EXHIBIT 10(xviii)
UNITED DOMINION REALTY TRUST
DESCRIPTION OF THE OUT-PERFORMANCE PROGRAM
Background
The Company competes for management talent with both public and private
real estate investment vehicles and constantly reviews compensation structures
and practices in an effort to remain highly competitive. The Company's
compensation programs are designed to further its primary goal of increasing
dividend income and share price appreciation. The Board of Directors intends for
these goals to be the primary economic motivation of its executive officers and
other key employees.
The Board of Directors believes that it is in the best interest of the
shareholders to attract and retain a management team that has a meaningful
equity stake in the long-term success of the Company. To this end it is
recommending that the shareholders approve the Out-Performance Program (the
"Program") pursuant to which officers and other key employees will be given the
opportunity to invest in the Company by purchasing performance shares
("Out-Performance Partnership Shares" or "OPPSs") of United Dominion Realty,
L.P., a Virginia limited partnership in which the Company is the sole general
partner ("Dominion Realty").
The Program is designed to provide participants with the possibility of
substantial returns on their investment if the Company's total return on its
Common Stock exceeds targeted levels, while putting the participants' investment
at risk if those levels are not exceeded. The Program will be administered by
the Company's Board of Directors. Members of the Board of Directors who are not
employees of the Company are not eligible to participate in the Program.
If the Program is approved, the Board of Directors anticipates authorizing
every other year the sale of a class of OPPSs to a limited liability company
(sometimes referred to as an "LLC") to be formed for the benefit of selected
officers and key employees who agree to invest in that class of OPPSs. The
participants will contribute the funds for the LLC to purchase the OPPSs and
will share ownership of the LLC on the basis of each participant's investment in
the LLC. The purchase price for each class of OPPSs will be set by the Company's
Board of Directors based upon the advice of an independent valuation expert. The
Board of Directors expects that the specific features of each class of OPPSs,
the designation of officers and key employees as potential participants in the
class and the level of participation of a particular participant will vary from
class to class.
Participation in Class I OPPSs
The Board of Directors has developed the principal terms of the Class I
OPPSs that it intends to offer to participants in 2001. For the Class I OPPSs,
participation rights will be approximately as follows:
OPPSs to
Participant be Offered
----------------------------------- --------------------
Chief Executive Officer 444,500
Senior Executive Vice President 190,500
Chief Financial Officer 127,000
Treasurer/Investor Relations 127,000
Other Key Employees 381,000
--------------------
1,270,000
====================
The purchase price for the Class I OPPSs has been determined by the Board
of Directors to be $1,270,000 based on a valuation by Salomon Smith Barney, Inc.
That valuation took into account that any investment in the Class I OPPSs will
become worthless if the targeted Total Return is not achieved. The value of the
Class I OPPSs also has been discounted significantly because of the substantial
restrictions on transfer and the limited redemption rights provided for with
respect to Class I OPPSs.
It is important to recognize that any officer or other employee who is
provided the opportunity to invest is under no obligation to exercise that
right. The Class I OPPSs must be fully subscribed within 45 days of shareholder
approval, if obtained. If some of those eligible to participate elect not to
participate, the remaining OPPSs shall be retained by the Company.
The Board of Directors may elect to loan Company funds to participants to
permit them to invest in a class of OPPSs. For the Class I OPPSs, the Board has
determined that participants can borrow some or all of the funds they need to
participate with a loan maturity date at the earlier of the fifth anniversary of
the date of the loan or 60 days from the date the participant ceases to be
employed by the Company for any reason. Loans to the Chief Executive Officer,
the Senior Executive Vice President, the Chief Financial Officer and the
Treasurer/Investor Relations will be 100% recourse. All other participants will
be at risk personally for at least 25% of the amount he or she invests with
respect to the Class I OPPSs. Interest will be payable annually and the interest
rate will be the same as the Company's cost of funds, as determined on an annual
basis.
To begin the Program, for the Class I OPPSs the Company's performance will
be measured over a twenty-eight month period beginning with the month Mr.
Toomey's employment began (February, 2001). The LLC that holds the Class I OPPS
will have no right to receive distributions or allocations of income or loss, or
to redeem those shares prior to the date (the "Valuation Date") that is the
earlier of (i) the expiration of the measurement period for the class (June 1,
2003), or (ii) the date of a change of control of the Company (defined as a
"Transaction" in Dominion Realty's Agreement of Limited Partnership).
