UDR Apartments - 10-Q quarterly report FY

      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. 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 March 31, 2005, there were 166,061,749 units in the Operating Partnership outstanding, of which 156,107,518 units or 94.0% were owned by United Dominion and 9,954,231 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 Notes 6 and 9). As of March 31, 2005, there were 5,542,200 units in the Heritage OP outstanding, of which 5,201,355 units or 93.9% were owned by United Dominion and 340,845 units or 6.1% were owned by limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the Operating Partnership and the Heritage OP. All significant intercompany accounts and transactions have been eliminated in consolidation.

      The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in United Dominion’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005.

      In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at March 31, 2005 and results of operations for the interim periods ended March 31, 2005 and 2004. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year.

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

      At March 31, 2005, there are 262 communities with 76,935 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment (dollars in thousands):

      FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”(FAS 144) requires, among other things, that the primary assets and liabilities and the results of operations of United Dominion’s real properties which have been sold subsequent to January 1, 2002, or are held for disposition subsequent to January 1, 2002, be classified as discontinued operations and segregated in United Dominion’s Consolidated Statements of Operations and Balance Sheets. Properties classified as real estate held for disposition generally represent properties that are 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 March 31, 2005, 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 March 31, 2005, within the Consolidated Statements of Operations for the quarters ended March 31, 2005 and 2004, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2005 and 2004.

      For the three months ended March 31, 2005, United Dominion sold 10 communities with 1,855 apartment homes and 11 townhomes from a community of 36 townhomes. We recognized gains for financial reporting purposes of $7.0 million on these sales. At March 31, 2005, United Dominion had one community with a total of 768 apartment homes and a net book value of $53.3 million, one commercial property with a net book value of $1.1 million, one parcel of land with a net book value of $4.0 million, and one townhome from a community of 36 townhomes with a net book value of $0.3 million included in real estate held for disposition. 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. 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.”

      Secured debt on continuing and discontinued operations, which encumbers $1.8 billion or 33.8% of United Dominion’s real estate owned based upon book value ($3.5 billion or 66.2% of United Dominion’s real estate owned is unencumbered) consists of the following as of March 31, 2005 (dollars in thousands):

      During the three months ended March 31, 2005, we prepaid approximately $110 million of secured debt. In conjunction with these prepayments, we incurred prepayment penalties of $8.5 million that are reflected on the Consolidated Statements of Operations as “Loss on early debt retirement.” These penalties were funded by the proceeds from the sale of our technology investment of $12.3 million.

      A summary of unsecured debt as of March 31, 2005 and December 31, 2004 is as follows (dollars in thousands):

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

      The 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 three months ended March 31, 2005 and 2004 was 8,518,057 shares and 8,916,952 shares, respectively. The weighted average effect of the conversion of the Series A Out-Performance Partnership Units for the three months ended March 31, 2005 and 2004 was 1,791,329 shares. The weighted average effect of the conversion of the convertible preferred stock for the three months ended March 31, 2005 and 2004 was 2,803,812 shares and 6,502,140 shares, respectively.

      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 will continue to use this acceptable option valuation model upon the required adoption of Statement 123R on January 1, 2006. 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.

      Total comprehensive income for the three months ended March 31, 2005 and 2004, was $14.9 million and $16.2 million, respectively. The difference between net income and total comprehensive income is primarily due to the fair value accounting for interest rate swaps.

      United Dominion is committed to completing its real estate under development, which has an estimated cost to complete of $55.2 million at March 31, 2005.

      In May 2003, the stockholders of United Dominion approved the Series B Out-Performance Program (the “Series B Program”) pursuant to which certain executive officers of United Dominion (the “Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in a limited liability company (the “Series B LLC”), the only asset of which is a special class of partnership units of United Dominion Realty, L.P. (“Series B Out-Performance Partnership Shares” or “Series B OPPSs”). The purchase price for the Series B OPPSs was determined by United Dominion’s board of directors to be $1 million, assuming 100% participation, and was based upon the advice of an independent valuation expert. The Series B Program will measure the cumulative total return on our common stock over the 24-month period from June 1, 2003 to May 31, 2005.

      The Series B Program is designed to provide participants with the possibility of substantial returns on their investment if the total cumulative return on United Dominion’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period (a) exceeds the cumulative total return of the Morgan Stanley REIT Index peer group index over the same period; and (b) is at least the equivalent of a 22% total return, or 11% annualized.

