to $29.0 million, compared with $17.0 million for the same period last year. For the six months ended June 30, 1997, FFO increased 71.3% to $57.7 million, compared with $33.7 million for the same period last year. The increase in FFO was principally due to the increased net rental income from the Company's 26,719 non-mature apartment homes in 86 apartment communities acquired and developed subsequent to January 1, 1996. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, (In thousands) (In thousands) 1997 1996 % Change 1997 1996 % Change -------------------------------- ------------------------------- <S> <C> Calculation of funds from operations: Income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary item $ 13,451 $ 8,296 62.1% $ 28,475 $ 16,890 68.6% Adjustments: Real estate depreciation 19,127 10,805 77.0% 35,289 21,365 65.2% Dividends to preferred shareholders (3,611) (2,428) 48.7% (6,039) (4,856) 24.4% Impairment loss on real estate held for disposition -- 290 -- -- 290 -- -------------------------------- ------------------------------- Funds from operations $ 28,967 $ 16,963 70.8% $ 57,725 $ 33,689 71.3% ================================ =============================== </TABLE> Results of Operations The Company's net income is primarily generated from the operations of its apartment communities. For purposes of evaluating the Company's comparative operating performance, the Company categorizes its apartment communities into two categories (i) mature-those communities acquired, developed and stabilized prior to January 1, 1996 and held throughout both 1997 and 1996 and (ii) non-mature-those communities acquired, developed or sold subsequent January 1, 1996. For the three and six months ended June 30, 1997, the Company reported increases over the same period last year in rental income, income before gains (losses) on sales of investments and minority interest of unitholders in operating partnership and net income. For the six months ended June 30, 1997, net income available to common shareholders increased $12.9 million, with a corresponding increase of $.07 per share compared to the same period last year and for the three months ended June 30, 1997, net income available to common shareholders increased $5.3 million, with a corresponding increase of $.03 per share compared to the same period last year . Since the beginning of 1996, the Company acquired and developed a total of 26,719 apartment homes in 86 apartment communities (including 14,320 completed apartment homes in 44 apartment communities acquired in the South West Merger) and sold seven apartment communities containing 1,474 apartment homes, representing a net 73.8% expansion in the number of apartment homes owned during that period. These non-mature apartment homes provided a substantial portion of the aggregate reported increases. All Apartment Communities The operating performance for the Company's 218 apartment communities containing 59,437 completed apartment homes (and 1,474 apartment homes in seven apartment communities sold since January 1, 1996) for the three and six months ended June 30, 1997 and 148 apartment communities containing 36,361 apartment homes for the three and six months ended June 30, 1996, respectively, is summarized as follows: 14
<TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, (In thousands) (In thousands) -------------------------------- ---------------------------------- 1997 1996 % Change 1997 1996 % Change -------------------------------- ---------------------------------- <S> <C> Rental income $ 94,632 $ 55,602 70.2% $ 183,867 $ 108,698 69.2% Rental expenses (40,740) (24,502) 66.3% (78,134) (47,541) 64.3% Real estate depreciation (19,127) (10,805) 77.0% (35,289) (21,271) 65.9% -------------------------------- ---------------------------------- Net rental income (1) $ 34,765 $ 20,295 71.3% $ 70,444 $ 39,886 76.6% ================================ ================================== Weighted average number of apartment homes 58,678 35,423 65.6% 57,545 34,942 64.7% Economic occupancy (2) 91.9% 93.3% (1.4%) 91.6% 93.2% (1.6%) Average monthly rents $ 568 $ 548 3.6% $ 566 $ 545 3.9% </TABLE> (1) Net rental income for an apartment community is defined as total rental income, less rental expenses, less real estate depreciation. (2) Economic occupancy is defined as rental income (gross potential rent less vacancy loss, management units, units held out of service, move-in concessions and credit loss) divided by potential collections (gross potential rent less management units, units held out of service and move-in concessions) for the period, expressed as a percentage. Due to the acquisition and development of 26,719 apartment homes since January 1, 1996 (the Company also sold seven apartment communities containing 1,474 apartment homes during this same period), the weighted average number of apartment homes increased 64.7% to 57,545 for the six months ended June 30, 1997 and 65.6% to 58,678 for the three months ended June 30, 1997 . As a result of the increase in the number of apartment homes acquired since January 1, 1996, the Company has experienced significant increases in rental income, rental