UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS 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 March 31, 1999
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 of 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)
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 USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 3, 1999:
Common Stock, $1 Par Value: 104,060,227
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Real estate owned:
Real estate held for investment $ 3,649,969 $ 3,643,245
Less: accumulated depreciation 308,397 280,663
----------- -----------
3,341,572 3,362,582
Real estate under development 115,960 99,395
Real estate held for disposition 195,088 174,145
----------- -----------
Total real estate owned, net of accumulated depreciation 3,652,620 3,636,122
Cash and cash equivalents 21,887 18,529
Restricted cash 47,725 50,805
Deferred financing costs, net of accumulated amortization 13,650 10,894
Other assets 43,673 39,038
----------- -----------
Total assets $ 3,779,555 $ 3,755,388
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable-secured $ 1,049,815 $ 1,072,185
Notes payable-unsecured 1,124,697 1,045,564
Real estate taxes payable 17,742 29,078
Accrued interest payable 21,148 20,714
Security deposits and prepaid rent 21,883 21,125
Distributions payable 38,804 31,423
Accounts payable, accrued expenses and other liabilities 32,780 45,736
----------- -----------
Total liabilities 2,306,869 2,265,825
Minority interests 110,173 115,442
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 150,000 150,000
8,000,000 shares 7.50% Series D Cumulative Convertible Redeemable 175,000 175,000
Common stock, $1 par value; 150,000,000 shares authorized
104,070,604 shares issued and outstanding (103,639,117 in 1998) 104,071 103,639
Additional paid-in capital 1,095,703 1,090,432
Distributions in excess of net income (259,251) (242,331)
Deferred compensation - unearned restricted stock awards (421) --
Notes receivable from officer-shareholders (7,589) (7,619)
----------- -----------
Total shareholders' equity 1,362,513 1,374,121
----------- -----------
Total liabilities and shareholders' equity $ 3,779,555 $ 3,755,388
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------
Rental income $ 153,791 $ 104,427
Rental expenses:
Real estate taxes and insurance 15,995 10,502
Personnel 16,628 10,335
Utilities 8,249 5,805
Repair and maintenance 9,257 7,063
Administrative and marketing 6,400 4,164
Property management 4,730 3,330
--------- ---------
61,259 41,199
Other income:
Interest and other non-property income 447 1,012
Other expenses:
Real estate depreciation 29,392 20,928
Interest 38,079 22,825
General and administrative 3,476 2,163
Other depreciation and amortization 1,091 746
--------- ---------
72,038 46,662
--------- ---------
Income before gains (losses) on sales of investments and minority interests 20,941 17,578
Gains (losses) on sales of investments 191 (260)
--------- ---------
Income before minority interests 21,132 17,318
Minority interests of outside partnerships (167) --
--------- ---------
Income before minority interests of unitholders in operating partnerships 20,965 17,318
Minority interests of unitholders in operating partnerships (883) (135)
--------- ---------
Net income 20,082 17,183
Distributions to preferred shareholders (9,439) (5,650)
--------- ---------
Net income available to common shareholders $ 10,643 $ 11,533
========= =========
Earnings per common share:
Basic $ 0.10 $ 0.13
========= =========
Diluted $ 0.10 $ 0.13
========= =========
Common distributions declared per share $ 0.2650 $ 0.2625
========= =========
Weighted average number of common shares outstanding-basic 103,932 90,867
Weighted average number of common shares outstanding -diluted 103,935 90,984
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 20,082 $ 17,183
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 30,483 21,674
Minority interests 1,050 135
(Gains) / Losses on sales of investments (191) 260
Amortization of deferred financing costs 510 472
Changes in operating assets and liabilities:
Decrease in operating liabilities (23,078) (8,150)
Increase in operating assets (475) (1,580)
--------- ---------
Net cash provided by operating activities 28,381 29,994
INVESTING ACTIVITIES
Acquisition of real estate, net of liabilities assumed (17,875) (50,028)
Capital expenditures to real estate assets (14,302) (11,672)
Development of real estate assets, including acquisition of land (28,037) (12,607)
Net proceeds from sales of investments 12,900 9,730
Issuance of and payments on notes receivable 1,132 (12,951)
Net cash acquired from ASR -- 330
Capital expenditures-non real estate assets (1,650) (832)
--------- ---------
Net cash used in investing activities (47,832) (78,030)
FINANCING ACTIVITIES
Proceeds from the issuance of common stock 377 38,446
Proceeds from the issuance of common stock through the
dividend reinvestment and stock purchase plan 4,267 12,936
Borrowing from secured credit facility 102,355 --
Issuance of unsecured notes payable 150,000 --
Net (payments) borrowings of short-term bank debt (63,400) 58,900
Distributions paid to common shareholders (27,208) (22,527)
Distributions paid to preferred shareholders (6,640) (5,653)
Distributions paid to minority interest operating partnership unitholders (1,423) (657)
Scheduled principal payments on notes payable - secured (4,110) (1,707)
Non-scheduled payments on notes payable - secured (120,615) (18,165)
Payments on notes payable - unsecured (7,528) (7,504)
Payments of financing costs (3,266) (545)
--------- ---------
Net cash provided by financing activities 22,809 53,524
--------- ---------
Net increase in cash and cash equivalents 3,358 5,488
Cash and cash equivalents, beginning of period 18,529 473
--------- ---------
Cash and cash equivalents, end of period $ 21,887 $ 5,961
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid during the period $ 38,817 $ 22,389
Non-cash transactions associated with the acquisition of properties:
Secured debt assumed -- 43,022
Issuance of operating partnership units -- 1,924
Non-cash transactions associated with Mergers:
Real estate assets acquired -- 313,700
Other operating assets acquired -- 8,848
Issuance of common stock -- 108,465
Issuance of operating partnership units -- 21,420
Secured debt assumed -- 179,440
Operating liabilities assumed -- 13,553
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PREFERRED STOCK
Balance, December 31, 1998 $ 430,000
-----------
Balance, March 31, 1999 $ 430,000
===========
COMMON STOCK, $1 PAR VALUE
Balance, December 31, 1998 $ 103,639
Issuance of common shares through dividend reinvestment
and stock purchase plan 432
Purchase of common stock for restricted stock awards (46)
Issuance of restricted stock awards 46
-----------
Balance, March 31, 1999 $ 104,071
===========
ADDITIONAL PAID-IN CAPITAL
Balance, December 31, 1998 $ 1,090,432
Issuance of common shares through dividend reinvestment
and stock purchase plan 3,835
Issuance of common shares to employees and director-shareholders 308
Issuance of restricted stock awards 460
Adjustment for cash purchase of minority interests of unitholders in Operating Partnerships 668
-----------
Balance, March 31, 1999 $ 1,095,703
===========
DISTRIBUTIONS IN EXCESS OF NET INCOME
Balance, December 31, 1998 $ (242,331)
Net income 20,082
Common stock distributions declared ($.265 per share) (27,563)
Preferred stock distributions declared-Series A ($.578 per share) (2,428)
Preferred stock distributions declared-Series B ($.538 per share) (3,225)
Preferred stock distributions declared-Series D ($.473 per share) (3,786)
-----------
Balance, March 31, 1999 $ (259,251)
===========
DEFERRED COMPENSATION - UNEARNED RESTRICTED STOCK AWARDS
Balance, December 31, 1998 $ --
Issuance of restricted stock awards (460)
Amortization of deferred compensation 39
-----------
Balance, March 31, 1999 $ (421)
===========
NOTES RECEIVABLE FROM OFFICER-SHAREHOLDERS
Balance, December 31, 1998 $ (7,619)
Principal repayments 30
-----------
Balance, March 31, 1999 $ (7,589)
===========
TOTAL SHAREHOLDERS' EQUITY $ 1,362,513
===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 subsidiaries, including United
Dominion Realty, L.P., its Operating Partnership, and Heritage Communities, L.P.