      At the conclusion of the measurement period, if United Dominion’s total cumulative return satisfies these criteria, the Series B LLC as holder of the Series B OPPSs will receive (for the indirect benefit of the Participants as holders of interests in the Series B LLC) distributions and allocations of income and

      Based upon the results through March 31, 2005, no OPPSs would have been issued had the program terminated on that date. However, since the ultimate determination of OPPSs to be issued will not occur until June 2005, and the number of OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events.

      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 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.

      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 March 31, 2005, our portfolio included 264 communities with 77,704 apartment homes nationwide. The following table summarizes our market information by major geographic markets (includes real estate held for disposition, real estate under development, and land, but excludes commercial properties):

      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

      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. During the first quarter of 2005, we completed various financing activities under our $1.5 billion shelf registration statement. These activities are summarized in the section titled “Financing Activities” below. As of March 31, 2005, approximately $1.0 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 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. During the fourth quarter of 2004, we 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. We did not sell any shares of common stock under the sales agreement during the three months ended March 31, 2005.

      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.

      During the remainder of 2005, we have approximately $21.9 million of secured debt and $71.0 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.

      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. Our critical accounting policies are described in more detail in the section entitled

      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.

      For the three months ended March 31, 2005, our cash flow provided by operating activities was $50.4 million compared to $38.3 million for the same period in 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”).

      For the three months ended March 31, 2005, net cash used in investing activities was $71.2 million compared to $74.8 million for the same period in 2004. 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.

      During the three months ended March 31, 2005, we acquired one apartment community with 715 apartment homes. 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.

      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 the first three months of 2005, we spent $25.1 million or $323 per home 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 $8.4 million or $108 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, and other extensive interior upgrades totaled $16.7 million or $215 per home.

      The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development and commercial properties for the periods presented:

      Total capital improvements increased $12.1 million or $152 per home for the three months ended March 31, 2005 compared to the same period in 2004. 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.

      Development activity is focused in core markets in which we have strong operations in place. For the three months ended March 31, 2005, we invested approximately $9.8 million on development projects, an increase of $7.4 million from $2.4 million for the same period in 2004.

      The following projects were under development as of March 31, 2005:

      In addition, we own seven parcels of land that we continue to hold for future development that had a carrying value at March 31, 2005 of $25.4 million. Three of the seven parcels represent additional phases to existing communities as we plan to add apartment homes adjacent to currently owned communities that are in improving markets.

      For the three months ended March 31, 2005, we sold ten communities with 1,855 apartment homes and 11 townhomes from a community of 36 townhomes for a gross consideration of $72.6 million. We

      During 2005, we plan to continue to pursue our strategy of selling properties where long-term growth prospects are limited and redeploying capital into properties 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.

      Net cash provided by financing activities during the three months ended March 31, 2005, was $14.6 million compared to $33.7 million for the same period in 2004. 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 three months ended March 31, 2005:

      We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million. As of March 31, 2005, $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. 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 3.4%.

      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 March 31, 2005, $348.8 million was outstanding under the credit facility leaving $151.2 million of unused capacity.

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

      Information concerning short-term bank borrowings under our credit facility is summarized in the table that follows(dollars in thousands):

      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 as a measure of our operating performance. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, or GAAP, and is not necessarily indicative of cash available to fund cash needs.

      Historical cost accounting for real estate assets in accordance with GAAP 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.

      The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three months ended March 31, (dollars and shares in thousands):

      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 three months ended March 31, 2004, distributions to preferred stockholders exclude $1.6 million related to premiums on preferred stock conversions.

      Gains from 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/losses on real estate developed for sale to be a meaningful supplemental measure of performance because the short-term use of funds produce a profit that differs from the traditional long-term investment in real estate for REITs.

      The following is a reconciliation of GAAP gains from the disposition of real estate developed for sale to gross gains from the disposition of real estate developed for sale for the three months ended March 31, (dollars in thousands):

      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 months ended March 31, (shares in thousands):

      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.

      The following is a presentation of cash flow metrics based on generally accepted accounting principles for the three months ended March 31, (dollars in thousands):

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

      Net income available to common stockholders was $11.1 million ($0.08 per diluted share) for the quarter ended March 31, 2005, compared to $8.7 million ($0.07 per diluted share) for the same period in the prior year. The increase for the quarter ended March 31, 2005 when compared to the same period in 2004 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

      These increases in income were partially offset by a $10.2 million increase in interest expense, an $8.8 million increase in depreciation and amortization expense, an $8.5 million increase in losses on early debt retirement, and a $2.2 million increase in general and administrative expense during the first quarter of 2005 when compared to the same period in 2004.

      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 the three months ended March 31, (dollars in thousands):

      The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the three months ended March 31,(dollars in thousands):