10-Q 1 0001.txt FORM 10Q 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 June 30, 2000 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 August 1, 2000: Common Stock, $1 Par Value: 103,483,067 UNITED DOMINION REALTY TRUST, INC. FORM 10-Q INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999............................. 2 Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999... 3 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999............. 4 Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2000............ 5 Notes to Consolidated Financial Statements........................................................ 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................................ 12-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................................. 23 Item 2. Changes in Securities.............................................................................. 23 Item 3. Defaults Upon Senior Securities.................................................................... 23 Item 4. Submission of Matters to a Vote of Security Holders................................................ 23 Item 5. Other Information.................................................................................. 23 Item 6. Exhibits and Reports on Form 8-K................................................................... 23-27 Signatures ..................................................................................................... 28
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except for share data) (Unaudited)
June 30, December 31, 2000 1999 ---- ---- ASSETS Real estate owned: Real estate held for investment (Note 2) $ 3,792,850 $ 3,577,848 Less: accumulated depreciation (457,452) (373,164) ------------ -------------- 3,335,398 3,204,684 Real estate under development 66,917 91,914 Real estate held for disposition (net of accumulated depreciation of $8,781 and $22,700) (Note 3) 43,909 260,583 ------------ -------------- Total real estate owned, net of accumulated depreciation 3,446,224 3,557,181 Cash and cash equivalents 9,338 7,678 Restricted cash 54,304 56,969 Deferred financing costs 15,497 13,511 Investment in unconsolidated joint ventures (Note 7) 10,865 2,614 Other assets 49,500 50,364 ------------ -------------- Total assets $ 3,585,728 $ 3,688,317 ============ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Secured debt (Note 4) $ 927,709 $ 1,000,136 Unsecured debt (Note 5) 1,147,416 1,127,169 Real estate taxes payable 35,598 30,887 Accrued interest payable 19,816 17,867 Security deposits and prepaid rent 21,977 20,738 Distributions payable 36,562 36,020 Accounts payable, accrued expenses and other liabilities 38,527 51,121 ------------ -------------- Total liabilities 2,227,605 2,283,938 Minority interests 91,239 94,167 Shareholders' equity Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized; 4,145,020 shares 9.25% Series A Cumulative Redeemable issued and outstanding 103,626 104,214 (4,168,560 in 1999) 5,581,489 shares 8.60% Series B Cumulative Redeemable issued and outstanding 139,537 148,658 (5,946,300 in 1999) 8,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (8,000,000 in 1999) 175,000 175,000 Common stock, $1 par value; 150,000,000 shares authorized 103,487,168 shares issued and outstanding (102,740,777 in 1999) 103,487 102,741 Additional paid-in capital 1,091,887 1,083,687 Distributions in excess of net income (338,079) (296,030) Deferred compensation - unearned restricted stock awards (899) (305) Notes receivable from officer-shareholders (7,675) (7,753) ------------ -------------- Total shareholders' equity 1,266,884 1,310,212 ------------ -------------- Total liabilities and shareholders' equity $ 3,585,728 $ 3,688,317 ============ ============== 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 June 30, Six Months Ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES Rental income $ 155,144 $ 154,430 $ 309,202 $ 308,221 Non-property income 1,980 483 3,049 930 --------- --------- --------- --------- Total revenues 157,124 154,913 312,251 309,151 EXPENSES Rental expenses: Real estate taxes and insurance 17,684 16,515 35,167 32,510 Personnel 16,586 16,411 33,024 33,039 Repair and maintenance 9,130 10,448 17,662 19,705 Utilities 6,197 7,390 12,731 15,639 Administrative and marketing 6,065 6,432 11,966 12,435 Property management 4,760 4,784 9,404 9,296 Other operating 331 281 755 678 Real estate depreciation 44,054 31,465 77,958 60,857 Interest 39,752 38,918 78,826 76,997 Impairment loss on real estate and investments - 7,100 - 7,100 General and administrative 3,698 2,750 7,568 6,444 Other depreciation and amortization 1,250 1,030 2,453 2,121 --------- --------- --------- --------- Total expenses 149,507 143,524 287,514 276,821 --------- --------- --------- --------- Income before gains on sales of investments, minority interests and extraordinary item 7,617 11,389 24,737 32,330 Gains on sales of investments 5,928 32,214 8,461 32,405 --------- --------- --------- --------- Income before minority interests and extraordinary item 13,545 43,603 33,198 64,735 Minority interests of outside partners (560) (214) (737) (381) Minority interests of unitholders in operating partnerships (294) (3,098) (962) (3,981) --------- --------- --------- --------- Income before extraordinary item 12,691 40,291 31,499 60,373 Extraordinary item - early extinguishment of debt 586 509 358 509 --------- --------- --------- --------- Net income 13,277 40,800 31,857 60,882 Distributions to