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 September 30, 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 November 9, 1999: Common Stock, $1 Par Value: 102,996,532 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS,EXCEPT SHARE DATA) (UNAUDITED) SEPTEMBER 30, December 31, 1999 1998 ------------------------------------------------------------------------------------------------------------- ASSETS Real estate owned: Real estate held for investment $ 3,471,754 $ 3,643,245 Less: accumulated depreciation 342,291 280,663 ----------------- ----------------- 3,129,463 3,362,582 Real estate under development 123,394 99,395 Real estate held for disposition 377,657 174,145 ----------------- ----------------- Total real estate owned, net of accumulated depreciation 3,630,514 3,636,122 Cash and cash equivalents 9,050 18,529 Restricted cash 56,144 50,805 Deferred financing costs, net of accumulated amortization 14,930 10,894 Other assets 52,292 39,038 ----------------- ----------------- Total assets $ 3,762,930 $ 3,755,388 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable-secured $ 1,031,344 $ 1,072,185 Notes payable-unsecured 1,145,727 1,045,564 Real estate taxes payable 35,708 29,078 Accrued interest payable 21,019 20,714 Security deposits and prepaid rent 21,757 21,125 Distributions payable 34,226 31,423 Accounts payable, accrued expenses and other liabilities 32,010 45,736 ----------------- ----------------- Total liabilities 2,321,791 2,265,825 Minority interests 107,126 115,442 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 102,616,349 shares issued and outstanding (103,639,117 in 1998) 102,616 103,639 Additional paid-in capital 1,078,427 1,090,432 Distributions in excess of net income (269,163) (242,331) Deferred compensation - unearned restricted stock awards (348) -- Notes receivable from officer-shareholders (7,519) (7,619) ----------------- ----------------- Total shareholders' equity 1,334,013 1,374,121 ----------------- ----------------- Total liabilities and shareholders' equity $ 3,762,930 $ 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 Nine Months Ended September 30, September 30, 1999 1998 1999 1998 -------------------------------- --------------------------- Revenues: Rental income $155,523 $123,471 $463,745 $346,164 Interest and other non-property income 701 576 1,631 2,735 ------------- ------------ ------------ ------------ Total revenues 156,224 124,047 465,376 348,899 Expenses: Rental expenses: Real estate taxes and insurance 15,207 12,257 47,717 35,010 Personnel 17,308 13,558 50,347 36,858 Utilities 7,468 7,260 23,107 19,205 Repair and maintenance 10,735 10,104 30,440 26,408 Administrative and marketing 6,583 5,195 19,018 13,503 Other operating expenses 538 47 1,218 130 Property management 4,722 4,202 14,018 12,088 Real estate depreciation 29,957 26,901 90,814 73,376 Interest 39,014 27,224 116,011 75,784 Impairment loss on real estate owned --- --- 7,100 --- General and administrative 3,065 2,534 9,509 7,306 Other depreciation and amortization 1,106 893 3,226 2,434 ------------- ------------ ------------ ------------ Total expenses 135,703 110,175 412,525 302,102 ------------- ------------ ------------ ------------ Income before gains on sales of investments, minority interests and extraordinary item 20,521 13,872 52,851 46,797 Gains on sales of investments 48 13 32,454 20,474 ------------- ------------ ------------ ------------ Income before minority interests and extraordinary item 20,569 13,885 85,305 67,271 Minority interests of outside partnerships (276) --- (657) --- Minority interests of unitholders in operating partnerships (251) (78) (4,232) (1,200) ------------- ------------ ------------ ------------ Income before extraordinary item 20,042 13,807 80,416 66,071 Extraordinary item - early extinguishment of debt (166) --- 343 (116) ------------- ------------ ------------ ------------ Net income 19,876 13,807 80,759 65,955 Distributions to preferred shareholders-Series A and B (5,653) (5,650) (16,953) (16,953) Distributions to preferred shareholders-Series D (Convertible) (3,788) --- (11,367) --- ------------- ------------ ------------ ------------ Net income available to common shareholders $10,435 $8,157 $52,439 $49,002 ============= ============ ============ ============ Earnings per common share: Basic $0.10 $0.08 $0.50 $0.50 ============= ============ ============ ============ Diluted $0.10 $0.08 $0.50 $0.50 ============= ============ ============ ============ Common distributions declared per share $0.2650 $0.2625 $0.7950 $0.7875 ============= ============ ============ ============ Weighted average number of common shares outstanding-basic 103,439 103,104 103,897 98,786 Weighted average number of common shares outstanding -diluted 103,490 103,145 103,919 98,870 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 80,759 $ 65,955 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 94,040 75,810 Minority interests 4,889 1,200 Impairment loss on real estate owned 7,100 -- Amortization of deferred financing costs 2,613 1,500 Gains on sales of investments (32,454) (20,474) Extraordinary item-early extinguishment of debt (343) 116 Changes in operating assets and liabilities: Increase in operating assets (549) (6,636) Increase (decrease) in operating liabilities (3,161) 9,469 -------------- ------------ Net cash provided by operating activities 152,894 126,940 INVESTING ACTIVITIES Proceeds from sales of investments 119,150 142,580 Development of real estate assets, including acquisition of land (92,576) (63,006) Acquisition of real estate, net of liabilities assumed (47,204) (172,123) Capital expenditures to real estate assets (46,136) (55,290) Funds held in escrow from 1031 exchanges pending the acquisition of real estate (9,029) (10,211) Net cash paid or acquired in connection with mergers (6,237) 321 Capital expenditures-non real estate assets (5,180) (2,895) Other 1,132 (1,852) -------------- ------------ Net cash used in investing activities (86,080) (162,476) FINANCING ACTIVITIES Proceeds from the issuance of a notes payable - unsecured 197,345 -- Proceeds from the issuance of a notes payable - secured 201,931 -- Proceeds from the issuance of common stock 12,971 71,754 Net borrowings of short-term bank debt 4,800 171,400 Distributions paid to common shareholders (80,823) (75,975) Distributions paid to preferred shareholders (25,517) (16,959) Distributions paid to minority interest operating partnership unitholders (5,844) (2,078) Non-scheduled payments on notes payable-secured (196,939) (54,949) Balloon debt maturities and repurchase of notes payable - unsecured (101,641) (7,504) Payment of notes payable-secured in connection with the sales of investments (30,769) (9,889) Repurchase of common stock (26,083) -- Scheduled principal payments on notes payable - secured (15,064) (7,382) Payments of financing costs (6,649) (1,800) Cash paid to redeem operating partnership units (3,551) (3,070) Purchase of common stock for restricted stock awards (460) -- -------------- ------------ Net cash (used in) provided by financing activities (76,293) 63,548 -------------- ------------ Net (decrease) increase in cash and cash equivalents (9,479) 28,012 Cash and cash equivalents, beginning of period 18,529 473 -------------- ------------ Cash and cash equivalents, end of period $ 9,050 $ 28,485 ============== ============ SUPPLEMENTAL INFORMATION: Interest paid during the period $ 117,506 $ 75,968 Conversion of operating partnership units to common stock 1,005 -- Non-cash transactions associated with the acquisition of properties: Secured debt assumed -- 128,905 Issuance of operating partnership units -- 20,295 Issuance of common stock -- 5,240 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) PREFERRED STOCK Balance, December 31, 1998 $ 430,000 -------------------- Balance, September 30, 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 1,216 Purchase of treasury stock (2,300) Issuance of common shares to employees, officers and director- shareholders 6 Conversion of minority interests of unitholders in operating partnerships 55 Purchase of common stock for restricted stock awards (46) Issuance of restricted stock awards 46 -------------------- Balance, September 30, 1999 $ 102,616 ==================== ADDITIONAL PAID-IN CAPITAL Balance, December 31, 1998 $ 1,090,432 Issuance of common shares through dividend reinvestment and stock purchase plan 11,433 Purchase of treasury stock (23,783) Issuance of common shares to employees, officers and director- shareholders 161 Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships 184 -------------------- Balance, September 30, 1999 $ 1,078,427 ==================== DISTRIBUTIONS IN EXCESS OF NET INCOME Balance, December 31, 1998 $ (242,331) Net income 80,759 Common