(collectively, the "Company"). As of March 31, 1999, there were 38,218,389 units
in the Operating Partnership outstanding, of which, 30,672,837, or 80.3% were
owned by the Company and 7,545,552, or 19.7% were owned by non-affiliated
limited partners. In connection with the acquisition of ASR Investments
Corporation, the Company acquired Heritage Communities, L.P., a Delaware limited
partnership (Heritage OP). As of March 31, 1999, there were 3,834,837 units in
the Heritage OP outstanding, of which, 2,974,252 or 77.5% were owned by the
Company and 22.5% were owned by non-affiliated limited partnerships. The
financial statements of the Company include the minority interest of the
unitholders in the operating partnerships. The consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary for
fair presentation of financial position at March 31, 1999 and results of
operations for the interim periods ended March 31, 1999 and 1998. Such
adjustments are normal and recurring in nature. All significant inter-company
accounts and transactions have been eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform with the current
financial statement presentation. 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, 1998 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
2. Real Estate Held for Investment
The following table summarizes the components of real estate held for investment
at March 31, 1999 and December 31, 1998:
March 31, December 31,
Dollars in thousands 1999 1998
- -----------------------------------------------------------------
Land and land improvements $ 643,826 $ 647,328
Buildings and improvements 2,823,265 2,819,312
Furniture, fixtures and equipment 170,436 169,364
Construction in progress 12,442 7,241
------------ -----------
Real estate held for investment 3,649,969 3,643,245
Accumulated depreciation (308,397) (280,663)
------------ -----------
Real estate held for investment, net
of accumulated depreciation $ 3,341,572 $ 3,362,582
============ ===========
3. Notes Payable - Secured
Notes payable-secured, which encumber $1.8 billion or 46.2% of the Company's
real estate owned, ($2.2 billion or 53.8% of the Company's real estate owned is
unencumbered) consist of the following at March 31, 1999:
Principal Weighted Average Weighted Average No. Communities
Dollars in thousands Balance Interest Rate Years to Maturity Encumbered
- ----------------------------------------------------------------------------------------------------------------
Fixed-Rate Debt
Mortgage Notes Payable (a) $ 600,693 8.08% 6.7 99
Tax-Exempt Notes Payable 121,062 7.04% 12.7 17
REMIC Financings 70,719 7.87% 1.8 23
Secured Notes Payable (b) 45,000 7.46% 0.4 5
-----------------------------------------------------------------------
Total Fixed-Rate Notes Payable 837,474 7.88% 6.8 144
Variable-Rate Debt
Mortgage Notes Payable 35,257 7.27% 10.1 10
Tax-Exempt Notes Payable 74,729 3.51% 17.4 6
Secured Credit Facilities (FNMA) (c) 102,355 5.70% 5.0 10
-----------------------------------------------------------------------
Total Variable-Rate Notes Payable 212,341 5.19% 10.2 26
-----------------------------------------------------------------------
Total Notes Payable - Secured $1,049,815 7.33% 7.5 170
=======================================================================
6
(a) Includes fair value adjustments aggregating $17.7 million recorded in
connection with the ASR Merger and the AAC Merger on March 27, 1998 and
December 7, 1998, respectively.
(b) Variable-rate secured notes payable consist of a $31.7 million
variable-rate secured senior credit facility which encumbers five
communities and two secured variable-rate notes payable aggregating
$13.3 million, all of which mature in August 1999. The Company has five
interest rate swap agreements associated with secured debt with 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 7.46%.
(c) On March 18, 1999, the Company closed on the first part of a $200
million revolving credit facility (the "Credit Facility") with the
Federal National Mortgage Association. The Credit Facility bears an
interest rate of 5.70%, which is fixed through December 1, 1999. The
financing is for an initial term of five years, bears interest at a
floating rate which can be fixed for periods of up to 270 days, and can
be extended for an additional five or ten years at the Company's
discretion.
4. Notes Payable - Unsecured
A summary of notes payable - unsecured at March 31, 1999 and December 31, 1998
is as follows (dollars in thousands):
March 31, December 31,
1999 1998
---------- -----------
Commercial Banks
Borrowings outstanding under
revolving credit facilities $ 176,600 $ 240,000
Insurance Companies--Senior Unsecured Notes
7.98% due March, 2000-2003 (a) 29,800 37,228
Other (b) 5,797 5,836
Senior Unsecured Notes - Other
7.60% Medium-Term Notes due January 2002 (d) 70,000 --
7.67% Medium-Term Notes due January 2004 (d) 58,000 --
7.65% Medium-Term Notes due January 2003 (c)(d) 10,000 --
7.22% Medium-Term Notes due February 2003 (d) 12,000 --
8.50% Monthly Income Notes due November 2008 62,500 62,500
8.13% Senior Notes due November 2000 150,000 150,000
7.25% Notes due April 1999 75,000 75,000
8.50% Debentures due September 2024 (e) 150,000 150,000
7.95% Medium-Term Notes due July 2006 125,000 125,000
7.25% Notes due January 2007 125,000 125,000
7.07% Medium-Term Notes due November 2006 25,000 25,000
7.02% Medium-Term Notes due November 2005 50,000 50,000
---------- -----------
912,500 762,500
---------- -----------
Total Notes Payable - Unsecured $ 1,124,697 $1,045,564
========== ===========
(a) Payable in four equal principal installments of $7.4 million.