preferred shareholders - Series A and B (5,396) (5,653) (10,979) (11,306) Distributions to preferred shareholders - Series D (Convertible) (3,825) (3,787) (7,650) (7,573) Discount on preferred share repurchases 2,177 - 2,177 - --------- --------- --------- --------- Net income available to common shareholders $ 6,233 $ 31,360 $ 15,405 $ 42,003 ========= ========= ========= ========= Earnings per common share (Note 6): Basic $ 0.06 $ 0.30 $ 0.15 $ 0.40 ========= ========= ========= ========= Diluted $ 0.06 $ 0.30 $ 0.15 $ 0.40 ========= ========= ========= ========= Common distributions declared per share $ 0.2675 $ 0.2650 $ 0.5350 $ 0.5300 ========= ========= ========= ========= Weighted average number of common shares outstanding-basic 103,271 104,324 103,087 104,274 Weighted average number of common shares outstanding-diluted 103,470 104,338 103,258 104,284
See accompanying notes to consolidated financial statements. 3 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 2000 1999 ----------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 31,857 $ 60,882 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 80,411 62,978 Minority interests 1,699 4,362 Impairment loss on real estate owned - 7,100 Extraordinary item-early extinguishment of debt (358) (509) Amortization of deferred financing costs and other 2,153 1,729 Gains on sales of investments (8,461) (32,405) Changes in operating assets and liabilities: Decrease in operating liabilities (5,098) (14,325) Decrease/(increase) in operating assets 400 (9,151) -------- ------ Net cash provided by operating activities 102,603 80,661 INVESTING ACTIVITIES Proceeds from sales of investments 87,083 99,790 Proceeds received for excess expenditures over investment contribution in development joint venture 34,215 - Development of real estate assets (54,646) (56,597) Capital expenditures - real estate assets, net of escrow reimbursements (16,060) (32,529) Acquisition of real estate assets (14,765) (26,250) Capital expenditures - non real estate assets (2,233) (3,155) Funds held in escrow from tax free exchanges pending the acquisition of real estate - (32,936) Net cash paid in connection with mergers - (4,331) Other - 1,132 ------- ------ Net cash provided by/(used in) investing activities 33,594 (54,876) FINANCING ACTIVITIES Net reduction in secured debt (71,875) (21,993) Net increase in unsecured debt 20,650 73,727 Payment of financing costs (3,807) (4,790) Proceeds from the issuance of common stock 7,429 8,685 Distributions paid to minority interests (4,785) (7,026) Distributions paid to preferred shareholders (18,555) (16,078) Distributions paid to common shareholders (55,277) (52,787) Repurchase of common and preferred stock (8,317) (3,070) -------- --------- Net cash (used in) financing activities (134,537) (23,332) Net increase in cash and cash equivalents 1,660 2,453 Cash and cash equivalents, beginning of period 7,678 26,081 ------- ------ Cash and cash equivalents, end of period $ 9,338 $ 28,534 ======== ======== SUPPLEMENTAL INFORMATION: Interest paid during the period $ 76,399 $ 84,975 Conversion of operating partnership units to common stock 626 1,005 Issuance of restricted stock awards 829 476 Non-cash transactions associated with the acquisition of properties: Secured debt assumed 10,130 -
See accompanying notes to consolidated financial statements. 4 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2000 (In thousands, except per share data) (Unaudited) PREFERRED STOCK Balance, December 31, 1999 $ 427,872 Repurchase of preferred stock (9,709) ----------- Balance, June 30, 2000 $ 418,163 =========== COMMON STOCK, $1 PAR VALUE Balance, December 31, 1999 $ 102,741 Issuance of common shares through dividend reinvestment and stock purchase plan 767 Repurchase of common stock (26) Purchase of restricted stock awards (86) Issuance of restricted stock awards 86 Conversion of operating partnership units 5 ----------- Balance, June 30, 2000 $ 103,487 =========== ADDITIONAL PAID-IN CAPITAL Balance, December 31, 1999 $ 1,083,687 Issuance of common shares through dividend reinvestment and stock purchase plan 6,547 Repurchase of preferred stock 2,478 Repurchase of common stock (231) Issuance of common shares to employees, officers and director-shareholders 37 Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships (631) ----------- Balance, June 30, 2000 $ 1,091,887 =========== NOTES RECEIVABLE FROM OFFICER-SHAREHOLDERS Balance, December 31, 1999 $ (7,753) Principal repayments from officer-shareholders 78 ----------- Balance, June 30, 2000 $ (7,675) =========== DISTRIBUTIONS IN EXCESS OF NET INCOME Balance, December 31, 1999 $ (296,030) Net income 31,857 Common stock distributions declared ($.535 per share) (55,277) Preferred stock distributions declared-Series A ($1.16 per share) (4,794) Preferred stock distributions declared-Series B ($1.08 per share) (6,185) Preferred stock distributions declared-Series D ($.96 per share) (7,650) ----------- Balance, June 30, 2000 $ (338,079) =========== DEFERRED COMPENSATION-UNEARNED RESTRICTED STOCK AWARDS Balance, December 31, 1999 $ (305) Issuance of restricted stock awards (829) Amortization of deferred compensation 235 ----------- Balance, June 30, 2000 $ (899) =========== TOTAL SHAREHOLDERS' EQUITY $ 1,266,884 ===========