expenses and real estate depreciation for the three and six months ended June 30, 1997. Mature Apartment Communities The operating performance for the Company's 135 mature apartment communities containing 33,163 apartment homes for the three and six months ended June 30, 1997 and 1996 is summarized as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, (In thousands) (In thousands) ---------------------------------- -------------------------------- 1997 1996 % Change 1997 1996 % Change ---------------------------------- -------------------------------- <S> <C> Rental income $ 53,767 $ 51,946 3.5% $106,847 $103,104 3.6% Rental expenses (23,666) (22,970) 3.0% (46,622) (45,204) 3.1% Real estate depreciation (11,750) (10,288) 14.2% (20,699) (20,381) 1.6% ---------------------------------- -------------------------------- Net rental income $ 18,351 $ 18,688 (1.8%) $ 39,526 $ 37,519 5.3% ================================== ================================ Economic occupancy 92.4% 93.3% (0.9%) 92.1% 93.1% (1.0%) Average monthly rents $ 567 $ 545 4.0% $ 563 $ 541 4.1% </TABLE> For the six months ended June 30, 1997, the Company's mature communities provided approximately 58% of the Company's apartment rental income and 56% of its net rental income. During the first six months of 1997, the Company's mature apartment communities experienced good rent and other income growth. Compared to the same period last year, total rental income from these apartment homes grew 3.6%, or approximately $3.7 million, reflecting an increase in average monthly rents of 4.1% to $563 per month. In addition, other income, primarily fee income, increased approximately $802,000 or 23.8%. The rental rate increase was offset by a 1.0% decline in economic occupancy to 92.1%, which resulted from a decrease in physical occupancy of 1.0%. The economic occupancy declined due to the weakening of certain major southeastern markets during the last half of 1996 including Columbia and Greenville, South Carolina, Washington DC, Jacksonville, Florida, Richmond and Hampton Roads, Virginia and Atlanta, Georgia. Overall, economic occupancy bottomed out in January 1997 at 90.7% and has trended upward during 15
the remainder of the year to 92.2% for June 1997. The Company attributes the market softness primarily to increased home buying, a slowdown in job growth and an oversupply of apartment homes in certain of the southeastern markets. For the quarter ended June 30, 1997, total rental income from these apartment homes grew 3.5%, or approximately $1.8 million, reflecting an increase in average monthly rents of approximately $2.2 million or 4.0% to $567. Other income increased approximately $374,000 or 21.3%, over the same period last year while economic occupancy declined .9% to 92.4%. The Company expects to maintain rent growth in the 4% range and economic occupancy in the 92% range during the remainder of 1997. For the six months ended June 30, 1997, rental expenses at these communities increased 3.1%, or $1.4 million, resulting in an improvement in the operating expense ratio (the ratio of rental expenses to rental income) of .2% to 43.6%. The 3.1% increase in operating expenses is attributable to higher real estate taxes, marketing and advertising, personnel and the Company's cost of self-management. Real estate taxes increased approximately $201,000 or 2.7% over the same period last year as the Company has experienced continuing pressure on this expense item over the past year due to tax reassessments in certain markets. Marketing and advertising costs increased 46.5% or approximately $580,000 over the same period last year as a direct result of softening in certain major markets. Personnel costs increased 5.3% or approximately $519,000 primarily due to the fact that the Company was understaffed at some of its properties during much of 1996. The cost of self-management increased 36.0% or approximately $912,000 as the Company invested heavily in its personnel and technological infrastructure during 1997 in response to the significant growth the Company has experienced during the past year. In addition, incentive compensation earned by the site associates increased due to the better performance compared to budget achieved by these communities compared to the same period last year. These rental expense increases were somewhat offset by a decrease in repairs and maintenance expense of 4.5% or approximately $549,000 primarily as a result of less exterior painting, extraordinary repairs and mechanical repairs during the 1997 period. For the quarter ended June 30, 1997, rental expenses increased $696,000 or 3.0% over the same period last year for the same reasons discussed above. The Company's objective is to maintain rental expense growth below the 2% range during the remainder of 1997. For the three and six months ended June 30, 1997, depreciation expense increased partly as a result of the upgrade and improvement process in place at the Company's mature apartment communities discussed under "Capital Expenditures" in Liquidity and Capital Resources. Non-Mature Communities The operating performance for the three and six months ended June 