stock distributions declared ($.795 per share) (79,271) Preferred stock distributions declared-Series A ($1.73 per share) (7,278) Preferred stock distributions declared-Series B ($1.61 per share) (9,675) Preferred stock distributions declared-Series D ($1.42 per share) (11,367) -------------------- Balance, September 30, 1999 $ (269,163) ==================== DEFERRED COMPENSATION - UNEARNED RESTRICTED STOCK AWARDS Balance, December 31, 1998 $ - Issuance of restricted stock awards (460) Amortization of deferred compensation 112 -------------------- Balance, September 30, 1999 $ (348) ==================== NOTES RECEIVABLE FROM OFFICER-SHAREHOLDERS Balance, December 31, 1998 $ (7,619) Principal repayments 100 -------------------- Balance, September 30, 1999 $ (7,519) ==================== TOTAL SHAREHOLDERS' EQUITY $ 1,334,013 ==================== 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, "United Dominion"). As of September 30, 1999, there were 38,338,636 units in the Operating Partnership outstanding, of which 30,926,136, or 80.7% were owned by United Dominion and 7,412,501, or 19.3% were owned by non-affiliated limited partners. In connection with the acquisition of ASR Investments Corporation, United Dominion acquired Heritage Communities, L.P., a Delaware limited partnership (Heritage OP). As of September 30, 1999, there were 3,945,674 units in the Heritage OP outstanding, of which 3,422,038 or 86.7% were owned by United Dominion and 13.3% were owned by non-affiliated limited partners. The financial statements of United Dominion include the minority interests of the unitholders in the operating partnerships. 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 generally accepted accounting principles 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 December 31, 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at September 30, 1999 and results of operations for the interim periods ended September 30, 1999 and 1998. Such adjustments are normal and recurring in nature. All significant inter-company accounts and transactions have been eliminated in consolidation. 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 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 with the current financial statement presentation. 2. Real Estate Held for Investment At September 30, 1999, there are 265 communities with 74,340 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment at September 30, 1999 and December 31, 1998: September 30, December 31, Dollars in thousands 1999 1998 - ------------------------------------------------------------------------- Land and land improvements $ 619,184 $ 647,328 Buildings and improvements 2,683,469 2,819,312 Furniture, fixtures and equipment 163,057 169,364 Construction in progress 6,044 7,241 ----------- ----------- Real estate held for investment 3,471,754 3,643,245 Accumulated depreciation (342,291) (280,663) ----------- ----------- Real estate held for investment, net of accumulated depreciation $ 3,129,463 $ 3,362,582 =========== =========== At the beginning of June 1999, United Dominion embarked on an accelerated disposition plan for non-strategic properties. As a result of the review of its real estate apartment portfolio, 21 properties included in real estate held for investment were moved to real estate held for disposition during the second quarter. Accordingly, through the review and analysis of communities targeted for strategic disposition which included exiting one of United Dominion's major markets, an aggregate $7.1 million impairment loss was recognized on five communities. An impairment loss was indicated as a 2. Real Estate Held for Investment (CONTINUED) 6 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) result of the net book value of the assets held for disposition being greater than the estimated fair market value less the cost of disposal. 3. Notes Payable - Secured Notes payable-secured, which encumber $1.92 billion or 47.9% of United Dominion's real estate owned, ($2.09 billion or 52.1% of United Dominion's real estate owned is unencumbered) consist of the following at September 30, 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) $ 562,800 8.06% 7.0 85 Tax-Exempt Notes Payable 113,236 6.99% 13.1 16 REMIC Financings 69,249 7.88% 1.3 23 Secured Notes Payable (FNMA) (b)(c) 7,000 6.78% 4.5 0 ------------------------------------------------------------------------ Total Fixed-Rate Notes Payable 752,285 7.87% 7.4 124 Variable-Rate Debt Mortgage Notes Payable 23,769 7.50% 17.5 9 Tax-Exempt Notes Payable 66,615 4.17% 19.4 5 Secured Credit Facilities (FNMA) (c) 188,675 6.18% 4.5 19 ------------------------------------------------------------------------ Total Variable-Rate Notes Payable 279,059 5.81% 9.1 33 ------------------------------------------------------------------------ Total Notes Payable - Secured $ 1,031,344 7.31% 7.8 157 ======================================================================== (a) Includes fair value adjustments aggregating $15.4 million recorded in connection with two statutory mergers consummated in 1998. (b) United Dominion has one interest rate swap agreement associated with secured debt with an aggregate notional value of $7 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreement effectively changes United Dominion's interest rate exposure on $7 million from a variable rate to a weighted average fixed rate of approximately 6.78%. (c) During the first nine months of 1999, United Dominion closed on $195.7 million of a $200 million revolving credit facility (the "Credit Facility") with the Federal National Mortgage Association ("FNMA"). The Credit Facility currently bears a variable rate of interest of 6.20%. 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 United Dominion's discretion. The current floating rate will be reset on December 1, 1999. The Company entered into two forward rate swap agreements dated August 29, 1999 and August 31, 1999 for $10 million and $40 million, respectively. The two agreements have an effective date of December 1, 1999 and a termination date of April 1, 2004. The agreements will be used to synthetically fix the interest rate on $10 million of this Credit Facility to a weighted average fixed rate of 6.47% and $40 million of this Credit Facility to a weighted average fixed rate of 5.74%. 4. Notes Payable - Unsecured A summary of notes payable - unsecured at September 30, 1999 and December 31, 1998 is as follows (dollars in thousands): September 30, December 31, 1999 1998 ------------- ------------- Commercial Banks Borrowings outstanding under credit facilities (a) (b) $244,800 $240,000 Insurance Companies--Senior Unsecured Notes 7.98% due March, 2000-2003 (c) 29,800 37,228 Other (d) 5,394 5,836 4. Notes Payable - Unsecured (continued) Senior Unsecured Notes - Other 7 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7.73% Medium-Term Notes due April 2005 (g) 25,000 -- 7.53% Medium-Term Notes due April 2029 (e) (g) 15,000 -- 7.60% Medium-Term Notes due January 2002 (g) 70,000 -- 7.67% Medium-Term Notes due January 2004 (g) 58,000 -- 7.65% Medium-Term Notes due January 2003 (f) (g) 10,000 -- 7.22% Medium-Term Notes due February 2003 (g) 12,000 -- 5.05% City of Portland, OR Bonds due October 2003 7,345 -- 8.50% Monthly Income Notes due November 2008 60,863 62,500 8.13% Senior Notes due November 2000 146,150 150,000 7.25% Notes repaid April 1999 -- 75,000 8.50% Debentures due September 2024 (h) 150,000 150,000 7.95% Medium-Term Notes due July 2006 123,400 125,000 7.25% Notes due January 2007 112,975 125,000 7.07% Medium-Term Notes due November 2006 25,000 25,000 7.02% Medium-Term Notes due November 2005 50,000 50,000 ----------- ---------- 865,733 762,500 ----------- ---------- Total Notes Payable - Unsecured $ 1,145,727 $1,045,564 =========== ========== (a) Weighted average interest rate of 6.0% at September 30, 1999 and December 31, 1998. (b) United Dominion has five interest rate swap agreements with an aggregate notional value of $45 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amounts. The interest rate swap agreements effectively change United Dominion's interest rate exposure on $45 million of its outstanding credit facilities from a variable rate to a weighted average fixed rate of approximately 6.84%. (c) Payable annually in four equal principal installments of $7.4 million. (d) Includes $4.8 million and $5.4 million at September 30, 1999 and December 31, 1998, respectively, of deferred gains from the termination of interest rate risk management agreements. (e) Notes include an investor put feature which grants options to redeem the notes in April 2003, 2009, 2014 and 2019 at par. (f) United Dominion has one interest rate swap agreement associated with unsecured notes with an aggregate notional value of $10 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreement effectively changes United Dominion's interest rate exposure on the $10 million from a variable rate to a fixed rate of 7.65%. (g) During the first nine months of 1999, United Dominion issued $190 million aggregate principal amounts of senior unsecured notes under its $200 million Medium-Term Note Program, with a weighted average interest rate of 7.6% and a weighted average term of 6.3 years. (h) Debentures include an investor put feature which grants a one-time option to redeem debentures in September 2004. During the first nine months of 1999, United Dominion recognized a $343 thousand extraordinary gain related to the repurchase of $19.1 million of its unsecured notes payable at less than face value. 