See accompanying notes to consolidated financial statements. 5 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P., (the "Operating Partnership"), and Heritage Communities L.P., (the "Heritage OP"), (collectively, "United Dominion"). As of June 30, 2000, there were 74,463,788 units in the Operating Partnership outstanding, of which, 67,624,603, or 90.8%, were owned by United Dominion and 6,839,185, or 9.2%, were owned by non-affiliated limited partners. As of June 30, 2000, there were 4,502,668 units in the Heritage OP outstanding, of which 3,839,330, or 85.3%, were owned by United Dominion and 663,338 units, or 14.7%, were owned by non-affiliated limited partners. The consolidated 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, 1999 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 June 30, 2000 and results of operations for the interim periods ended June 30, 2000 and 1999. 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 June 30, 2000 there are 286 communities with 79,206 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment at June 30, 2000 and December 31, 1999 (dollars in thousands):
June 30, December 31, 2000 1999 ----------- ----------- Land and land improvements $ 564,546 $ 636,905 Buildings and improvements 3,037,692 2,767,940 Furniture, fixtures and equipment 188,344 166,826 Construction in progress 2,268 6,177 ----------- ----------- Real estate held for investment 3,792,850 3,577,848 Accumulated depreciation (457,452) (373,164) ----------- ----------- Real estate held for investment, net of accumulated depreciation $3,335,398 $3,204,684 =========== ===========
6 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 3. Real Estate Held for Disposition At June 30, 2000, United Dominion had eight communities with 1,428 apartment homes, three commercial properties and one parcel of land included in real estate held for disposition totaling $43.9 million, which is net of $8.8 million of accumulated depreciation. Certain assets are secured by mortgage indebtedness, which may be assumed by the purchaser or repaid from the net proceeds. Real estate held for disposition contributed property operating income (property rental income less property operating expense) of $2.7 million and $2.6 million for the six months ended June 30, 2000 and 1999, respectively. Properties held for disposition reflect properties management has committed to sell during the next twelve months. The management of United Dominion periodically reviews its divestiture program, which is designed to better position the company for achieving more consistent earnings growth and increasing shareholder value over the long-term. The factors considered in these reviews include the age, quality and projected operating income of communities that might be sold, the expected market value for the communities, the estimated timing for completion of sales and the proforma effect of sales upon United Dominion's earnings and financial position. After a review undertaken in the second quarter of 2000, management transferred approximately $197 million of assets from real estate held for disposition to real estate held for investment and, as a result, approximately $10 million in catch up depreciation expense was recognized on the communities transferred. Also, during the second quarter 2000 review, management reaffirmed its objective to sell approximately $200 million of non-core properties during 2000. 4. Secured Debt Secured debt, which encumbers $1.8 billion or 45.0% of United Dominion's real estate owned, ($2.1 billion or 55.0% of United Dominion's real estate owned is unencumbered) consists of the following at June 30, 2000 (dollars in thousands):
No. of Weighted Avg. Weighted Avg. Communities Principal Outstanding Interest Rate Years to Maturity Encumbered -------------------------------------------------------------------------------- 2000 1999 2000 2000 2000 -------------------------------------------------------------------------------------------------------------------- Fixed Rate Debt Mortgage Notes Payable (a) $544,299 $ 555,414 7.82% 6.4 82 Tax-Exempt Secured Notes Payable 95,968 96,699 6.92% 12.0 13 REMIC Financings 53,267 59,167 7.82% 0.5 20 Secured Credit Facilities (b) 57,000 57,000 6.65% 13.5 -- -------------------------------------------------------------------------------- Total Fixed Rate Secured Debt 750,534 768,280 7.62% 7.2 115 Variable Rate Debt Secured Credit Facilities 138,675 138,675 6.60% 13.5 19 Tax-Exempt Secured Notes Payable 19,916 66,616 4.81% 25.0 3 Mortgage Notes Payable 18,584 26,565 7.40% 12.2 9 -------------------------------------------------------------------------------- Total Variable Rate Secured Debt 177,175 231,856 6.48% 14.7 31 -------------------------------------------------------------------------------- Total Secured Debt $927,709 $1,000,136 7.40% 8.7 146 ================================================================================
(a) Includes fair value adjustments aggregating $13.1 million recorded in connection with the ASR Merger and the AAC Merger on March 27, 1998 and December 7, 1998, respectively. (b) During 1999, United Dominion closed on a $200 million revolving credit facility with the Federal National Mortgage Association (the "FNMA Credit Facility"). At June 30, 2000, the FNMA Credit Facility had a weighted average floating rate of interest of 6.61%. In order to limit a portion of its interest rate exposure on the Credit Facility, United Dominion entered into three forward rate swap agreements. These agreements have an aggregate notional value of $57 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreements effectively change United Dominion's interest rate exposure on $57 million of secured debt from a variable rate to a weighted average fixed rate of 6.65%. 7 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) Approximate principal payments due during each of the next five calendar years and thereafter, as of June 30, 2000, are as follows (dollars in thousands):