The Class I OPPSs will only be entitled to receive distributions and
allocations of income and loss if, as of the Valuation Date, the cumulative
Total Return of the Company Common Stock during the measurement period
. exceeds the cumulative Total Return of the designated peer group index
over the same period; and
. is at least the equivalent of a 30% Total Return or 12% annualized
(the "Minimum Return").
If the thresholds are met, holders of the OPPSs will be entitled to begin
receiving distributions and allocations of income and loss from Dominion Realty
equal to the distributions and allocations that would be received on the number
of interests in Dominion Realty ("OP Units") obtained by:
. (i) determining the amount by which the cumulative Total Return of the
Company Common Stock over the measurement period exceeds the greater
of the cumulative Total Return of the Morgan Stanley REIT Index (peer
group index) or the Minimum Return (such excess being the "Excess
Return");
. (ii) multiplying 4% of the Excess Return by the Company's Market
Capitalization; and
. (iii) dividing the number obtained in clause (ii) by the market value
of one share of the Company Common Stock on the Valuation Date, as the
weighted average price per day of the Common Stock for the 20 trading
days immediately preceding the Valuation Date.
For the Class I OPPSs, the number determined pursuant to clause (ii) in the
preceding paragraph is capped at 2% of Market Capitalization (approximately 1%
per year). "Market Capitalization" is defined as the average number of shares
outstanding over the 28 month period (that includes Common Stock and OP Units
but does not include
outstanding options or convertible securities) multiplied by the daily closing
price of the Company's Common Stock.
If, on the Valuation Date, the cumulative Total Return of the Company
Common Stock does not meet the Minimum Return, the Total Return of the Morgan
Stanley REIT Index and there is no Excess Return, then holders of Class I OPPSs
will forfeit their initial investment of $1.27 million.
The Morgan Stanley REIT Index will be used as the peer group index for
purposes of measuring the Class I Out-Performance Partnership Shares. The Morgan
Stanley REIT Index is a capitalization-weighted index with dividends reinvested
of the most actively traded real estate investment trusts. The Morgan Stanley
REIT Index is comprised of approximately 113 real estate investment trusts
selected by Morgan Stanley & Co. Incorporated and a total market cap of $123.6
billion. The Board of Directors of the Company has selected this index because
it believes that it is the real estate investment trust index most widely
reported and accepted among institutional investors. For the historical
performance of the Morgan Stanley REIT Index, see the Performance Graph on page
24. The Board of Directors has the ability to select a different index for
future classes of OPPSs. For example, the Board of Directors may select a
different index if it determines that the Morgan Stanley REIT Index is no longer
an appropriate comparison for the Company; if the Morgan Stanley REIT Index is
not maintained throughout the Measurement Period; or for any other reason that
the Board of Directors determines.
"Total Return" means, for any security or index and for any period, the
cumulative total return for such security or index over such period, as measured
by the sum of (a) the cumulative amount of dividends paid in respect of such
security or index for such period (assuming that all cash dividends are
reinvested in such security as of the payment date for such dividend based on
the security price on the dividend payment date), and (b) an amount equal to (x)
the security price or index value at the end of such period, minus (y) the
security price or index value at the beginning of the measurement period.
LLC Governance and Restrictions on Transfer
The Class I OPPSs cannot be transferred by the LLC without the approval of
the managers of the LLC, who are expected to be the two largest participants in
the LLC, as long as they are employees of the Company, and representatives of
the independent Directors. Class I OPPSs may only be transferred by the LLC
after targeted returns have been exceeded and a forty-month vesting period from
the date of issuance has passed. At that time transfers may only be made to
participants or to one of their family members (or a family-owned entity).
Individuals who receive OPPSs after the vesting period may exchange them for an
equivalent number of OP Units. They may not transfer any OPPSs or OP Units
received except to a family member (or a family-owned entity) or in the event of
death or disability.
The terms of the operating agreement of the Class I LLC will restrict the
participants' ability to transfer their interests in the LLC. The LLC will have
the right to repurchase the interest of any participant in the LLC at the
original purchase price if prior to the end of the forty-month vesting period
such participant's employment with the Company is terminated for any reason
other than by death or disability. In this case, the participant will be
entitled to retain any distributions that he or she received on the OPPSs
subsequent to the Valuation Date. The LLC will be used as a vehicle to purchase
the OPPSs to ensure that there would be no opportunity for the participants to
profit from the ownership of those OPPSs prior to the Valuation Date.