(b) Includes $5.2 million and $5.4 million at March 31, 1999 and December
31, 1998, respectively, of deferred gains from the termination of
interest rate risk management agreements.
(c) The Company has one interest rate swap agreement associated with
unsecured debt with an aggregate notional value of $10 million under
which the Company pays a fixed-rate of interest and receives a
variable-rate on the notional amount. The interest rate swap agreement
effectively changes the Company's interest rate exposure on the $10
million from a variable-rate to a fixed-rate of 7.65%.
(d) During the first three months of 1999, the Company issued an aggregate
$150 million of medium-term notes with a weighted average interest rate
of 7.59% under its $200 million Medium-Term Note Program.
7
(e) Debentures include an investor put feature which grants a one-time
option to redeem debentures in September 2004.
5. Earnings Per Share
Basic earnings per common share is computed based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is computed based on 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 potential common stock
equivalents is determined using the treasury stock method based on the Company's
average stock price. The early extinguishment of debt does not have an effect on
the earnings per share calculation for the periods presented. The effect of the
conversion of the operating partnership units and convertible preferred stock is
not dilutive and is therefore not included in the following calculations. The
weighted average effect of the conversion of the operating partnership units for
the three months ended March 31, 1999 and 1998 was 8,590,907 and 1,130,559,
respectively. The weighted average effect of the conversion of the convertible
preferred stock for the three months ended March 31, 1999 and 1998 was
12,307,692 and 0, respectively. The following table sets forth the computation
of basic and diluted earning per share.
In thousands, except per share data March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share-net income available to common
shareholders $ 10,643 $ 11,533
Denominator:
Denominator for basic earnings per share-
weighted average shares 103,932 90,867
Effect of dilutive securities:
Employee stock options 3 117
--------- ---------
Dilutive potential common shares
Denominator for dilutive earnings per
share-adjusted weighted average shares
and assumed conversions 103,935 90,984
========= ========
Basic earnings per share $ .10 $ .13
========= ========
Diluted earnings per share $ .10 $ .13
========= ========
6. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133)
which is required to be adopted in years beginning after June 15, 1999.
Statement 133 permits early adoption as of the beginning of any fiscal quarter
after its issuance, however, the Company does not anticipate adopting Statement
133 until such time as it is required. Statement 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
Statement 133 will be on earnings and the financial position of the Company,
however, management does not anticipate that the adoption of Statement 133 will
have a significant effect on earnings or the financial position of the Company.
8
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of United Dominion Realty Trust, Inc.
(the "Company") appearing elsewhere in this report. This quarterly report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements include, without
limitation, statements concerning 1999 property acquisitions and dispositions,
1999 development activity and capital expenditures, 1999 capital raising
activities, 1999 rent growth, occupancy and rental expense growth. Such
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievement of the Company 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 the Company,
and/or its properties, adverse changes in the real estate markets and general
and local economies and business conditions. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore there can
be no assurance that such statements included in this report will 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 representation by the Company or any other person that
the results or conditions described in such statements or the objectives and
plans of the Company will be achieved.
The Company operates in one defined business segment as an owner, operator,
renovator and developer of apartment communities nationwide. Management's
strategy is to be a national, highly efficient provider of quality apartment
homes. The Company has implemented this strategy through the acquisition of
portfolios of higher quality communities, the strategic disposition of certain
communities, a greater commitment to development and the upgrade of its older
communities. The Company seeks to be a market leader by operating a sufficiently
sized portfolio of apartments within each market in order to drive down
operating costs through economies of scale and management efficiencies. The
Company believes that market diversification increases investment opportunity
and decreases the risk associated with cyclical local real estate markets and
economies. At March 31, 1999, the Company owned 329 communities containing
86,989 apartment homes nationwide.
9
The following table summarizes the Company's apartment market information by
strategic geographic market:
Three Months Ended
As of March 31, 1999 March 31, 1999
------------------------------------------- -------------------------
Average
No. of % of Carrying Monthly
No. of Apartment Apartment Value Physical Rental
Market Communities Homes Homes (in thousands) Occupancy Rates (a)
- -------------------------------------------------------- -------------------------
Dallas, TX 29 8,956 10% $ 394,394 94.3% $ 617
Houston, TX 24 5,992 7% 221,883 92.0% 573
Phoenix, AZ 9 3,136 4% 182,663 91.5% 658
Orlando, FL 13 3,848 4% 181,856 92.6% 659
Tampa, FL 12 4,018 5% 171,892 92.2% 640
San Antonio, TX 13 3,840 4% 171,589 92.9% 611
Raleigh, NC 11 3,484 4% 158,505 92.9% 676
Nashville, TN 11 3,064 4% 142,080 92.3% 629
San Francisco, CA 4 980 1% 128,903 98.1% 1,468
Charlotte, NC 11 2,566 3% 121,794 91.5% 674
Columbus, OH 7 2,102 2% 115,480 93.4% 618
Richmond, VA 10 3,092 4% 115,219 91.6% 629
Columbia, SC 11 3,326 4% 113,856 90.0% 527
Eastern NC 10 2,710 3% 110,651 84.8% 602
Monterey
Peninsula, CA 16 2,076 2% 106,308 92.5% 722
Memphis, TN 7 2,196 3% 104,345 91.6% 593
Greensboro, NC 8 2,123 2% 101,721 87.0% 623
Miami /
Ft. Lauderdale, FL 5 1,280 1% 80,688 92.3% 817
Baltimore, MD 8 1,739 2% 79,754 95.2% 693
Atlanta, GA 7 1,642 2% 78,515 91.7% 674
Portland, OR 4 996 1% 59,867 91.6% 675
Hampton Roads, VA 7 1,629 2% 58,805 92.6% 584
Washington, DC 5 1,110 1% 57,802 95.2% 770
Jacksonville, FL 3 1,157 1% 56,043 88.1% 634
Greenville, SC 6 1,436 2% 53,889 84.1% 543
Los Angeles, CA 2 926 1% 53,529 96.3% 726
Eastern Shore, MD /
Delaware 6 1,156 1% 52,273 97.1% 654
Lansing, MI 4 1,227 1% 50,594 91.7% 618
Sacramento, CA 2 914 1% 47,609 97.8% 635
Seattle, WA 4 790 1% 46,503 88.9% 670
Denver , CO 2 876 1% 44,260 91.9% 627
Fort Myers /
Naples, FL 3 764 1% 43,991 97.9% 663
Fayetteville, NC 3 884 1% 40,920 95.1% 575
Detroit, MI 4 744 1% 38,168 93.4% 685
Indianapolis, IN 3 875 1% 32,720 93.4% 520
Daytona Beach /
Melbourne, FL 4 862 1% 32,311 95.0% 578
Tucson, AZ 8 1,112 1% 28,139 89.5% 423
Albuquerque, NM 4 758 1% 26,861 82.0% 512
Austin, TX 2 542 1% 23,401 95.1% 606
Other Virginia 6 1,154 1% 47,801 92.6% 619
Other Midwest 5 969 1% 42,420 93.8% 600
Other Washington
State 2 536 1% 25,226 80.9% 743
Other Texas 3 776 1% 23,402 87.3% 489
Other Georgia 2 468 1% 22,468 86.6% 656
Arkansas 2 512 1% 21,896 91.4% 589
Nevada 1 384 1% 20,594 90.0% 643
Other California 2 444 1% 18,339 91.9% 580
Other South
Carolina 2 408 -- 13,493 90.4% 437
Alabama 1 242 -- 11,221 92.2% 510
Other North
Carolina 1 168 -- 7,645 93.4% 607
-------------------------------- ---------------
Total 329 86,989 100% $3,984,286 92.0% $634
================================ ===============
10
(a) Average monthly rental rates represent potential rent collections (gross
potential rents less market adjustments), which approximate net
effective rents. These figures exclude one acquisition completed in
1999.