Amount Year Maturing --------------------------------- 2000 $ 46,893 2001 95,512 2002 52,625 2003 49,229 2004 125,707 Thereafter 557,743 ----------- Total $927,709 ===========
5. Unsecured Debt A summary of unsecured debt at June 30, 2000 and December 31, 1999 is as follows (dollars in thousands):
2000 1999 ---------- ---------- Commercial Banks Borrowings outstanding under an unsecured credit facility (a) (b) $ 187,300 $ 277,600 Senior Unsecured Notes - Other 8.13% Senior Notes due November 2000 144,260 146,150 7.60% Medium-Term Notes due January 2002 50,000 55,000 7.65% Medium-Term Notes due January 2003 (c) 10,000 10,000 7.22% Medium-Term Notes due February 2003 12,000 12,000 5.05% City of Portland, OR Bonds due October 2003 7,345 7,345 8.63% Notes due March 2003 99,000 -- 7.98% Notes due March, 2000-2003 (d) 22,371 29,800 7.67% Medium-Term Notes due January 2004 54,000 54,000 7.73% Medium-Term Notes due April 2005 22,400 23,400 7.02% Medium-Term Notes due November 2005 50,000 50,000 7.95% Medium-Term Notes due July 2006 108,155 120,340 7.07% Medium-Term Notes due November 2006 25,000 25,000 7.25% Notes due January 2007 110,825 111,825 ABAG Tax-Exempt Bonds due August 2008 46,700 -- 8.50% Monthly Income Notes due November 2008 58,233 59,778 8.50% Debentures due September 2024 (e) 135,398 140,000 Other (f) 4,429 4,931 ---------- ---------- 960,116 849,569 ---------- ---------- Total Unsecured Debt $1,147,416 $1,127,169 ========== ==========
(a) Weighted average interest rate of 7.6% and 6.7% at June 30, 2000 and December 31, 1999, respectively. 8 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) (b) As of June 30, 2000, United Dominion had three interest rate swap agreements associated with commercial bank borrowings with an aggregate notional value of $20 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 swaps effectively change United Dominion's interest rate exposure on these borrowings from a variable rate to a weighted average fixed rate of approximately 7.2%. (c) United Dominion has one interest rate swap agreement associated with these 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%. (d) Payable annually in three equal principal installments of $7.4 million. (e) Includes an investor put feature which grants a one-time option to redeem the debentures in September 2004. (f) Includes $4.2 million and $4.6 million at June 30, 2000 and December 31, 1999, respectively, of deferred gains from the termination of interest rate risk management agreements. 6. 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 following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share data):
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 ----------------------------------- ----------------------------------- Numerator for basic and diluted earnings per share- net income available to common shareholders $ 6,233 $ 31,360 $ 15,405 $ 42,003 Denominator: Beginning denominator for basic earnings per share-weighted average common shares outstanding 103,388 104,324 103,204 104,274 Non-vested restricted stock (117) - (117) - -------------- --------------- -------------- --------------- Denominator for basic earnings per share 103,271 104,324 103,087 104,274 -------------- --------------- -------------- --------------- Non-vested restricted stock 117 - 117 - Effect of dilutive securities: Employee stock options 82 14 54 10 -------------- --------------- -------------- --------------- Denominator for diluted earnings per share 103,470 104,338 103,258 104,284 ============== =============== ============== =============== Basic earnings per share $ 0.06 $ 0.30 $ 0.15 $ 0.40 ============== =============== ============== =============== Diluted earnings per share $ 0.06 $ 0.30 $ 0.15 $ 0.40 ============== =============== ============== ===============
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 9 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) calculations. If the operating partnership units were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2000 and 1999 would be 7,502,546 and 7,503,058 for 2000 and 8,363,908 and 8,476,792 for 1999, respectively. If the convertible preferred stock was converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2000 and 1999 would be 12,307,692 common shares. 7. Investment in Unconsolidated Joint Ventures At June 30, 2000, United Dominion's investment in unconsolidated joint ventures consists of a 25% partnership interest in a development joint venture in which the company is serving as the managing partner. No gain or loss was recognized on the company's contribution to the development joint venture. United Dominion has responsibility for the venture's operations and for the development of five apartment communities with a total of 1,438 homes for an aggregate total cost of approximately $105 million. During 1999, United Dominion entered into a joint venture with another public multifamily real estate company to develop a web- based apartment operating system. United Dominion's joint venture interest consists of a 40% limited liability company membership interest. The operating results for the joint ventures were not material for the six months ended June 30, 2000. The following is a combined summary of the financial position of the joint venture entities for the date presented (dollars in thousands):