30, 1997 for the Company's 86 non-mature apartment communities which includes: (i) the 30 apartment communities containing 7,712 apartment homes acquired during 1996 and a 253 home community acquired in 1995 and not stabilized due to significant rehabilitation, (ii) the 44 apartment communities containing 14,215 apartment homes acquired on December 31, 1996 in connection with the South West Merger (excluding 105 newly developed apartment homes), (iii) the 12 apartment communities containing 4,106 apartment homes and the second phase of an apartment community acquired in 1996 containing 100 apartment homes acquired since January 1, 1997, (iv) the seven apartment communities containing 1,474 apartment homes sold since January 1, 1996 and (v) the 586 apartment homes developed since January 1, 1996 is summarized as follows (dollars in thousands): Three Months Ended June 30, 1997 and 1996: <TABLE> <CAPTION> 1997 Acquisitions and Former 1997 and 1996 1996 Acquisitions South West Development & Sales Total Non-Mature 1997 1996 1997 1996 1997 1996 1997 1996 ------------------- -------------------- -------------------- --------------------- <S> <C> Rental income $ 12,613 $ 2,503 $ 21,644 $ -- $ 6,608 $ 1,153 $ 40,865 $ 3,656 Rental expenses (5,137) (992) (9,411) -- (2,526) (540) (17,074) (1,532) Real estate depreciation (2,527) (517) (3,316) -- (1,534) -- (7,377) (517) ------------------- -------------------- -------------------- --------------------- Net rental income $ 4,949 $ 994 $ 8,917 $ -- $ 2,548 $ 613 $ 16,414 $ 1,607 =================== ==================== ==================== ===================== </TABLE> 16
Six Months Ended June 30, 1997 and 1996: <TABLE> <CAPTION> 1997 Acquisitions Former 1997 and 1996 1996 Acquisitions South West Development & Sales Total Non-Mature 1997 1996 1997 1996 1997 1996 1997 1996 -------------------- -------------------- ------------------- --------------------- <S> <C> Rental income $ 25,067 $ 3,278 $ 42,894 $ -- $ 9,059 $ 2,316 $ 77,020 $ 5,594 Rental expenses (10,085) (1,259) (17,954) -- (3,473) (1,078) (31,512) (2,337) Real estate depreciation (5,269) (859) (7,423) -- (1,898) (31) (14,590) (890) -------------------- -------------------- ------------------- --------------------- Net rental income $ 9,713 $ 1,160 $ 17,517 $ -- $ 3,688 $ 1,207 $ 30,918 $ 2,367 ==================== ==================== =================== ===================== </TABLE> For the six months ended June 30, 1997, the Company's non-mature apartment communities provided approximately 42% of the Company's apartment rental income and 44% of its net rental income. Rental income, rental expenses and real estate depreciation increased from 1996 to 1997 directly as a result of the increase in the weighted average number of apartment homes owned during 1997. For the 26,719 apartments homes in the 86 non-mature communities acquired and developed and the 1,474 apartment homes in seven communities sold since January 1, 1996, average economic occupancy was 90.2% and the operating expense ratio was 40.9% during the first six months of 1997. For the quarter ended June 30, 1997, average economic occupancy was 90.8% and the operating expense ratio was 41.8% 1996 Acquisitions The 30 apartment communities containing 7,712 apartment homes that were acquired during 1996 (excluding the South West Merger) and a 253 home community acquired in 1995 and not stabilized due to significant rehabilitation provided a significant increase in rental income, rental expenses and depreciation expense for the Company's apartment portfolio for the three and six months ended June 30, 1997. For the first six months of 1997, these apartment communities had economic occupancy of 88.8% and an operating expense ratio of 40.2%. For the quarter ended June 30, 1997, these apartment communities had economic occupancy of 89.3% and an operating expense ratio of 40.7%. The first year return on investment for these communities was projected at 9.5%, however, the actual return on investment for the six months ended June 30, 1997, on an average investment of approximately $306 million, was 9.2% (excluding two communities under renovation). This was primarily due to the under-performance of nine apartment communities that were acquired in August 1996, as part of a portfolio transaction which had a concentration of communities in the Greensboro/Winston-Salem, North Carolina market. Occupancy levels in this region peaked in the 93% to 94% range in August 1996 when the Company acquired these properties and has fallen to approximately 84.7% for the first six months of 1997 reflecting an oversupply of apartment product in this market. South West Property Trust Inc. (SWP) The acquisition of the 44 apartment communities containing 14,215 completed apartment homes included in the SWP Merger on December 31, 1996, provided the largest increases in rental income, rental expenses and depreciation expenses for the Company's entire apartment portfolio for the three and six months ended June 30, 1997. For the six months ended June 30, 1997, these apartment communities had economic occupancy of 92.1% and an operating expense ratio of 41.9%. The first year return on investment for the SWP Portfolio was projected to be 9.5% which approximates the 9.6% return on investment posted during the first six months of of 1997. Included in the SWP communities are 12,361 stabilized apartment communities (those acquired, developed and stabilized prior to January 1, 1996) which experienced rent growth of 4.9% over the amounts reported last year by SWP, an average economic occupancy of 92.1% and an operating expense ratio of 44.1%. For the quarter ended June 30, 1997, these apartment communities had economic occupancy of 92.4% and an operating expense ratio of 43.5%. 