8 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 United Dominion'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. For the three and nine months ended September 30, 1999 and 1998, the weighted average number of operating partnership units was 8,251,432 and 8,398,303 for 1999 and 3,077,181 and 2,482,255 for 1998, respectively. For the three and nine months ended September 30, 1999, the weighted average number of preferred shares was 12,307,692. The following table sets forth the computation of basic and diluted earning per share. Three months ended Nine months ended September 30, September 30, 1999 1998 1999 1998 ------------------------- ------------------------- In thousands, except per share data Numerator for basic and diluted earnings per share-net income available to common shareholders $ 10,435 $ 8,157 $ 52,439 $ 49,002 Denominator: Denominator for basic earnings per share- weighted average shares 103,439 103,104 103,897 98,786 Effect of dilutive securities: Employee stock options 51 41 22 84 -------------- ----------- -------------- ----------- Dilutive potential common shares Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 103,490 103,145 103,919 98,870 ============== =========== ============== =========== Basic earnings per share $ .10 $ .08 $ .50 $ .50 ============== =========== ============== =========== Diluted earnings per share $ .10 $ .08 $ .50 $ .50 ============== =========== ============== =========== 6. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133", which is required to be adopted in years beginning after June 15, 2000. Statement 133 permits early adoption as of the beginning of any fiscal quarter after its issuance, however, United Dominion does not anticipate adopting Statement 133 until such time as it is required. Statement 133 will require United Dominion 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. United Dominion has not yet determined what the effect of Statement 133 will be on earnings and the financial position of United Dominion, however, management does not anticipate that the adoption of Statement 133 will have a significant effect on earnings or the financial position of United Dominion. 9 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. ("United Dominion") 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 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 United Dominion, and/or its properties, adverse changes in the real estate markets and general and local economies and business conditions. Although United Dominion believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and 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 a representation by United Dominion or any other person that the results or conditions described in such statements or the objectives and plans of United Dominion will be achieved. United Dominion operates in one defined business segment with activities related to the ownership, acquisition, development, management and strategic disposition of multifamily apartment communities nationwide. Management's strategy is to be a national, highly efficient provider of quality apartment homes. During the past several years, United Dominion has implemented this strategy through the acquisition of portfolios of higher quality communities, the disposition of non-strategic communities, a greater commitment to development and the upgrade of its older communities. United Dominion seeks to be a market leader by operating a sufficiently sized portfolio of apartments within each if its targeted markets in order to drive down operating costs through economies of scale and management efficiencies. United Dominion believes that geographic market diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies. At September 30, 1999, United Dominion owned 318 communities with 85,216 apartment homes. 10 The following table summarizes United Dominion's apartment information by geographic location including its 34 major markets: Nine Months Ended Three Months Ended As of September 30, 1999 September 30, 1999 September 30, 1999 ------------------------------------------- ------------------ ------------------- Average Average No. of % of Carrying Monthly Monthly No. of Apartment Apartment Value Physical Rental Physical Rental Market Communities Homes Homes (in thousands) Occupancy Rates (a) Occupancy Rates (a) - --------------------------------------------------------------- --------------------- ----------------------- Dallas/Ft. Worth, TX 29 8,956 11% $ 405,738 94.4% $ 622 94.8% $ 628 Houston, TX 25 6,180 7% 236,878 91.7% 573 91.3% 579 Phoenix, AZ 10 3,374 4% 194,320 90.9% 661 91.3% 663 Orlando, FL 14 3,940 5% 190,540 94.1% 664 95.2% 669 San Antonio, TX 13 3,840 4% 177,371 92.1% 619 91.9% 626 Tampa, FL 12 4,018 5% 175,947 92.2% 644 92.8% 649 Raleigh, NC 9 2,951 3% 144,272 92.6% 691 93.2% 695 Nashville, TN 11 3,064 4% 143,639 94.0% 603 94.7% 607 San Francisco, CA 4 980 1% 129,942 98.5% 1,477 99.0% 1,491 Charlotte, NC 10 2,490 3% 124,778 91.2% 678 91.4% 683 Columbus, OH 7 2,330 3% 121,808 93.8% 621 94.9% 624 Columbia, SC 11 3,320 4% 114,686 90.8% 530 91.0% 532 Wilmington, NC 10 2,710 3% 111,390 88.4% 594 92.0% 588 Monterey Peninsula, CA 16 2,076 2% 106,675 93.9% 737 94.8% 755 Memphis, TN 7 2,196 3% 105,411 93.8% 593 94.9% 593 South Florida 6 1,638 2% 102,245 91.2% 826 89.7% 834 Greensboro, NC 8 2,123 2% 102,015 88.2% 624 88.8% 626 Richmond, VA 8 2,372 3% 98,051 93.4% 658 96.2% 663 Southern CA 5 1,578 2% 80,998 93.8% 695 92.7% 712 Baltimore, MD 7 1,596 2% 72,478 95.9% 693 96.9% 699 Atlanta, GA 6 1,426 2% 69,009 92.1% 689 93.9% 697 Portland, OR 4 996 1% 60,258 91.2% 682 90.3% 687 Jacksonville, FL 3 1,157 1% 56,410 90.1% 637 91.5% 640 Hampton Roads, VA 6 1,437 2% 54,104 94.4% 600 95.3% 605 Greenville, SC 6 1,436 2% 51,013 85.8% 546 86.1% 548 Sacramento, CA 2 914 1% 48,031 97.6% 643 97.6% 651 Seattle, WA 4 790 1% 46,917 92.0% 678 95.7% 684 Denver , CO 2 876 1% 44,592 93.0% 638 95.0% 651 Washington, DC 4 803 1% 44,056 96.1% 776 96.5% 782 Detroit, MI 4 744 1% 38,299 94.8% 688 96.1% 697 Indianapolis, IN 3 875 1% 33,210 94.5% 518 94.6% 519 Austin, TX 2 542 1% 23,625 93.6% 616 94.4% 625 Albuquerque, NM 3 530 1% 20,639 89.0% 526 92.6% 527 Tucson, AZ 2 408 -- 14,053 90.4% 445 91.8% 445 Other FL 7 1,666 2% 78,369 91.2% 618 91.7% 625 Eastern Shore, MD / Delaware 6 1,156 1% 52,441 96.5% 663 96.3% 672 Other, MI 4 1,227 1% 50,729 88.9% 622 89.2% 627 Other North Carolina 4 1,052 1% 48,785 94.8% 583 95.7% 588 Other Virginia 6 1,154 1% 47,913 93.5% 621 94.9% 625 Other Midwest 5 969 1% 42,828 94.4% 603 94.9% 609 Other Washington State 2 536 1% 25,288 79.9% 699 85.8% 654 Other Georgia 2 468 1% 22,644 85.7% 659 84.6% 663 Other Texas 3 776 1% 22,322 87.2% 490 89.1% 492 Arkansas 2 512 1% 22,191 93.5% 592 94.8% 595 Nevada 1 384 -- 20,716 92.2% 644 92.7% 646 Other South Carolina 2 408 -- 13,601 91.3% 441 91.8% 446 Alabama 1 242 -- 8,762 91.8% 511 90.8% 514 ----------------------------------------- --------------------- ----------------------- Total 318 85,216 100% $3,999,987 92.5% $640 93.2% $645 ========================================= ===================== ======================= (a) Average monthly rental rates represent potential rent collections (gross potential rents less market adjustments), which approximate net effective rents. These average rent figures exclude three acquisitions completed in 1999 and development communities in lease-up. Liquidity and Capital Resources 11 As a qualified real estate investment trust ("REIT"), United Dominion distributes a substantial portion of its cash flow to its shareholders in the form of quarterly distributions. United Dominion believes that cash provided by operations will be adequate to meet normal operating requirements and payment of distributions in accordance with REIT requirements in both the short and long-term. United Dominion utilizes a variety of primarily external financing sources to fund portfolio growth, major capital improvement programs and balloon debt payments. United