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 believes that cash provided by operations
will be adequate to meet normal operating requirements and payment of
distributions by the Company in accordance with REIT requirements in both the
short and long-term. 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. At March
31, 1999, the Company had cash and cash equivalents of $21.9 million and amounts
available under its credit facilities aggregating $88.4 million.
The Company expects to meet its short-term liquidity requirements through net
cash provided by operations and borrowings under credit facilities. To meet
certain long-term liquidity requirements, such as scheduled debt maturities,
development activity and significant capital improvements, the Company expects
to issue secured and unsecured notes payable. The Company may also fund its
capital requirements through: (i) proceeds from asset sales, (ii) common shares
sold through the Company's Dividend Reinvestment and Stock Purchase Plan, (iii)
retained operating cash flow and (iv) the use of unused credit facilities. The
Company completed the majority of its 1999 financing activity during the first
quarter of 1999, however, it is anticipated that additional debt will be issued
during the remainder of 1999, primarily to replace existing debt maturities and
to pay down credit facilities.
The following discussion explains the changes in net cash provided by operating
activities, net cash used for investing activities and net cash provided by
financing activities which are presented in the Company's Consolidated Statement
of Cash Flows.
Operating Activities
For the quarter ended March 31, 1999, the Company's cash flow from operating
activities of $28.4 million was slightly down compared to $30.0 million for the
same period last year. Although the Company experienced growth in its apartment
portfolio during 1998, the financing costs associated with these acquisitions
offset the increased operating income.
Investing Activities
During the three months ended March 31,1999, net cash used for investing
activities was $47.8 million compared to $78.0 million for the same period last
year. Changes in the level of investing activities from period to period
primarily reflect the changing levels of the Company's acquisition, capital
expenditure, development and sales programs.
Acquisitions During the first three months of 1999, the Company acquired one
newly constructed community in Nashville, Tennessee, containing 288 apartment
homes at a total cost (including closing costs) of $17.9 million or $60,800 per
home. During the remainder of 1999, the Company does not anticipate acquiring
communities except to reinvest a portion of the proceeds from property sales.
The Company anticipates that 40% of the net proceeds from property sales will be
reinvested in strategic acquisitions during 1999.
Real estate under development
The Company's development strategy is focused in certain of its major markets
where it is believed that there will be stabilized demand. During the first
three months of 1999, the Company invested $28.0 million on development
projects, including the acquisition of land.
At March 31, 1999, the Company had 1,548 apartment homes under development as
outlined below (dollars in thousands except estimated cost per home):
11
Completed Estimated Estimated Expected
No. Apt. Apt. Development Development Cost per Completion
Property Location Homes Homes Costs Costs Home Date
- --------------------------------------------------------------------------------------------------------
New Communities
- ---------------
Dominion Franklin (a) Nashville, TN 360 360 $ 25,430 $ 24,800 $ 68,900 1Q99
Ashlar I Fort Myers, FL 260 220 17,297 18,600 71,500 2Q99
Sierra Foothills Phoenix, AZ 322 -- 10,683 22,400 69,600 4Q99
Alexander Court Columbus, OH 356 192 17,968 23,000 64,600 3Q99
Legends at Park 10 Houston, TX 236 -- 5,447 13,400 56,800 4Q99
Ashton at Waterford Lakes Orlando, FL 292 -- 8,440 18,600 63,700 4Q99
The Meridian I Dallas, TX 250 -- 4,354 15,500 62,000 2Q00
-----------------------------------------------------------
2,076 772 89,619 136,300 65,700
Additional Phases
- -----------------
Heritage Green II Columbus, OH 96 72 3,931 6,900 71,900 2Q99
Dominion Crown Pointe II Charlotte, NC 220 -- 1,471 14,900 67,700 1Q00
-----------------------------------------------------------
316 72 5,402 21,800 69,000
Land Held for Future Development -- 20,939 -- -- --
-----------------------------------------------------------
Total to Date 2,392 844 $115,960 $158,100 $ -- --
===========================================================
(a) Dominion Franklin will be considered substantially complete once all punch
work has been finalized and the buildings are ready for walkthrough.
During 1999, the following development projects were completed (dollars in
thousands except estimated cost per home):
Estimated Estimated
No. Apt. Development Development Cost per Date % Leased
Property Location Homes Costs Costs Home Completed at 3/31/99
- ---------------------------------------------------------------------------------------------------------------
New Communities
Stone Canyon Houston, TX 216 $ 10,543 $ 11,100 $51, 400 3/99 55.1%
During 1998, the Company increased its commitment to development as part of its
strategic repositioning. During 1999, the Company expects, either directly or
with joint venture partners, to invest approximately $150 million on
development, including communities currently under development plus six new
starts during the year.