1997 Acquisitions, Development and Sales Included in this category are the following: (i) the twelve apartment communities containing 4,106 apartment homes and the second phase of an existing apartment community containing 100 apartment homes acquired by the Company during the first six months of 1997 which are projected to have a first year return on investment of approximately 9.73%, (ii) the 586 apartment homes developed since January 1, 1996 and (iii) the seven apartment communities containing 1,474 apartment sold since January 1, 1996. These communities did not have a material impact on the Company's results of operations for the three and six month periods ended June 30, 1997. 17
Commercial Properties Rental income and rental expenses from commercial properties decreased $621,000 and $248,000, respectively during the three months ended June 30, 1997, compared to the same period last year. For the six month period, rental income, rental expenses and depreciation expense decreased $1.4 million, $523,000 and $94,000 compared to the same period last year. These decreases were directly attributable to the sale of five shopping centers and one industrial park since the beginning of 1996. Interest Expense Interest expense increased $8.5 million and $17.0 million for the three and six months ended June 30, 1997 over the same periods last year. The weighted average amount of debt employed during the first six months of 1997 was higher than it was in 1996 ($1.1 billion in 1997 versus $563.3 million in 1996). The weighted average interest rate on this debt was slightly lower than it was during the same period last year, decreasing from 7.6% in 1996 to 7.5%. For the quarter ended June 30, 1997, the weighted average debt outstanding was higher than the same period last year ($1.1 billion in 1997 versus $600.1 million in 1996). The weighted average interest rate on this debt was slightly lower than it was during the same period last year, decreasing from 7.6% in 1996 to 7.5% in 1997. For the three and six months ended June 30, 1997, total interest capitalized was $721,000 and $1.2 million, respectively. General and Administrative During the three and six months ended June 30, 1997, general and administrative expenses increased by $271,000 and $721,000 over the same periods last year. In 1997, the Company incurred increases in most of its general and administrative expense categories which is directly attributable to the increased size of the Company. The largest increases occurred in payroll and payroll related expenses and investor relations expense which are directly attributable to the increased size of the Company. General and administrative expense as a percentage of rental revenues decreased .8% from 2.7% during the second quarter of 1996 period to 1.9% during the second quarter of 1997 primarily due to economies of scale. During the second quarter of 1997, general and administrative expenses grew approximately 17% while rental income grew by approximately 67% over the same period last year. For the six month period ended June 30, 1997, general and administrative expense as a percentage of rental revenues decreased .6% from 2.6% to 2.0%. During this same period, general and administrative expenses grew by approximately 25% while rental income grew by 65%. Gains on Sales of Investments During the six months ended June 30, 1997, the Company recognized gains on the sales of investments aggregating $3.4 million as a result of the following transactions: (i) the first quarter sale of the Company's investment in the preferred stock of First Washington Realty Trust, Inc. obtained as partial consideration in the 1995 sale of four commercial properties on which the Company recognized a gain for financial reporting purposes of $2.1 million and (ii) the second quarter sale of three apartment communities containing 844 apartment homes and one shopping center for an aggregate sales price of $20.8 million on which the Company recognized aggregate gains for financial reporting purposes of $1.3 million. Dividends to Preferred Shareholders Dividends to preferred shareholders totaled $3.6 million and $6.0 million for the three and six month periods ended June 30, 1997 compared to $2.4 million and $4.9 million for the same periods last year. The increases in dividends to preferred shareholders is a result of the issuance of six million shares of Series B 8.60% Cumulative Redeemable Preferred Stock on May 29, 1997. Inflation The Company believes that the direct effects of inflation on the Company's operations have been inconsequential. 18