Dominion'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 September 30, 1999, United Dominion had cash and cash equivalents of $9.1 million and amounts available under its credit facilities aggregating $65.2 million. United Dominion 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, United Dominion uses secured and unsecured notes payable and common and preferred equity. Although United Dominion believes that it will have the capacity to meet its long-term liquidity needs, there can be no assurance that such additional debt financing or debt and equity offerings will be available or, if available, on terms satisfactory to United Dominion. United Dominion may also fund its capital requirements through: (i) proceeds from asset sales, (ii) common shares sold through the Dividend Reinvestment and Stock Purchase Plan, (iii) retained operating cash flow and (iv) the use of unused credit facilities. United Dominion completed the majority of its 1999 financing activity during the first half of 1999 (see Financing Activities). United Dominion has no significant debt maturities until August 2000 at which time United Dominion's $200 million revolving credit facility expires. The following discussion explains the changes in net cash provided by operating activities, net cash used in investing activities and net cash (used in) provided by financing activities which are presented in United Dominion's Consolidated Statement of Cash Flows. Operating Activities For the nine months ended September 30, 1999, United Dominion's cash flow from operating activities was $152.9 million compared to $126.9 million for the same period last year. The increase is primarily due to the increased operating income from United Dominion's acquired communities as well as increases in property operating income achieved primarily through higher rent growth as discussed under "Results of Operations". Investing Activities During the nine months ended September 30, 1999, net cash used for investing activities was $86.1 million compared to $162.5 million for the same period last year. Changes in the level of investing activities from period to period reflect the changing levels of United Dominion's acquisition, capital expenditure, development and sales programs, as well as the impact of the capital market environment on these activities. During 1999, United Dominion's investment activities have consisted primarily of the sale of non-strategic properties, with a portion of the proceeds used in the acquisition of real estate. In addition, United Dominion has funded the development of higher quality communities, as well as capital expenditures on its apartment portfolio. Disposition of Investments As part of its strategic repositioning, United Dominion has undertaken proactive portfolio review analyses with the objective of identifying communities that no longer meet United Dominion's long-term investment objectives due to size, location, age, quality or performance. The disposition program allows United Dominion to reduce the age of its existing portfolio, which should result in lower operating expense and capital expenditure growth associated with the older communities, to exit non-core markets and to divest itself of communities that are no longer strategically important. United Dominion intends to sell between 7,000 and 8,000 apartment homes during 1999 as part of the strategic repositioning plan which will continue into 2000. It is anticipated that the proceeds from the sales, estimated in the $250 million range, will be used to fund acquisitions in order to complete tax-deferred exchanges to defer large capital gains, to fund development activity, to reduce debt and to repurchase common and 12 preferred stock. The dispositions are expected to be moderately dilutive to current earnings as the initial returns on investment in higher quality communities and the interest rate on debt repaid are lower than the returns on investment in the communities being sold. In connection with its disposition strategy, for the nine months ended September 30, 1999, United Dominion sold 18 communities with 3,635 apartment homes for an aggregate sales price of $122.6 million and a net book value of $87.8 million which included two parcels of land located adjacent to two of the communities sold. Proceeds received in connection with the sales were used to repay debt, repurchase common stock and complete 1031 tax deferred exchanges (see Acquisitions). For financial reporting purposes, gains on the sales of these assets aggregated $32.5 million. At September 30, 1999, there were 53 communities with 10,876 apartment homes and three commercial properties classified as real estate held for disposition with a net book value of $377.7 million (net of $41.5 million of accumulated depreciation). These communities contributed property operating income (property rental income less property operating expenses) of $9.1 million and $26.8 million for the three and nine month periods ended September 30, 1999. Management believes that the majority of these properties will be disposed of over the next twelve months. In October 1999, United Dominion sold three additional apartment communities with 761 homes for an aggregate sales price of $25.1 million. In addition, United Dominion has entered into various contracts with a number of purchasers to sell 24 communities with 5,649 apartment homes for an aggregate sales price of $168.3 million. Furthermore, United Dominion has four communities with 513 apartment homes under letter of intent for an aggregate sales price of $17.1 million. For financial reporting purposes, aggregate gains on the sales of investments are not expected to be material. The transactions are expected to close during the fourth quarter of 1999 and the first quarter of 2000; however, there can be no assurance that any of these transactions will be consummated as planned. Real Estate under Development United Dominion focuses its development activity in certain of its significant markets where it believes there will be stabilized demand. For the nine months ended September 30, 1999, United Dominion invested $92.6 million on development projects, including the acquisition of land. At September 30, 1999, United Dominion had six apartment communities and two additional phases to existing communities under development with 2,368 apartment homes as outlined below (dollars in thousands except estimated cost per home): Development Estimated Estimated Expected No. Apt. Completed Costs Development Cost per Completion Property Location Homes Apt. Homes To Date Costs Home Date - --------------------------------------------------------------------------------------------------------------- NEW COMMUNITIES - --------------- Sierra Foothills Phoenix, AZ 322 238 $ 19,136 $ 22,400 $ 69,600 4Q99 Alexander Court Columbus, OH 356 356 21,024 23,000 64,600 4Q99 Legends at Park Row Houston, TX 236 188 12,891 13,900 58,900 4Q99 Ashton at Waterford Lakes Orlando, FL 292 92 15,962 19,000 65,100 1Q00 The Meridian I Dallas, TX 250 -- 6,907 15,500 62,000 2Q00 Oaks at Weston Raleigh, NC 380 -- 4,740 30,200 79,500 1Q01 -------------------------------------------------------------- 1,836 874 80,660 124,000 67,500 -- Additional Phases - ----------------- Dominion Crown Point II Charlotte, NC 220 -- 6,950 14,800 67,300 1Q00 Carmel II San Antonio, TX 312 -- 3,156 19,700 63,100 4Q00 Land Held for Future Development -- -- 32,628 -- -- -- ---------------------------------------------------------------- Total to Date 2,368 874 $123,394 $158,500 $66,900 -- ================================================================ During 1999, the following development projects were completed (dollars in thousands except estimated cost per home): No. Apt. Development Cost per Date % Leased Property Location Homes Costs Home Completed at 9/30/99 - ----------------------------------------------------------------------------------------------------------------- New Communities - --------------- Stone Canyon Houston, TX 216 $ 10,227 $ 47,300 3/99 81.5% 13 Dominion Franklin Nashville, TN 360 25,831 71,800 3/99 87.2% Ashlar I Fort Myers, FL 260 18,919 72,800 5/99 89.2% Additional Phases - ----------------- Heritage Green II Columbus, OH 96 5,897 61,400 5/99 96.9% --------------------- Total 932 $ 60,874 $65,300 ===================== United Dominion is committed to completing its real estate currently under development, which has an estimated cost to complete of $67.7 million. Additional development starts planned for the remainder of 1999 will likely be done with financial partners through joint ventures. Acquisitions During the nine months ended September 30, 1999, United Dominion acquired three communities with 854 apartment homes at a total cost (including closing costs) of $47.2 million