Capital Expenditures
The Company capitalizes value enhancing improvements plus improvements that
substantially extend the useful life of an existing asset. In addition to the
Company's capital expenditures on new acquisitions, a significant portion of
capital expenditures relate to the Company's same communities. During the first
quarter of 1999, the Company invested $14.3 million on capital improvements to
its apartment portfolio. During the first three months of 1999, capitalized
expenditures related to the Company's same communities (those owned prior to
January 1, 1998) averaged $116 per home as follows: (i) ordinary capital
expenditures including floor coverings, HVAC equipment, roofs, appliances and
other ordinary capital expenditures of $2.0 million or $36 per home, (ii) asset
preservation expenditures including landscaping, parking lots and other land
improvements of $2.5 million or $44 per home and (iii) revenue enhancing
expenditures including sub-metering of water and sewer, interior improvements
and upgrades, construction of carports, garages and self-storage units, business
and fitness centers, security alarms, gating and access devices and intrusion
alarms, washer and dryer connections and other revenue enhancing expenditures of
$2.1 million or $36 per home.
The Company has completed most of its same community upgrade program and has
reduced its capital expenditures related to same communities during the first
three months of 1999, but will continue to selectively add revenue enhancing
improvements which can provide a high return on investment.
Disposition of investments
The Company continually undertakes portfolio review analyses with the objective
of identifying communities that no longer meet the Company's long-term
investment objectives due to size, location, age, quality and/or
12
performance. These strategic dispositions allow the Company to reduce the age of
its existing portfolio, which should result in lower operating expense and
capital expenditure growth associated with the older communities and to exit
non-core markets. The Company intends to sell 6,000 to 7,000 apartment homes
during 1999 to complete the sale of non-strategic assets. It is anticipated that
the net proceeds from the sales, estimated at $250 million, will be used to fund
acquisitions in order to complete tax-deferred exchanges to defer large capital
gains, to fund development activity and to reduce debt. The dispositions are
expected to be moderately dilutive to current earnings as the initial returns on
investment on higher quality communities and the interest rate on debt repaid
are lower than the returns in investment on the communities being sold.
During March 1999, the Company sold two communities containing 516 apartment
homes for an aggregate sales price of $13.6 million. Proceeds received in
connection with the sales were used to repay secured notes payable encumbering
the communities and repay bank debt. For financial reporting purposes, gains on
the sales of these assets aggregated $191,000.
As of March 31, 1999, the Company has entered into a contract to sell (i) a
portfolio (the "Mid-Atlantic Portfolio") comprised of six communities containing
1,579 apartment homes for an aggregate sales price of approximately $66 million,
(ii) a portfolio (the "Tucson Portfolio") comprised of six communities
containing 704 apartment homes for an aggregate sales price of approximately
$14.0 million and (iii) three individual communities containing 609 apartment
homes and one parcel of land for an aggregate sales price of approximately $25.8
million. The transactions are expected to close during the second quarter of
1999. In addition, the Company has six communities with 1,435 apartment homes
under letter of intent for an aggregate sales price of $44.8 million. For
financial reporting purposes, aggregate gains on the sales of investments of
approximately $30 million would be recognized by the Company if all of the sales
previously described are completed, however, there can be no assurance that
these transactions will be consummated as planned.
Financing Activities
Net cash provided by financing activities during the three months ended March
31, 1999 was $22.8 million compared to $53.5 million for the same period last
year.
Cash provided by financing activities
In January 1999, the Company established a program for the sale of up to $200
million aggregate principal amount of medium-term notes (the "MTN Program"). The
Company subsequently sold an aggregate of $150 million of senior unsecured notes
under the MTN Program which consisted of the following: (i) $70 million of 7.60%
Notes due January 25, 2002, (ii) $58 million of 7.67% Notes due January 26,
2004, (iii) $10 million of variable-rate Notes due January 27, 2003 on which the
Company subsequently executed a swap fixing the rate at 7.65% and (iv) $12
million of 7.22% notes due February 19, 2003. Net proceeds from the offerings
were used to repay amortizing unsecured debt, repay maturing mortgage debt and
repay revolving bank debt.
Susequent to March 31, 1999, the Company sold $25 million of 7.73% Notes due
April 5, 2005 and $15 million of 7.53% Notes due April 27, 2029 (puttable to the
Company beginning 2003) in connection with the MTN Program. Proceeds from the
offering were used to repay a senior unsecured note which matured in April 1999.
On March 18, 1999, the Company closed on the first part of a $200 million
revolving credit facility (the "Credit Facility") with the Federal National
Mortgage Association. The $102.3 million initially borrowed under the terms of
the Credit Facility has an initial interest rate of 5.70%, which is fixed
through December 1, 1999. Subsequent to March 31, 1999 the Company borrowed an
additional $16.6 million at an interest rate of 5.68% and $10.7 million at an
interest rate of 5.72%. The financings are for an initial term of five years,
bear interest at a floating rate which can be fixed for periods of up to 270
days, and can be extended for an additional five or ten years at the Company's
discretion. The net proceeds from the Credit Facility were used to repay a $91
million secured credit facility assumed in connection with the American
Apartment Communities II transaction and the remaining proceeds were used to
repay revolving bank debt. The Company intends to borrow additional amounts
under this Credit Facility to fund maturing and prepayable mortgage debt during
the remainder of 1999 as conditions allow.
13
The Company issued 431,965 shares of its common stock and received $4.3 million
under its Dividend Reinvestment and Stock Purchase Plan during the first quarter
of 1999 which included $0.3 million in optional cash investments and $4.0
million of reinvested dividends.
During the first quarter of 1999, the Company paid distributions to its common
and preferred shareholders and unitholders in its operating partnerships
aggregating $35.3 million.
The Company anticipates issuing additional debt during the next twelve months to
replace debt that is maturing while striving to minimize the overall cost of
capital.
Derivative Instruments
The Company has, from time to time, used derivative instruments to synthetically
alter on-balance sheet liabilities to hedge anticipated transactions. Derivative
contracts did not have a material impact on the results of operations during the
three months ended March 31, 1999.
Market Risk Disclosures
The Company is exposed to market risk principally from interest rate risk
associated with variable-rate notes payable and maturing debt that has to be
refinanced. The Company does not hold financial instruments for trading
purposes, but rather, holds these financial instruments to finance the ownership
and management of real estate. The Company's interest rate sensitivity position
is managed by its treasury department. Interest rate sensitivity is the
relationship between changes in market interest rates and changes in rate
sensitive income due to the repricing characteristics of assets and liabilities.
The Company's earnings are affected by changes in short-term interest rates on
its variable-rate debt and the repricing of fixed-rate debt maturities. A large
portion of the Company's market risk is exposure to short-term interest rate
fluctuations on variable-rate borrowings outstanding under its various credit
facilities, which was $176.6 million at March 31, 1999. The impact on the
Company's financial statements of refinancing fixed-rate debt that matured
during the first quarter was not material.