The Class I Out-Performance Partnership Shares are not convertible into
Common Stock. However, in the event of a change of control of the Company, the
LLC or any participant that holds any OPPSs will have the same redemption rights
as other holders of OP Units. Upon the occurrence of a change of control, the
LLC or participant that holds OPPSs may require Dominion Realty to redeem all or
a portion of the units held by such party in exchange for a cash payment per
unit equal to the market value of a share of Common Stock at the time of
redemption. However, in the event that any units are tendered for redemption,
Dominion Realty's obligation to pay
the redemption price will be subject to the prior right of the Company to
acquire such units in exchange for an equal number of shares of Common Stock.
Examples of the Value of Class I OPPSs
The following tables illustrate the value of the Class I OPPSs under
different share prices and total returns at the Valuation Date. For the two year
period ended December 31, 2000, the minimum thresholds for the Class I OPPSs
would not have been met.
This table assumes that the cumulative Total Return of the Morgan Stanley REIT
Index is less than the 30% minimum return:
Value to Shareholders
---------------------------------------
Value of
Stock Price at UDR Total Shareholder Value Opps
Valuation Date Return (1) Achieved (2) to Management (3)
- ---------------- ------------ ------------------- -------------------
(Millions) (Millions)
$12.00 28.8% $ 349.2 $ 0.0
$13.00 39.5% $ 479.4 $ 5.4
$14.00 50.3% $ 609.6 $ 12.4
$15.00 61.0% $ 739.8 $ 20.3
$16.00 71.7% $ 870.0 $ 29.1
$17.00 82.5% $ 1,000.1 $ 37.0
$18.00 93.2% $ 1,130.3 $ 39.2
This table assumes that the cumulative Total Return of the Morgan Stanley REIT
Index is 50% and therefore is the operative threshold instead of the 30% minimum
return.
Value to Shareholders
---------------------------------------
Value of
Stock Price at UDR Total Shareholder Value Opps
Valuation Date Return (1) Achieved (2) to Management (3)
- ---------------- ------------ ------------------- -------------------
(Millions) (Millions)
$12.00 28.8% $ 349.2 $ 0.0
$13.00 39.5% $ 479.4 $ 0.0
$14.00 50.3% $ 609.6 $ 0.2
$15.00 61.0% $ 739.8 $ 7.2
$16.00 71.7% $ 870.0 $ 15.1
$17.00 82.5% $ 1,000.1 $ 24.0
$18.00 93.2% $ 1,130.3 $ 33.8
(1) Total Return to the UDR shareholders, assuming an 8% annual dividend rate.
(2) Total Return multiplied by average market capitalization of $1,305 million
(108.78 million shares and OP Units outstanding multiplied by the share
price at the Valuation Date).
(3) Out-Performance shareholder value multiplied by management participation of
4% subject to 2% dilution limit.
The numbers used in the table are for illustrative purposes only and there
can be no assurance that actual outcomes will be within the ranges used. Some of
the factors that could affect the results set forth in the table are the Total
Return on the Company Common Stock relative to the Total Return of the Morgan
Stanley REIT Index, and the market value of the average outstanding equity of
the Company during any Measurement Period. These factors may be affected by
general economic conditions, local real estate conditions and the dividend
policy of the Company.
Possible Negative Effects of the OPPSs
Although the Company does not believe that the sale of Out-Performance
Partnership Shares will have an antitakeover effect, the OPPSs could increase
the potential cost of acquiring control of the Company and thereby discourage an
attempt to take control of the Company. However, the Board of Directors is not
aware of any attempt to take control of the Company and the Board of Directors
has not approved the sale of the OPPSs with the intention of discouraging any
such attempt.
If with respect to the Class I OPPSs the Total Return on the Company Common
Stock over the Measurement Period exceeds both the Total Return of the Morgan
Stanley REIT Index and exceeds the Minimum Return, then the LLC that holds the
OPPSs could be entitled to receive the same distributions and allocations as the
holder of a significant number of OP Units of Dominion Realty. This could have a
dilutive effect on future earnings per share of Company Common Stock, and on the
Company's equity ownership in Dominion Realty.