As of June 30, 2000 ------------------ Assets: Real estate, net $51,712 Other assets 11,821 ---------- Total assets $63,533 ========== Liabilities and partners' equity: Mortgage notes payable $16,436 Other liabilities 8,535 Partners' equity 38,562 ---------- Total liabilities and partners' equity $63,533 ==========
8. Impact of Recently Issued Standards 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 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. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of SFAS No. 133," which addresses the application of a limited number of Statement 133 issues. United Dominion currently plans to adopt this pronouncement effective January 1, 2001. 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 material effect on earnings or the financial position of United Dominion. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles 10 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) to revenue recognition issues in financial statements. The Securities and Exchange Commission issued SAB 101B in June 2000 that further delays the effective date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Thus, United Dominion will adopt SAB 101 in the fourth quarter of 2000. Management does not anticipate that the adoption of SAB 101 will have a material effect on United Dominion's consolidated financial statements. 11 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The following information should be read in conjunction with the United Dominion Realty Trust, Inc. ("United Dominion") 1999 Form 10-K as well as the financial statements and notes included in Item 1 of 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 property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy and rental expense growth. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or 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, 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 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 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 is a real estate investment trust with activities related to the ownership, development, acquisition, renovation, management, marketing 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 core portfolio of apartment communities. Through a combination of dispositions and acquisitions over the past two years, United Dominion aggressively moved the company into better performing markets with attractive prospects for long-term growth. During this same period, more emphasis has been placed on higher quality development projects. This strategy resulted in the upgrade of the overall quality and average age of United Dominion's portfolio, which is now solidly positioned with "B" and "A" grade communities. United Dominion seeks to be a market leader by operating a sufficiently sized portfolio of apartments within each of its target markets in order to drive down operating costs through economies of scale and management efficiencies. United Dominion believes that geographic market diversification increases investment opportunities and decreases the risk associated with cyclical local real estate markets and economies. At June 30, 2000, United Dominion owned 294 communities with 80,734 apartment homes nationwide, including 8 communities with 1,428 completed apartment homes included in real estate held for disposition and 100 recently completed apartment homes included in real estate under development. 12 The following table summarizes United Dominion's apartment market information by major and other geographic markets:
As of June 30, 2000 ------------------------------------------------------ No. of % of Carrying No. of Apartment Carrying Value Area Properties Homes Value (in thousands) ---------------------------------------------------------------------------------- Major Markets ------------- Houston, TX 25 6,228 6.1% $ 240,504 Dallas, TX 14 4,533 5.7% 221,535 Phoenix, AZ 10 3,460 5.1% 197,901 Orlando, FL 14 4,140 5.1% 197,663 San Antonio, TX 12 3,615 4.6% 181,791 Tampa, FL 10 3,370 4.0% 154,944 Fort Worth, TX 11 3,561 3.8% 147,317 Raleigh, NC 9 2,951 3.7% 145,861 San Francisco, CA 4 980 3.6% 139,128 Nashville, TN 10 2,808 3.5% 136,289 Charlotte, NC 11 2,710 3.4% 132,120 Columbus, OH 5 2,175 3.1% 121,257 Memphis, TN 7 2,196 2.7% 106,382 Monterey Peninsula, CA 11 1,827 2.6% 103,626 Richmond, VA 8 2,372 2.6% 103,023 South Florida 6 1,638 2.6% 102,786 Greensboro, NC 8 2,123 2.6% 102,409 Columbia, SC 9 2,730 2.5% 97,854 Southern California 5 1,414 2.3% 88,843 Wilmington, NC 6 1,869 2.2% 87,845 Baltimore, MD 8 1,788 2.2% 85,847 Atlanta, GA 6 1,426 1.8% 69,580 Jacksonville, FL 3 1,157 1.5% 57,015 Hampton Roads, VA 6 1,437 1.4% 54,979 Sacramento, CA 2 914 1.4% 52,881 Portland, OR 4 996 1.2% 48,757 East Lansing, MI 4 1,226 1.2% 47,599 Denver, CO 2 876 1.2% 45,706 Fayetteville, NC 3 884 1.1% 41,219 Detroit, MI 4 744 1.0% 40,440 Fort Myers, FL 2 556 1.0% 39,946 Washington, DC 3 615 0.9% 35,800 Eastern Shore MD 4 784 0.9% 35,016 Seattle, WA 3 628 0.9% 33,272 Fredericksburg, VA 2 556 0.8% 30,711 Austin, TX 2 542 0.7% 26,907 Indianapolis, IN 2 766 0.7% 26,343 Tacoma, WA 2 429 0.6% 25,389 Daytona Beach, FL 3 549 0.6% 24,551 Little Rock, AR 2 512 0.6% 22,411 Albuquerque, NM 3 530 0.5% 20,070 Jacksonville, NC 3 653 0.5% 19,425 Dover, DE 2 372 0.5% 17,791 Tucson, AZ 2 408 0.3% 13,459 Dayton, OH 2 240 0.3% 12,384 Pullman, WA 2 334 0.3% 11,466 Roanoke, VA 3 454 0.2% 10,486 Other Single Asset Markets 15 3,658 3.6% 141,812 ------------------------------------------------------ Total Apartments 294 80,734 99.7% $3,900,340 ------------------------------------------------------ Commercial 4 N/A 0.3% 12,117 ------------------------------------------------------ Total 298 80,734 100.0% $3,912,457 ======================================================