or $55,300 per home. In October 1999, one additional apartment community was acquired with 184 apartment homes for a total cost (including closing costs) of $14.2 million or $77,000 per home. Through the remainder of 1999, United Dominion does not anticipate acquiring communities except to reinvest a portion of the proceeds from property dispositions. Purchase Purchase No. Apt. Price Cost Location Date Name Homes (thousands) per Home - --------------------------------------------------------------------------------------------------------------- Nashville, Tennessee 01/07/99 Colonnade 288 $17,475 $60,700 San Bernadino, California 06/30/99 Grand Terrace 208 8,739 42,000 Pembroke Pines, Florida 07/26/99 Pembroke Bay 358 21,107 59,000 ----------------------- Total/Weighted Average 854 $47,321 $55,400 ======================= Capital Expenditures United Dominion capitalizes value enhancing improvements plus improvements that substantially extend the useful life of an existing asset. In addition to United Dominion's capital expenditures to upgrade and improve new acquisitions, a significant portion of capital expenditures relate to United Dominion's same communities. For the nine months ended September 30, 1999, United Dominion invested $46.1 million on capital improvements to its total apartment portfolio, of which, $21.1 million was used to fund capital expenditures to its same community portfolio. For the nine months ended September 30, 1999, non-revenue enhancing capital expenditures related to United Dominion's same communities, including floor coverings, HVAC equipment, roofs, appliances, landscaping, parking lots and other non-revenue enhancing capital expenditures, aggregated $14.7 million or $270 per home ($360 per home on an annualized basis). In addition, revenue enhancing capital expenditures related to the same communities, including water sub-metering, the additions of microwaves, washer-dryers, interior upgrades and new business and fitness centers totaled $6.5 million or $119 per home ($159 per home on an annualized basis) for the nine months ended September 30, 1999. United Dominion has completed the majority of its same community upgrade program and has reduced its capital expenditures related to same communities during the first nine months of 1999, but will continue to selectively add revenue enhancing improvements which are budgeted to provide a high return on investment. Financing Activities Net cash used in financing activities during the nine months ended September 30, 1999 was $76.3 million compared to net cash provided by financing activities of $63.5 million last year. The capital markets environment and the level of its acquisition, development, capital expenditures and sales programs affect the financing activities of United Dominion. Cash (used in) Provided by Financing Activities On March 18, 1999, United Dominion 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. In April 1999, United Dominion borrowed an additional $16.6 million at an interest rate of 5.68% and $10.7 million at an interest 14 rate of 5.72%. Each of 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 United Dominion's discretion. The 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. In August, an additional $66.0 million was borrowed under the Credit Facility which has an initial interest rate of 6.53%. Proceeds from the borrowing were used to replace $58 million in maturing secured debt and the remaining $8 million was used to repay revolving bank debt. In January 1999, United Dominion established a program for the sale of up to $200 million aggregate principal amount of medium-term notes (the "MTN Program"). During the first nine months of 1999, United Dominion sold an aggregate of $190 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 United Dominion subsequently executed a swap fixing the rate at 7.65%, (iv) $12 million of 7.22% Notes due February 19, 2003, (v) $25 million of 7.73% Notes due April 5, 2005 and (vi) $15 million of 7.53% Notes due April 27, 2029 (puttable to United Dominion beginning 2003). Net proceeds from the offerings were used to repay $7.5 million amortizing unsecured debt, repay maturing mortgage debt, repay a $75 million senior unsecured note that matured in April 1999 and repay revolving bank debt. United Dominion issued 1,213,978 shares of its common stock and received $12.6 million under its Dividend Reinvestment and Stock Purchase Plan during the nine months ended September 30, 1999 which included $0.9 million in optional cash investments and $11.7 million of reinvested dividends. For the nine months ended September 30, 1999, United Dominion paid distributions to its common shareholders and unitholders in its operating partnerships aggregating $86.7 million. The distributions to common shareholders and holders of common operating partnership units equate to an annualized dividend rate of $1.06 per share or unit. In addition, $25.5 million of preferred dividends were paid to Series A, B and D preferred shareholders. In May 1999, the Board of Directors authorized the repurchase of up to 5.5 million common shares, or 5% of the total common shares outstanding, using proceeds from the disposition program. Such purchases will be made from time to time in the open market or in privately negotiated transactions; the timing, volume and price of such purchases will be at the discretion of management and the Board. For the nine months ended September 30, 1999, United Dominion repurchased 2,300,000 common shares at an average price of $11.34 per share. Subsequent to September 30, 1999, United Dominion repurchased an additional 181,000 common shares at an average price of $10.88 per share. The Board of Directors, in its October 1999 meeting, authorized United Dominion to repurchase United Dominion's 9.25% Series A Cumulative Redeemable Preferred Stock and its 8.60% Series B Cumulative Redeemable Preferred Stock from time to time as market conditions permit. During the first nine months of 1999, using proceeds from its disposition program, United Dominion repurchased $19.1 million of certain of its higher rate outstanding unsecured debt with a weighted average yield of 8.63%. In addition, in connection with the sales program, United Dominion was relieved of $30.7 million of mortgage debt. Credit Facilities United Dominion has a $200 million unsecured revolving credit facility (the "Bank Credit Facility") which expires in August 2000, and a $110 million one-year unsecured line of credit (the "Line of Credit"). In September 1999, United Dominion obtained the Line of Credit from eight banks which provides United Dominion with access to up to $110 million in unsecured bank credit. The $110 million Line of Credit replaced an expiring line of credit in the amount of $50 million and provides United Dominion with access to an additional $60 million in funding. In September 1999, United Dominion's $15 million uncommitted line of credit with a major U.S. financial institution expired. At and for the nine months ended September 30, 1999, United Dominion had the following credit facilities (dollars in thousands): Three Months Ended September 30, 1999 At September 30, 1999 -------------------------------------- ----------------------- Weighted Average 15 Amount of Amount Weighted Average Amount Weighted Average Facility Facility Outstanding Interest Rate Outstanding Interest Rate - ------------------------------------------------------------------------- ------------------------------- Bank Credit Facility $ 200,000 $194,862 5.8% $194,800 6.0% Line of Credit 110,000 33,461 6.1% 50,000 6.4% ---------- ------------------------ ------------------------ $ 310,000 $228,323 5.8% $ 244,800 6.0% ========== ======================== ======================== Derivative Instruments United Dominion 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 nine months ended September 30, 1999. Market Risk Disclosures United Dominion is exposed to market risk principally from interest rate risk associated with variable-rate notes payable and maturing debt that has to be refinanced. A large portion of United Dominion's market risk is exposure to short-term interest rate fluctuations on variable-rate borrowings outstanding under its various bank credit facilities, which was $244.8 million at September 30, 1999 and borrowings of $195.7 million outstanding under its revolving credit facility with FNMA. The impact on United Dominion's financial statements of refinancing fixed-rate debt that matured during the third quarter was not material. United Dominion's market risk has not changed materially from the amounts reported in United Dominion's Annual Report on Form 10-K for the year ended December 31, 1998. Funds from Operations Funds from operations ("FFO") is defined as income