At March 31, 1999, the notional value of the Company's derivative products for
the purpose of managing interest rate risk was $55 million of interest rate
swaps. An aggregate notional value of $45 million of interest rate swaps have an
average pay rate fixed at 5.98% to 8.00% and an average receive rate of one
month to three month LIBOR. These agreements effectively fix $45 million of the
Company's variable-rate secured notes payable to a weighted average interest
rate of 7.46%. The remaining $10 million of interest rate swaps effectively
changed the Company's interest rate exposure to a fixed-rate of 7.65%.
The Company's market risk has not changed materially from the amounts reported
in the Company's annual report on Form 10-K.
Credit Facilities
The Company has a $200 million three year unsecured revolving credit facility
(the "Credit Facility"), a $50 million one year unsecured line of credit (the
"Line of Credit") and a $15 million uncommitted line of credit (the "Uncommitted
Line") with a major U.S. financial institution. At and for the three months
ended March 31, 1999, the Company had the following credit facilities (dollars
in thousands):
Three Months Ended March 31, 1999 At March 31, 1999
---------------------------------- ------------------------------
Weighted Average
Amount of Amount Weighted Average Amount Weighted Average
Credit Facility Facility Outstanding Interest Rate Outstanding Interest Rate
- -------------------------------------------------------------------------- ------------------------------
Credit Facility $200,000 $144,998 5.5% $161,600 5.4%
Line of Credit 50,000 16,778 6.0% -- n/a
Uncommitted Line 15,000 4,227 5.5% 15,000 5.5%
-------- ------------------------------ -----------------------------
$265,000 $166,003 5.6% $176,600 5.4%
======== ============================== =============================
14
Funds from Operations
Funds from operations ("FFO") is defined as income before gains (losses) on
sales of investments, minority interest of unitholders in operating partnerships
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.
For the three months ended March 31, 1999, FFO increased 25.3% to $40.5 million,
compared with $32.3 million for the same period last year. The increase in FFO
was principally due to the increased net rental income from the Company's
non-mature apartment homes acquired and developed subsequent to January 1, 1998.
Three Months Ended
March 31,
(in thousands)
---------------------------------
1999 1998 % Change
---------------------------------
Calculation of funds from operations:
Income before gains (losses) on sales of investments
and minority interests $ 20,941 $ 17,578 19.1%
Adjustments:
Real estate depreciation, net of outside partners' interest 29,136 20,928 39.2%
Minority interests of outside partnerships (167) -- --%
Distributions to preferred shareholders (9,439) (5,650) 67.1%
Adjustment for internal acquisition costs -- (544) --%
-------------------------------
Funds from operations $ 40,471 $ 32,312 25.3%
===============================
Results of Operations
The Company's net income is primarily generated from the operations of its
apartment communities. For purposes of evaluating its comparative operating
performance, the Company categorizes its communities into two categories, same
community and non-mature. For the 1999 versus 1998 comparison, these communities
are as follows: (i) same community--those communities acquired, developed and
stabilized prior to January 1, 1998 and held throughout both the first quarter
of 1999 and 1998 and (ii) non-mature--those communities acquired, developed or
sold subsequent January 1, 1998.
For the three months ended March 31, 1999, the Company reported increases over
the same period last year in rental income, rental expenses, other expenses and
net income. The Company's non-mature communities provided a substantial portion
of the aggregate reported increases. However, compared to the same period last
year, net income available to common shareholders decreased $.9 million, with a
corresponding decrease of $.03 for both basic and diluted earnings per share.
During 1998, the Company issued both preferred and common stock in connection
with its acquisitions which reduced net income available to common shareholders
and basic and diluted earnings per share during the first quarter of 1999.
All Communities
The operating performance of the Company's 329 communities with 86,989 apartment
homes for the three months ended March 31, 1999, and 264 communities with 70,057
apartment homes for the three months ended March 31, 1998, respectively, is
summarized in the chart below (dollars in thousands):
1999 1998 % Change
-----------------------------------
Property rental income $ 153,421 $ 103,893 47.7%
Property operating expenses (excluding
depreciation and amortization) (60,680) (40,913) 48.3%
-----------------------------------
Property operating income $ 92,741 $ 62,980 47.3%
===================================
Weighted average number of apartment homes 87,244 63,005 38.5%
Physical occupancy 92.0% 92.3% (0.3)%
15
Due to the acquisition and development of 30,046 apartment homes since January
1, 1998, the weighted average number of apartment homes increased 38.5% to
87,244 for the three months ended March 31, 1999, which resulted in significant
increases in property rental income and property operating expenses during the
first quarter of 1999.
Same Communities
The operating performance of the Company's 205 same communities with 56,585
apartment homes for the three months ended March 31, 1999 and 1998 is summarized
below (dollars in thousands):
1999 1998 % Change
------------------------------------------
Property rental income $ 98,747 $ 95,118 3.8%
Property operating expenses (excluding
depreciation and amortization) (38,442) (37,283) 3.1%
------------------------------------------
Property operating income $ 60,305 $ 57,835 4.3%
==========================================
Physical occupancy 92.0% 92.3% (0.3)%
Average monthly rents $ 621 $ 599 3.7%
For the three months ended March 31,1999, the Company's same communities
provided approximately 64.4% of the Company's property rental income and 65.0%
of its property operating income. During the first three months of 1999, the
Company's same communities continued to generate rent growth greater than the
rate of inflation. Compared to the same period last year, property rental income
from these apartment homes grew 3.8%, or approximately $3.6 million, reflecting
an increase in average monthly rents of 3.7% to $621 per month while physical
occupancy decreased 0.3% to 92.0% compared to the same period last year. A
portion of the rent growth reflected the impact of the Company's upgrade and
revenue enhancing expenditure programs that has been ongoing during the past
several years. The operating margin (property operating income divided by
property rental income) improved 0.3% to 61.1% as a result of increased property
rental income during this period. The Company expects to maintain annualized
rent growth in the 3% range and physical occupancy in the 92% range during 1999.
For the three months ended March 31, 1999, property operating expenses at the
same communities increased 3.1%, or $1.2 million. The increase was primarily the
result of a $1.1 million increase in personnel costs as the Company experienced
pressure on wages due to low unemployment and tighter job markets, particularly
in the service area, as well as, increased overhead costs such as
hospitalization and workers' compensation.