Six Months Three Months Ended Ended June 30, 2000 June 30, 2000 --------------------------------- ----------------------------------- Average Average Physical Monthly Physical Monthly Area Occupancy Rental Rates (a) Occupancy Rental Rates (a) ---------------------------------------------------------- ----------------------------------- Major Markets ------------- Houston, TX 92.7% $ 590 93.3% $ 591 Dallas, TX 95.1% 660 95.2% 661 Phoenix, AZ 94.3% 670 93.5% 674 Orlando, FL 94.3% 680 94.1% 682 San Antonio, TX 93.7% 639 93.7% 640 Tampa, FL 94.0% 675 94.2% 689 Fort Worth, TX 95.9% 603 96.3% 613 Raleigh, NC 91.6% 702 91.9% 703 San Francisco, CA 99.6% 1,537 99.6% 1,556 Nashville, TN 93.8% 717 94.7% 725 Charlotte, NC 91.8% 679 93.8% 675 Columbus, OH 95.1% 646 95.0% 646 Memphis, TN 94.8% 597 95.2% 598 Monterey Peninsula, CA 92.9% 813 95.9% 821 Richmond, VA 95.9% 675 95.9% 679 South Florida 92.3% 840 91.7% 844 Greensboro, NC 92.9% 629 93.1% 630 Columbia, SC 92.2% 543 93.0% 544 Southern California 95.0% 794 94.0% 803 Wilmington, NC 88.6% 644 89.8% 644 Baltimore, MD 97.5% 722 97.8% 724 Atlanta, GA 93.8% 711 93.9% 714 Jacksonville, FL 90.2% 647 89.8% 650 Hampton Roads, VA 96.2% 623 96.0% 628 Sacramento, CA 97.6% 664 96.9% 668 Portland, OR 92.6% 678 93.8% 677 East Lansing, MI 93.0% 625 91.4% 626 Denver, CO 94.0% 676 94.1% 681 Fayetteville, NC 94.3% 589 95.3% 591 Detroit, MI 96.4% 696 96.8% 699 Fort Myers, FL 96.1% 774 94.8% 778 Washington, DC 98.5% 807 98.4% 811 Eastern Shore MD 95.4% 713 96.9% 715 Seattle, WA 96.1% 694 96.2% 698 Fredericksburg, VA 96.9% 717 97.6% 720 Austin, TX 95.8% 642 96.6% 648 Indianapolis, IN 92.2% 527 92.7% 527 Tacoma, WA 92.0% 720 92.0% 725 Daytona Beach, FL 94.9% 666 94.8% 670 Little Rock, AR 96.1% 594 97.9% 594 Albuquerque, NM 92.5% 520 93.5% 520 Jacksonville, NC 93.8% 490 92.9% 493 Dover, DE 96.6% 631 96.9% 633 Tucson, AZ 93.4% 450 92.8% 452 Dayton, OH 94.2% 683 95.5% 686 Pullman, WA 86.9% 708 80.0% 704 Roanoke, VA 92.9% 477 92.7% 478 Other Single Asset Markets 94.0% 575 94.5% 577 --------------------------------- ----------------------------------- Total Apartments 94.0% $ 666 94.3% $ 668 --------------------------------- ----------------------------------- Commercial N/A N/A N/A N/A --------------------------------- ----------------------------------- Total 94.0% $ 666 94.3% $ 668 ================================= ===================================
(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 development communities in lease- up. 13 Liquidity and Capital Resources United Dominion's primary source of liquidity is its cash flow from operations as determined by rental rates, occupancy levels and operating expenses related to these apartment homes. United Dominion routinely uses its unsecured bank credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing. During the past several years, proceeds from the sales of real estate have been used for both investing and financing activity. United Dominion regularly reviews its short and long-term liquidity requirements and considers the adequacy of its cash flow from operations as well as other liquidity sources to meet these requirements. United Dominion believes that it can fund its short-term liquidity needs such as normal recurring operating expenses, debt service payments, recurring capital expenditures and distributions to common and preferred shareholders through cash provided by operating activities and borrowings outstanding from our unsecured bank credit facility, as needed. A significant portion of the proceeds from the sale of communities is used to reduce debt and, to a lesser extent, to buy back preferred stock and acquire real estate assets. Management recognizes that using proceeds in this manner to increase our financial flexibility will lessen the near-term earnings growth rate as the return on reinvested proceeds is less than the return on the properties sold; however, management strives to minimize this effect. To facilitate future fund raising activities in the public capital markets, management believes that it is prudent to maintain shelf registration statement capacity. In this regard, United Dominion filed such a shelf registration statement in December 1999 providing for the issuance of up to $700 million in common shares, preferred shares and debt securities of which $600 million is available for future issuance. Future Capital Needs Future development expenditures are expected to be funded with proceeds from the sale of property and borrowings outstanding under our unsecured credit facility. Acquisition activity is expected to be primarily limited to the reinvestment of proceeds from the sale of property in order to defer large tax gains. United Dominion has no significant maturities of debt until the fourth quarter of 2000 at which time a $144.3 million unsecured note payable and a $24.2 million secured note payable will mature. Management expects to repay the maturing unsecured debt from a variety of sources including proceeds from the company's disposition program, utilizing availability under our unsecured bank credit facility and the issuance of unsecured debt in the capital markets. We expect to refinance the maturing secured debt with debt of similar characteristics at the then prevailing market rates. The following table outlines United Dominion's debt maturities over the next five years (dollars in thousands):