before gains (losses) on sales of investments, minority interests 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. United Dominion computes FFO in accordance with the recommendations set forth by the National Association of Real Estate Investment Trusts ("NAREIT"). United Dominion 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 United Dominion'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 nine months ended September 30, 1999, FFO increased 28.8% to $132.2 million, compared with $102.7 million for the same period last year. The increase in FFO was principally due to the increased net rental income from United Dominion's apartment homes acquired and developed subsequent to January 1, 1998 as well as increased property operating income from its same community portfolio. Three Months Ended Nine Months Ended September 30, September 30, (in thousands) (in thousands) -------------------------- ----------------------------- 1999 1998 % Change 1999 1998 % Change -------------------------- ----------------------------- Calculation of funds from operations: Income before gains on sales of investments; minority interests and extraordinary items $ 20,521 $ 13,872 47.9% $ 52,851 $ 46,797 12.9% Adjustments: Real estate depreciation, net of outside partners' interest 29,651 26,901 10.2% 89,902 73,376 22.5% Minority interests of outside partnerships (276) -- -- (657) -- -- 16 Distributions to preferred shareholders (9,441) (5,650) 67.1% (28,320) (16,953) 67.1% Impairment loss on real estate owned -- -- -- 7,100 -- -- Adjustment for internal acquisition costs -- -- -- -- (544) -- -------------------------- ----------------------------- Funds from operations-basic $ 40,455 $ 35,123 15.2% $ 120,876 $ 102,676 17.7% ========================== ============================= Adjustments: Distributions to preferred shareholders- Series D (Convertible) 3,788 -- -- 11,367 -- -- -------------------------- ----------------------------- Funds from operations-diluted $ 44,243 $ 35,123 26.0% $ 132,243 $ 102,676 28.8% ========================== ============================= Results of Operations United Dominion's net income is primarily generated from the operations of its apartment communities. For purposes of evaluating its comparative operating performance, United Dominion 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 the first nine months of 1999 and 1998 and (ii) non-mature--those communities acquired, developed or sold subsequent to January 1, 1998. For the three and nine months ended September 30, 1999, United Dominion reported increases over the same period last year in rental income and rental expenses. United Dominion's 122 non-mature communities with 30,824 apartment homes provided a substantial portion of the aggregate reported increases. Compared to the same periods last year, the acquisition and development of these non-mature communities resulted in an increase in the weighted average number of apartment homes by 18.4% and 26.0% for the three and nine months ended September 30, 1999, respectively. Same Communities The operating performance for the three and nine months ended September 30, 1999 and 1998 is summarized below (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ----------------------------- 1999 1998 % Change 1999 1998 % Change -------------------------- ----------------------------- Property rental income $ 97,212 $ 94,765 2.6% $ 287,502 $ 278,980 3.1% Property operating expenses (excluding depreciation and amortization) (38,711) (38,984) (0.7)% (113,219) (112,547) 0.6% -------------------------- ----------------------------- Property operating income $ 58,501 $ 55,781 4.9% $ 174,283 $ 166,433 4.7% ========================== ============================== Physical occupancy 93.2% 94.0% (0.8)% 92.6% 93.1% (0.5)% Average monthly rental rates $ 630 $ 610 3.3% $ 625 $ 604 3.5% Operating margin 60.2% 58.9% 1.3% 60.6% 59.6% 1.0% For the three and nine months ended September 30, 1999, same community property operating income was strong, increasing 4.9% and 4.7%, respectively, over the same periods last year. During the first nine months of 1999, property rental income for the same communities grew 3.1%, or $8.5 million over the same period last year. The increase was attributable to an increase in average monthly rents of 3.5% to $625 per home that was offset by a slight decrease of 0.5% in physical occupancy to 92.6%. For the quarter ended September 30, 1999, property rental income grew 2.6% or $2.4 million, reflecting an increase in average monthly rents of 3.3% to $630 per home that was offset by a decrease of 0.8% in physical occupancy to 93.2%. United Dominion expects to maintain annualized rent growth in the 3% range during the remainder of the year. For the nine months ended September 30, 1999, property operating expenses at the same communities increased 0.6%, or $672 thousand. Utility expenses decreased due to further progress on water sub-metering reimbursements, repair and maintenance expense decreased due to benefit from the upgrade program undertaken during the past several years and management expenses decreased due to better economies of scale. However, United Dominion did experience increases in real estate taxes due to general increases in property tax rates or revaluations. In addition, personnel costs increased due to higher salaries and benefit costs and administrative and marketing costs increased due to the addition of monitored alarms in more communities during 1999 and higher technology costs. For the 17 quarter, rental expenses were relatively flat, decreasing 0.7% or $273 thousand for the same reasons previously described. United Dominion expects to maintain annualized expense growth in the 2% range during the remainder of 1999. For the nine month period, the operating margin (property operating income divided by property rental income) improved 1.0% to 60.6% primarily as a result of increased property rental income during this period. For the three month period, the operating margin improved 1.3% to 60.2%. Non-Mature Communities The operating performance for the three and nine months ended September 30, 1999 and 1998 is summarized in the chart below (dollars in thousands): THREE MONTHS ENDED SEPTEMBER 30: Disposition Development Total Non-Mature 1998 Acquisitions 1999 Acquisitions Communities Communities Communities ----------------- ----------------- ------------- --------------- ---------------- 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 ----------------- ----------------- ------------- --------------- ---------------- Property rental income $ 51,870 $ 21,354 $ 1,422 $ -- $ 911 $ 5,955 $ 3,785 $ 1,006 $ 57,988 $ 28,315 Property operating expenses (excluding depreciation and amortization) (20,035) (10,176) (603) -- (696) (2,885) (1,755) (477) (23,089) (13,538) ----------------- ----------------- ------------- --------------- ---------------- Property operating income $ 31,835 $ 11,178 $ 819 $ -- $ 215 $ 3,070 $ 2,030 $ 529 $ 34,899 $ 14,777 ==================== ================= ================ ================= =================== NINE MONTHS ENDED SEPTEMBER 30: Disposition Development Total Non-Mature 1998 Acquisitions 1999 Acquisitions Communities Communities Communities ----------------- ----------------- ------------- --------------- ---------------- 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 ----------------- ----------------- ------------- --------------- ---------------- Property rental income $ 153,500 $ 41,756 $ 2,304 $ -- $ 10,909 $ 22,119 $ 8,470 $ 2,195 $ 175,183 $ 66,070 Property operating expenses (excluding depreciation and amortization) (60,598) (18,759) (1,033) -- (5,200) (10,407) (4,204) (1,087) (71,035) (30,253) ----------------- ----------------- ------------- --------------- ---------------- Property operating income $ 92,902 $ 22,997 $ 1,271 $ -- $ 5,709 $ 11,712 $ 4,266 $ 1,108 $ 104,148 $ 35,817 ==================== ================= ================ ================= =================== For the quarter ended September 30, 1999, the non-mature communities had physical occupancy of 93.1% (excluding Development Properties undergoing lease-up) and an operating margin of 60.2%. For the nine months ended September 30, 1999, these communities had physical occupancy of 92.4% and an operating margin of 59.5%. 1998 Acquisitions 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 was on target with United Dominion's pro forma acquisition expectations of a 9% return on investment for the first year of ownership. During the nine months ended September 30, 1999, the AAC portfolio provided an annualized first year return on investment of 8.9% on an average investment of $779 million. For the quarter, on an average investment of $781 million, the return on investment was 9.4%. These communities achieved physical occupancy of 94.0% and 93.5% for the three and nine months periods, which is higher than United Dominion's average physical occupancy primarily due to the California communities included in this portfolio. 