Non-Mature Communities
The operating performance for the three months ended March 31, 1999 for the
Company's 124 non-mature communities with 30,404 homes is summarized in the
chart below (dollars in thousands):
Property Development
1998 Acquisitions 1999 Acquisitions Dispositions Properties Total Non-Mature
--------------------- ----------------- --------------- -------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
--------------------- ------------- ---------------- -------------- -----------------
Property rental income $ 51,721 $2,791 $404 $-- $546 $5,477 $2,003 $507 $54,674 $8,775
Property operating
expenses (excluding
depreciation and
amortization) (20,646) (782) (184) -- (313) (2,557) (1,095) (291) (22,238) (3,630)
--------------------- ------------- ---------------- -------------- -----------------
Property operating
income $ 31,075 $ 2,009 $ 220 $-- $233 $ 2,920 $ 908 $216 $32,436 $5,145
===================== ============== ================= =============== =================
For the three months ended March 31, 1999, the Company's non-mature communities
provided approximately 35.6% of the Company's property rental income and 35.0%
of its property operating income. For the quarter ended March 31, 1999, these
communities had physical occupancy of 91.8% (excluding Development Properties
undergoing lease-up) and an operating margin of 59.3%. For the first quarter of
1999, the non-mature communities provided average monthly rents of $656 per home
per month which is higher than the same communities. The higher rents is a
result of the new markets, particularly in California, that the Company entered
during 1998, which provide for higher rents per apartment home.
16
1998 Acquisitions
Single Acquisitions and ASR Portfolio
Included in this category are (i) 24 communities with 6,959 apartment homes
acquired in individual and portfolio transactions by the Company during 1998 and
(ii) 39 communities with 7,550 apartment homes included in the ASR portfolio
acquired on March 27, 1998. The first year return on investment (property rental
income less property operating expenses divided by the average capital
investment in real estate) for these communities for the three months ended
March 31, 1999, on an average investment of $651 million, was 8.5%. These
communities continue to be upgraded and repositioned, which is expected to
improve their operating results during the remaining quarters of 1999.
American Apartment Communities II, Inc. (AAC)
The acquisition of 53 communities with 14,001 apartment homes on December 7,
1998 included in the statutory merger with AAC met the Company's proforma
acquisition expectations during the first quarter of 1999, providing an
annualized first year return on investment of 8.7% on an average investment of
$768 million. In addition, these communities achieved physical occupancy of
93.4% during this same period which is higher than the Company's average
physical occupancy.
1999 Acquisitions
Included in this category is one community with 288 apartment homes acquired by
the Company during the first quarter of 1998 which is projected to have a first
year average return on investment in the 9.5% range.
Property Dispositions
Included in this category are the 20 communities with 5,834 apartment homes sold
as part of the Company's strategic repositioning program (see Disposition of
Investments under Liquidity and Capital Resources) since January 1, 1998. These
communities did not have a material impact on the first quarter 1999 results of
operations.
Development Properties
This represents the 1,288 homes developed at various times since January 1,
1998. These communities did not have a material impact on the first quarter 1999
results of operations. Once stabilized, development communities are projected to
generate an average return on investment in excess of 10%.
Real Estate Depreciation
Real estate depreciation increased $8.5 million or 40.4% for the three months
ended March 31, 1999 over the same period last year. This increase is directly
attributable to the addition of depreciable real estate assets as a result of
the Company's acquisition, development and capital expenditure programs during
1998.
Interest Expense
Interest expense increased $15.3 million for the three months ended March 31,
1999 over the same period last year. The weighted average amount of debt
employed during the first three months of 1999 was higher than it was for the
same period during 1998 ($2.2 billion in 1999 versus $1.2 billion in 1998). The
weighted average interest rate on this debt for the three month period was 7.4%,
reflecting no change from the same period last year. For the three months ended
March 31, 1999 and 1998, total interest capitalized was $1.7 million and $0.5
million, respectively.
General and Administrative
During the three months ended March 31, 1999, general and administrative
expenses increased by $1.3 million or 60.7% over the same period last year
primarily due to (i) the added infrastructure costs incurred due to the
increased size of the Company, (ii) the change in accounting for internal
acquisition costs subsequent to March 19, 1998, (iii) increased costs
associated with the Company's annual report and proxy which were completed
earlier in 1999 than in 1998 and (iv) severance compensation fully expensed in
the quarter.
Inflation
The Company believes that the direct effects of inflation on the Company's
operations have been inconsequential.
17
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date sensitive software or embedded
chips may recognize a date using "00"" as the year 1900 rather than the year
2000. This could result in system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company continues to identify and address issues regarding the transition to
Year 2000, as it is dependent on computer systems and applications to conduct
its business. The Company has performed a thorough assessment of its personal
computers, desktop software and major applications and is in the process of
completing its server environment assessment. To ensure that the Company
completed a formalized and thorough assessment of its Year 2000 issues, the
Company engaged an outside consulting firm to conduct a Year 2000 assessment and
develop a remediation plan. The plans covers four stages: (i) inventory, (ii)
assessment, (iii) remediation and (iv) testing and certification. Because the
Company operates in a structured, standardized environment, the assessment
indicated a high degree of Year 2000 compliance with few items for remediation.
All mission-critical applications have been determined to be Year 2000
compliant. Desktop hardware and software are 90% compliant, with remediation of
the non-compliant 10% to be completed by July 1999. None of the non-compliant
issues identified are mission-critical.
The Company is commencing the assessment phase for non-IT operating equipment at
its communities (gates, security, telephone, elevator, HVAC systems and other
such systems). This assessment will be completed by June 1, 1999, with any
remediation to be completed by November 1, 1999.
The Company is also assessing the Year 2000 compliance of vendors and other
external relationships to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their own Year 2000 issues. The
Company has initiated formal communication with these parties. The Company
cannot ensure timely compliance of third parties and; therefore, could be
adversely affected by failure of a significant third party to become Year 2000
compliant. The effect, if any, on the Company's results of operations from the
failure of such third parties to be Year 2000 compliant is not reasonably
estimable.
The Company estimates that the total Year 2000 project cost will be
approximately $100,000, of which approximately 70% has been incurred as of March
31, 1999. Amounts expended to ensure Year 2000 compliance have been funded by
cash flows from operations and are not expected to have a material impact on the
Company's financial position, results of operations, or cash flows. The Company
believes that its Year 2000 initiatives are adequate to address reasonably
likely Year 2000 issues.