PART II Item 1. LEGAL PROCEEDINGS Neither the Company nor any of its apartment communities is presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company or any of the communities, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the Company. Item 2. CHANGES IN SECURITIES None Item 3. DEFAULT UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. (b) A Form 8-K dated July 1, 1997 was filed with the Securities and Exchange Commission on July 15, 1997. The filing reported the acquisition by the Company of properties which were in the aggregate were "significant". 19
EXHIBIT INDEX Item 6 (a) . The exhibits listed below are filed as part of this quarterly report. References under the caption "Location" to exhibits, forms, or other filings indicate that the form or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. <TABLE> <CAPTION> Exhibit Description Location - ------- --------------------------------------- --------------------------------------------------- <S> <C> 2(b) Definitive Agreement and Plan of Exhibit 2(b) to the Company's Form S-4 Registration Merger dated as of October 1, 1996, Statement (Registration No. 333-13745) filed with the between the Company, United Sub, Commission on October 9, 1996. Inc. and South West Property Trust Inc. 3(a) Restated Articles of Incorporation Exhibit 4(i)(c) to the Company's Form S-3 Registration Statement (Registration No. 33-64275) 3(a)(i) Amendment of Restated Articles of Exhibit 6(a)(4) to the Company's Form 8-A Incorporation Registration Statements dated April 19, 1990 and April 24, 1995. 3(a)(ii) Amendment of Restated Articles of Exhibit 1(c) to the Company's Form 8-A Incorporation Registration Statements dated June 11, 1997. 3(b) Restated By-Laws Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report Certificate on Form 10-K for the year ended December 31, 1993. 4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995. Redeemable Preferred Stock 4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 8.60% Series B Cumulative Registration Statement dated June 11, 1997. Redeemable Preferred Stock 4(ii)(a) Loan Agreement dated as of Exhibit 6(c)(i) to the Company's Form 8-A November 7, 1991, between the Registration Statement dated April 19, 1990. Company and Aid Association for Lutherans 4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A as of February 15, 1993, between Registration Statement dated April 19, 1990. the Company and CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company, Connecticut General Life 20
Insurance Company, on behalf of one or more separate accounts, Insurance Company of North America, Principal Mutual Life Insurance Company and Aid Association for Lutherans 4(ii)(f) Credit Agreement dated as of Exhibit 6 (c)(6) to the Company's December 15, 1994 between the Form 8-A Registration Statement Company and First Union National Bank dated April 19, 1990. of Virginia 10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report on the Company and John P. McCann Form 10-K for the year ended December 31, 1982. dated October 29, 1982 10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Company's Annual Report on the Company and James Dolphin Form 10-K for the year ended December 31, 1982. dated October 29, 1982. 10(iii) Employment Agreement between Exhibit 10(iii) to the Company's Annual The Company and Barry M. Kornblau Report on Form 10-K for the year ended dated February 1, 1991. December 31, 1990. 10(iv) Employment Agreement between Exhibit 10(iv) to the Company's Annual. the Company and John S. Schneider Report on Form 10-K for the year ended dated December 14, 1996. December 31, 1996. 10(v) Employment Agreement between Exhibit 10(v) to the Company's Annual. the Company and Robert F. Sherman report on Form 10-K for the year ended dated December 19, 1996. December 31, 1996. 10(vi) Employment Agreement between Exhibit 10(vi) to the Company's Annual the Company and David L. Johnston Report on Form 10-K for the year ended dated December 19, 1996. December 31, 1996. 10(vii) 1985 Stock Option Plan, Exhibit 10(vii) to the Company's Quarterly as amended. Report on Form 10-Q for the quarter ended March 31, 1997. 10(viii) 1991 Stock Purchase and Loan Plan, Exhibit 10(vii) to the Company's Quarterly as amended. Report on Form 10-Q for the quarter ended March 31, 1997. 10(ix) Amended and Restated Agreement Exhibit 10(vi) to the Company's Annual Report on of Limited Partnership of Form 10-K for the year ended December 31, 1995. United Dominion Realty, L.P. Dated as of December 31, 1995. 21
10(x) Underwriting Agreement with respect Filed herewith. To 8.60% Series B Cumulative Redeemable Preferred Stock 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges </TABLE> 22
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. United Dominion Realty Trust, Inc. (registrant) Date: August 14, 1997 /s/ James Dolphin - --------------------- ----------------- James Dolphin Executive Vice President and Chief Financial Officer Date: August 14, 1997 /s/ Jerry A. Davis - --------------------- ------------------ Jerry A. Davis Vice-President , Corporate Controller and Principal Accounting Officer 23