1998 Acquisitions (Excluding AAC) Included in this category are 56 communities with 13,577 apartment homes acquired in individual, portfolio and merger transactions by United Dominion during 1998 (net of seven communities with 932 apartment homes sold). The return on investment (property rental income less property operating expenses divided by the average capital investment in real estate) for these communities for the nine months ended September 30, 1999, on an average investment of $631 million, was 8.3%. For the quarter, on an average investment of $640 million, the return on investment was 8.1%. These communities continue to be upgraded and repositioned which should improve their operating results over the long-term. In addition, these communities are an active area of the disposition program. 18 1999 Acquisitions Included in this category are three communities with 854 apartment homes acquired by United Dominion during the first nine months of 1999 that are projected to have a first year average return on investment in the 8.5% to 9% range. These communities did not have a material impact on 1999 results of operation. Disposition Communities Included in this category are the 36 communities with 8,953 apartment homes sold as part of United Dominion's strategic repositioning (see Disposition of Investments under Liquidity and Capital Resources) since January 1, 1998. The communities sold during 1998 and 1999 had an annualized return on investment between 9% and 11%. Development Communities This represents the 2,034 homes developed at various times since January 1, 1998, which included the completion of three new communities and one additional phase to an existing community during the first nine months of 1999. Once stabilized, development communities are projected to generate an average return on investment in excess of approximately 10%, however, the full impact on property operating income is not realized until after the communities are stabilized, which is generally six months after construction is completed. United Dominion considers a development community stabilized on the earlier to occur of (i) one year after completion of construction or (ii) attainment of 90% physical occupancy. Construction activity is staged to allow for leasing and occupancy during the construction period in order to minimize the lease-up period subsequent to the completion of construction. All Communities The operating performance for the three and nine months ended September 30, 1999 and 1998 is summarized in the chart below (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ------------------------------- 1999 1998 % Change 1999 1998 % Change --------------------------------- ------------------------------- Property rental income $ 155,200 $ 123,080 26.1% $ 462,685 $ 345,050 34.1% Property operating expenses (excluding depreciation and amortization) (61,800) (52,522) 17.7% (184,254) (142,800) 29.0% --------------------------------- ------------------------------- Property operating income $ 93,400 $ 70,558 32.3% $ 278,431 $ 202,250 37.7% ================================= =============================== Weighted average number of apartment homes 85,673 72,365 18.4% 86,590 68,723 26.0% Physical occupancy 93.2% 92.2% 1.0% 92.5% 91.6% 0.9% Due to the impact of the acquisition and development of 31,398 apartment homes since January 1, 1998, the increase in the weighted average number of apartment homes for the three and nine months ended September 30, 1999 resulted in significant increases in property rental income and property operating expenses for both the three and nine months ended September 30, 1999. Reast Estate Depreciation Real estate depreciation increased $3.0 million or 11.4% and $17.4 million or 23.8% for the three and nine months ended September 30, 1999, respectively over the same period last year. This increase is directly attributable to the addition of depreciable real estate assets as a result of United Dominion's acquisition, development and capital expenditure programs during 1998 and 1999. Interest Expense Interest expense increased $11.8 million and $40.2 million for the three and nine months ended September 30, 1999, respectively, over the same period last year as the weighted average amount of debt employed during 1999 was higher than it was for the same periods last year primarily due to debt assumed and issued during 1998 to fund United Dominion's investment activities. For the nine month period, the weighted average debt outstanding was $2.2 billion in 1999 versus $1.4 billion in 1998 and for the three month period it was $2.2 billion in 1999 versus $1.5 billion in 1998. For both the three and nine months ended September 30, 1999, the weighted average interest rate on this debt was 7.4%, reflecting no change from the same periods last year. For the three and nine months ended September 30, 1999, total interest capitalized was $1.1 million and $4.3 million, respectively. For the three and nine months ended September 30, 1998, total interest capitalized was $910 thousand and $2.2 million, respectively. 19 General and Administrative During the three and nine months ended September 30, 1999, general and administrative expenses increased $531 thousand and $2.2 million, respectively over the same period last year primarily due to (i) the added infrastructure costs incurred due to the increased size of United Dominion, (ii) the change in accounting for internal acquisition costs subsequent to March 19, 1998 commencing with the adoption of EITF No 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions", which required that United Dominion expense direct internal costs related to identifying and acquiring operating properties, and (iii) severance compensation fully expensed during the first quarter of 1999. Distribution to Preferred Shareholders Distributions to preferred shareholders increased $3.8 million and $11.4 million for the three and nine months ended September 30, 1999, respectively over the same periods last year. The increase is the result of the issuance of 8 million shares of 7.5% Series D Cumulative Convertible Redeemable Preferred Stock on December 7, 1998 in connection with the acquisition of AAC. Inflation United Dominion believes that the direct effects of inflation on United Dominion's operations have been inconsequential. Information Technology United Dominion is currently engaged in the development of an innovative on-site property management system and a leasing automation system (the `systems") to enable management to capture, review and analyze data to a greater extent than is possible using available existing commercial software. United Dominion believes these new systems will enable the company to become a more efficient provider of a high quality living environment for our current residents, and provide the scalability necessary to support future growth. United Dominion intends to enter into a formal joint venture with another public multifamily real estate company, our joint venture partner, and to continue development of these systems and system software, through the joint venture entity. The system development process is currently managed by the employees of United Dominion who have significant related project management experience and the employees of the joint venture partner. The actual programming and documentation of the system is being conducted by these employees and third party consultants under the supervision of these experienced project managers. Current projections indicate that total development costs over a three-year period will be approximately $7.5 million (including hardware costs and expenses, the costs of employees and related overhead, and the costs of engaging third party consultants) and that such development costs will be shared on an equal basis by the joint venture partners. Once developed, the systems would be used in place of current property management information systems for which a license fee is paid to third parties. The leasing automation system would be used to make the lease application process easier for residents and more efficient for United Dominion. The systems are currently projected to undergo an on-site test (i.e., a "beta test") during the second quarter of 2000 and the systems should be functional by the fourth quarter of 2000. The leasing automation system is currently in beta testing at two communities and we intend, if such testing is successful, to implement the system during the first quarter of 2000. Neither United Dominion nor its joint venture partner have been engaged in the development of systems software. There are several risks associated with the development of the systems for internal use, such as: (i) the inability to maintain the schedule or budget that has been projected for the development and implementation of the software, and (ii) the systems may not have with the functionality and efficiencies desired. 