- ------------------------------------------------------------------------------------------
Assessment Remediation /
% Complete Compliance Testing
Expected Completion
- ------------------------------------------------------------------------------------------
IT - Mission-Critical
Applications 100% 100% July 1999
- ------------------------------------------------------------------------------------------
IT - Desktop
Hardware / Software 95% 90% July 1999
- ------------------------------------------------------------------------------------------
IT - Network
Hardware / Software 90% 90% July 1999
- ------------------------------------------------------------------------------------------
Operating Equipment 50%, Expected Expected
at Communities Completion, Completion, November 1999
June 1999 August 1999
- ------------------------------------------------------------------------------------------
Failure to correct a material Year 2000 problem could result in the failure of
certain normal business activities or operations. Management believes that, with
the implementation of new or upgraded business systems, as needed, and the
completion of the Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations due to the failure of those systems will be
reduced. However, the Company is dependent on the power and telecommunications
infrastructure within the United States. The most reasonably likely worst case
scenario would be that the Company may experience disruption in its operations
if any of the third-party suppliers reported a
18
system failure. Although the Company's Year 2000 project will reduce the level
of uncertainty about the compliance and readiness of its material third-party
providers, due to the general uncertainty over Year 2000 readiness of these
third-party suppliers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact.
The final phase of the Company's Year 2000 project relates to a contingency
plan. The Company maintains contingency plans in the normal course of business
designed to be deployed in the event of various potential business
interruptions.
19
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Information required by Item 3 regarding Quantitative and Qualitative Disclosure
of Market Risk is included in Part II, Item 2 of this Form 10-Q included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
20
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
On May 11, 1999, the Company held its Annual Meeting of Shareholders. A
total of 92,415,129 shares of common stock, representing 88.8% of the shares
outstanding and entitled to vote as of the March 26, 1999 record date were
presented in person or by proxy and constituted a quorum.
At the meeting, eleven (11) directors were re-elected. Each director
will serve an approximate one (1) year term until the Company's next Annual
Meeting. The following persons were elected Directors with each receiving at
least 87,293,861 shares, representing 83.9% of the total number of shares
entitled to vote at the meeting and 94.5% of the shares voted: Jeff C. Bane, R.
Toms Dalton, Robert P. Freeman, Jon A. Grove, James D. Klingbeil, Barry M.
Kornblau, John P. McCann, Lynne B. Sagalyn, Mark J. Sandler, Robert W. Scharar
and John S. Schneider.
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 January 20, 1999 was filed with the Securities and
Exchange Commission on January 20, 1999. The filing included pro forma
financial statements for the Company for the nine months ended September
30, 1998.
A Form 8-K dated March 29, 1999 was filed with the Securities and
Exchange Commission on March 29, 1999. The filing included pro forma
financial statements for the Company for the twelve months ended
December 31, 1998.
21
EXHIBIT INDEX
Item 6 (a)
The exhibits listed below are filed as part of this Annual 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.
Exhibit Description Location
- ---------- --------------------- -------------------------
2(a) Agreement and Plan of Merger dated Exhibit 2(a) to the Companys Form S-4 Registration
as of December 19, 1997, between Statement (Registration No. 333-45305) filed with
the Company, ASR Investment the Commission on January 30, 1998.
Corporation and ASR Acquisition Sub,
Inc.
2(b) Agreement of Plan of Merger dated as Exhibit 2(c) to the Companys Form S-3 Registration
of September 10, 1998, between the Statement (Registration No. 333-64281) filed with
Company and American Apartment the Commission on September 25, 1998.
Communities II, Inc. including as
exhibits thereto the proposed terms
of the Series D Preferred Stock and the
proposed form of Investment Agreement
between the Company, United Dominion
Realty, L.P., American Apartment
Communities II, Inc., American
Apartment Communities Operating
Partnership, L.P., Schnitzer Investment
Corp., AAC Management LLC and LF
Strategic Realty Investors, L.P.
2(c) Partnership Interest Purchase and Exchange Exhibit 2(d) to the Companys Form S-3 Registration
Agreement dated as of September 10, 1998, Statement (Registration No. 333-64281) filed with
between the Company, United Dominion the Commission on September 25, 1998.
Realty, L.P., American Apartment
Communities Operating Partnership, L.P.,
AAC Management LLC, Schnitzer
Investment Corp., Fox Point Ltd. and
James D. Klingbeil including as an exhibit
thereto the proposed form of the Third
Amended and Restated Limited Partnership
Agreement of United Dominion Realty, L.P.
3(a) Restated Articles of Incorporation Exhibit 4(a)(ii) to the Companys Form S-3
Registration Statement (Registration No. 333-72885)
filed with the Commission on February 24, 1999.
3(b) Restated By-Laws Exhibit 3(b) to the Companys Annual Report
on Form 10-K for the year ended December
31, 1998.
4(i)(a) Specimen Common Stock Exhibit 4(i) to the Companys Annual Report
22
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 Companys 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 Companys Form 8-A
of 8.60% Series B Cumulative Registration Statement dated June 11, 1997.
Redeemable Preferred Stock
4(i)(d) Rights Agreement dated as of Exhibit 1 to the Companys Form 8-A
January 27, 1998, between the Company Registration Statement dated February 4, 1998.
and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent.
4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Companys Form 8-A
Registration Statement dated February 4, 1998.
4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Companys 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
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
10(i) Employment Agreement between Exhibit 10(i) to the Companys Annual Report
the Company and John P. McCann on Form 10-K for the year ended December 31,
dated December 8, 1998. 1998.
10(ii) Employment Agreement between Exhibit 10(ii) to the Companys Annual Report
the Company and John S. Schneider on Form 10-K for the year ended December 31,
dated December 8, 1998. 1998.
10(iii) Employment Agreement between Exhibit 10(iii) to the Companys Annual Report
the Company and Richard Giannotti on Form 10-K for the year ended December 31,
dated December 8, 1998. 1998.
10(iv) 1985 Stock Option Plan, Exhibit 10(iv) to the Companys Quarterly
as amended. Report on Form 10-Q for the quarter ended
June 30, 1998.
10(v) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Companys Quarterly Report
Plan. on Form 10-Q for the quarter ended March 31, 1997.
23
10(vi) Third Amended and Restated Exhibit 10(vi) to the Companys Annual Report
Agreement of Limited Partnership of on Form 10-K for the year ended December 31,
United Dominion Realty, L.P. 1998.
Dated as of December 7, 1998.
10(vi)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Companys Form 10-Q for
April 16, 1998, between the the quarter ended March 31, 1998.
Company and United Dominion
Realty, L.P.
12 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges.
27 Financial Data Schedule Filed herewith.
24
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: May 17, 1999 /s/ John P. McCann
----------------------------------
John P. McCann
Chairman of the Board
and Chief Executive Officer
Date: May 17, 1999 /s/ Robin R. Flanagan
----------------------------------
Robin R. Flanagan
Assistant Vice President and
Chief Accounting Officer
25