20 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 United Dominion'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. United Dominion 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. United Dominion 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 United Dominion completed a formalized and thorough assessment of its Year 2000 issues, United Dominion engaged an outside consulting firm to conduct a Year 2000 assessment and develop a remediation plan. The plan covers four stages: (i) inventory, (ii) assessment, (iii) remediation and (iv) testing and certification. Because United Dominion 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. Remediation of all desktop hardware and software will be completed by November 30, 1999. None of the non-compliance issues identified were mission-critical. During the first quarter of 1999, United Dominion commenced the assessment phase for non-IT operating equipment at its communities (gates, security, telephone, elevator, HVAC systems and other such systems). This assessment was completed in August 1999, with remediation to be completed by November 30, 1999. United Dominion also assessed the Year 2000 compliance of vendors and other external relationships to determine the extent to which United Dominion may be vulnerable to such parties' failure to resolve their own Year 2000 issues. United Dominion initiated formal communication with these parties. United Dominion 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 United Dominion's results of operations from the failure of such third parties to be Year 2000 compliant is not reasonably estimable. United Dominion estimates that the total Year 2000 project cost will be approximately $100,000, of which approximately 90% has been incurred as of September 30, 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 United Dominion's financial position, results of operations, or cash flows. United Dominion believes that its Year 2000 initiatives are adequate to address reasonably likely Year 2000 issues. - ---------------------------- -------------------------- -------------------------- -------------------------- Assessment Remediation / Testing % Complete Compliance Completion - ---------------------------- -------------------------- -------------------------- -------------------------- IT - Mission-Critical Applications 100% 100% November 1999 - ---------------------------- -------------------------- -------------------------- -------------------------- IT - Desktop Hardware / Software 100% 100% November 1999 - ---------------------------- -------------------------- -------------------------- -------------------------- IT - Network Hardware / Software 100% 100% November 1999 - ---------------------------- -------------------------- -------------------------- -------------------------- Operating Equipment Expected at Communities 100% 100% Completion, November 30, 1999 - ---------------------------- -------------------------- -------------------------- -------------------------- 21 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, United Dominion is dependent on the power and telecommunications infrastructure within the United States. The most reasonably likely worst case scenario would be that United Dominion may experience disruption in its operations if any of the third-party suppliers reported a system failure. Although United Dominion'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, United Dominion is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact. The final phase of United Dominion's Year 2000 project relates to a contingency plan. United Dominion maintains contingency plans in the normal course of business designed to be deployed in the event of various potential business interruptions. 22 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 I, Item 2 of this Form 10-Q included in Management's Discussion and Analysis of Financial Condition and Results of Operations. 23 PART II ITEM 1. LEGAL PROCEEDINGS Neither the Company nor any of its apartment communities is presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company or any of the communities, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. 24 EXHIBIT INDEX Item 6 (a) The exhibits listed below are filed as part of this Quarterly Report. References under the caption Location to exhibits, forms, or other filings indicate that the form or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. Exhibit Description Location - ------- ----------- --------- 2(a) Agreement and Plan of Merger dated Exhibit 2(a) to the Company's Form S-4 Registration as of December 19, 1997, between Statement (Registration No. 333-45305) filed with Company, ASR Investment the 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 Company's 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 Company's 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 Company's 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 Company's Annual Report on Form 10-K for the year ended December 31, 1998. 25 4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report Certificate on Form 10-K for the year ended December 31, 1993. 4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995. Redeemable Preferred Stock 4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 8.60% Series B Cumulative Registration Statement dated June 11, 1997. Redeemable Preferred Stock 4(i)(d) Rights Agreement dated as of Exhibit 1 to the Company's 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)(d)(A) First Amended and Restated Rights Filed herewith. Agreement dated as of September 14, 1999, between the Company and ChaseMellon Sharelholder Services, L.L.C., as Rights Agent 4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Company's Form 8-A Registration Statement dated February 4, 1998. 4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A as of February 15, 1993, between Registration Statement dated April 19, 1990. the Company and CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company, Connecticut General Life Insurance Company, on behalf of one or more separate accounts, Insurance Company of North America, Principal Mutual Life Insurance Company and Aid Association for Lutherans 4(ii)(f) 364-day Credit Agreement dated Filed herewith. as of September 16, 1999, between the Company and certain subsidiaries and a syndicate of banks represented by Bank of America, N.A. 10(i) Employment Agreement between Exhibit 10(i) to the Company's 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 Company's Annual Report theCompany and John S. Schneider on Form 10-K for the year ended December 31, dated December 8,1998. 1998. 26 10(iii) Employment Agreement between Exhibit 10(iii) to the Company's Annual Report the Company and Richard Giannotti on Form 10-K for the year ended December 31, dated December 8, 1998. 1998. 10(iv) Employment Agreement between Filed herewith. the Company and A. William Hamill dated September 30, 1999. 10(v) 1985 Stock Option Plan, Exhibit 10(iv) to the Company's Quarterly as amended. Report on Form 10-Q for the quarter ended June 30, 1998. 10(vi) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Company's Quarterly Report Plan. on Form 10-Q for the quarter ended March 31, 1997. 10(vii) Third Amended and Restated Exhibit 10(vi) to the Company's 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(vii)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Company's Form 10-Q for April 16, 1998, between the the quarter ended March 31, 1998. Company and United Dominion Realty, L.P. 10(viii) Servicing and Purchase Exhibit 10(vii) to the Company's Form 10-Q for Agreement dated as of June 24, the quarter ended June 30, 1999. 1999, including as an exhibit thereto the Note and Participation Agreement forms. 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges. 27 Financial Data Schedule. Filed herewith. 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. 27 United Dominion Realty Trust, Inc. - ---------------------------------- (registrant) Date: November 12, 1999 /s/ A. William Hamill - ----------------------- ----------------------------- A. William Hamill Executive Vice President and Chief Financial Officer Date: November 12, 1999 /s/ Robin R. Flanagan - ----------------------- ----------------------------- Robin R. Flanagan Assistant Vice President and Chief Accounting Officer 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. 28