Amount Year Maturing ---------------------------------------------------- 2000 $ 193,248 2001 105,274 2002 112,686 2003 375,036 (a) 2004 317,910 Thereafter 970,971 ------------ Total $2,075,125 ============
(a) Includes $187.3 million of unsecured bank debt (See discussion under "Unsecured Credit Facilities" that follows). The following discussion explains the changes in net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities which are presented in United Dominion's Consolidated Statements of Cash Flows. 14 Operating Activities For the six months ended June 30, 2000, United Dominion's cash flow from operating activities was $102.6 million compared to $80.7 million for the same period last year. The increase is primarily due to the larger payment of accrued operating expenses during the first half of 1999, a portion of which related to the payment of expenses accrued in connection with the American Apartment Communities II merger on December 7, 1998. Investing Activities For the six months ended June 30, 2000, net cash provided by investing activities was $33.6 million compared to net cash used in investing activities of $54.9 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 disposition programs, as well as the impact of the capital market environment on these activities. The decrease in investing related expenditures reflect decreased acquisition activity and an increase in net proceeds received from the sale of investments, including funds held in escrow pending the acquisition of real estate. In addition, there was a net reduction in development expenditures as a result of the receipt of $34.2 million in connection with the consummation of a development joint venture in June 2000 (See discussion that follows under "Development Joint Venture"). Disposition of Investments During the first half of 2000, United Dominion continued its strategy of selectively disposing of assets that are not in core markets, have a lower net operating income growth rate than the overall portfolio or no longer meet the operating and investment strategies of United Dominion. For the six months ended June 30, 2000, United Dominion sold ten communities with 1,957 apartment homes, one commercial property and one parcel of land for an aggregate sales price of $87.8 million and recognized gains for financial reporting purposes of $8.5 million. Proceeds from the disposition program were primarily used to strengthen the balance sheet by paying down debt and repurchasing shares of United Dominion's preferred stock. United Dominion expects to sell approximately $200 million of real estate during 2000. Real Estate under Development Development activity is focused in core markets that have locally based development teams and strong operations managers in place. For the six months ended June 30, 2000, United Dominion invested $54.6 million on development projects, including the acquisition of land. The following projects are complete as of June 30, 2000:
Development No. of Costs Cost Per Date Apt. Homes (In thousands) Home Completed % Leased ------------ ------------- ------------ ------------ ------------ New Communities: ----------------- Ashton at Waterford Lakes 292 $21,400 $73,300 Feb-00 95.2% Orlando, FL Additional Phases: ------------------ Dominion Crown Pointe II 220 14,100 64,100 Jun-00 71.4% Charlotte, NC ------------ ------------- ------------ Total 512 $35,500 $69,300 ============ ============= ============
15 The following projects are under development at June 30, 2000:
No. of Completed Cost to Budgeted Expected Apt. Apt. Date Cost Est. Cost Completion Homes Homes (In thousands) (In thousands) Per Home Date -------- -------- ------------ ------------- ---------- ------------ New Communities: ------------------ Dominion Place at Kildaire Farm 332 -- $ 5,300 $25,700 $77,400 1Q02 Raleigh, NC The Vintage at Buttercup Creek 324 -- 2,900 21,700 67,000 4Q01 Austin, TX ----------- ----------- ------------- -------------- ----------- Subtotal 656 -- 8,200 47,400 72,300 ----------- ----------- ------------- -------------- ----------- Additional Phases: Ashlar II 168 -- 6,000 12,900 76,800 4Q00 Fort Myers, FL Escalante II 312 100 14,700 19,700 63,100 4Q00 San Antonio, TX Greensview II 192 -- 1,000 16,700 87,000 4Q01 Denver, CO ----------- ------- ------------- -------------- ----------- Subtotal 672 100 21,700 49,300 73,400 ----------- ------- ------------- -------------- ----------- Total 1,328 100 $29,900 $96,700 $72,800 =========== ======= ============= ============== ===========
In addition to the apartment homes under development at June 30, 2000, United Dominion has land held for future development with a carrying value of $37.0 million. Development Joint Venture On June 21, 2000, United Dominion completed the formation of a joint venture that will invest approximately $105 million to develop five apartment communities with a total of 1,438 apartment homes. United Dominion owns a 25% interest in the joint venture and is serving as the managing partner of the joint venture with responsibility for the venture's operations. Prior to completing the joint venture, United Dominion had commenced construction on all five of the projects. Upon closing of the venture, United Dominion contributed the projects in return for its equity interest of approximately $8 million in the venture and was reimbursed for approximately $34 million of development outlays that were incurred prior to closing the joint venture. The proceeds received were used to reduce outstanding debt balances. In addition, during the second quarter of 2000, United Dominion recognized fee income of approximately $1.6 million for general contracting services provided by the company to the joint venture of which approximately $1 million related to construction activity prior to the second quarter of 2000. The following joint venture projects are complete as of June 30, 2000:
Development No. of Cost Cost Per Date Apt. Homes (In thousands) Home Completed % Leased ------------ -------------- ------------ ------------- ------------ New Communities: The Meridian 250 $15,600 $62,400 Jun-00 100.0% Dallas, TX ------------ -------------- ------------ Total 250 $15,600 $62,400 ============ ============== ============
16 The following joint venture projects are under development at June 30, 2000:
No. of Cost to Budgeted Expected Apt. Completed Date Cost Est. Cost Completion Homes Apt. Homes (In thousands) (In thousands) Per Home Date ----------- -------------- -------------- ------------- ------------- ------------ New Communities: Oaks at Weston 380 60 $16,600 $30,100 $79,200 2Q01 Raleigh, NC Sierra Canyon 236 -- 7,000 16,700 70,800 1Q01 Phoenix, AZ Parke 33 264 -- 8,500 17,400 65,900 1Q01 Lakeland, FL Mandolin 308 -- 4,100 22,100 71,700 3Q01 Dallas, TX ----------- -------------- -------------- ------------- ------------- Total 1,188 60 $36,200 $86,300 $72,600 =========== ============== ============== ============= =============
Acquisitions During the six months ended June 30, 2000, United Dominion acquired one community with 267 apartment homes at a total cost (including closing costs) of $14.8 million which included the assumption of debt and the use of tax free exchange funds. During the remainder of 2000, United Dominion does not anticipate acquiring communities except to reinvest a portion of the proceeds from property dispositions in order to defer taxes on capital gains. Capital Expenditures United Dominion capitalizes those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred. During the first six months of 2000, $17.5 million or $225 per home was spent on capital expenditures for United Dominion's same communities (those acquired or developed prior to January 1, 1999). These capital improvements included recurring capital expenditures, including floor coverings, HVAC equipment, roofs, appliances, landscaping, siding, parking lots and other non-revenue enhancing capital expenditures, which aggregated $10.9 million or $140 per home. In addition, non-recurring / revenue enhancing capital expenditures, including water sub-metering, gating and access systems, the additions of microwaves, washer-dryers, interior upgrades and new business and fitness centers totaled $6.6 million or $85 per home for the first six months of 2000. United Dominion will continue to selectively add revenue-enhancing improvements, which are budgeted to provide a high return on investment. Capital expenditures during 2000 are currently expected to be at levels somewhat below the levels in 1999. Financing Activities Net cash used in financing activities during the six months ended June 30, 2000 was $134.5 million compared to net cash used by financing activities of $23.3 million for the same period last year. For the six months ended June 30, 2000, as part of its plan to improve its balance sheet position, United Dominion used 80% of the proceeds from its disposition program to pay down secured and unsecured debt and to repurchase shares of preferred stock. The remaining 20% of the proceeds were used to complete 1031 exchanges. During the first quarter of 2000, United Dominion issued $100 million of 8.625% unsecured notes due 2003. Net proceeds received of $99.5 million were used to repay outstanding bank debt. In addition, United Dominion completed the refinancing of tax-exempt notes aggregating $46.7 million at a blended rate of 6.32% and with a final maturity of August 2008. In conjunction with this refinancing, the company removed the liens on $86 million of real estate which had previously secured the tax-exempt notes. For the six months ended June 30, 2000, United Dominion, using proceeds from its disposition program, repurchased $27.2 million of certain of its higher rate 17 outstanding unsecured debt with a weighted average yield of 8.72%. In addition, the company was relieved of $9.7 million of mortgage debt and $22.8 million of revolving bank debt. During the remainder of the year, United Dominion expects to make further debt reductions as disposition activity increases. United Dominion issued 768,355 shares of its common stock and received $7.3 million under its Dividend Reinvestment and Stock Purchase Plan during the first six months of 2000. During the first six months of 2000, United Dominion paid distributions to its common shareholders and unitholders in its operating partnerships aggregating $60.1 million. The distribution to common shareholders and holders of operating partnership units equates to a dividend rate of $1.07 per share or unit. In addition, $18.6 million of preferred dividends were paid to Series A, B and D preferred shareholders. In 1999, the Board of Directors approved the repurchase of up to $25 million of United Dominion's Series A and Series B Cumulative Redeemable Preferred Stock ($25 liquidation value) from time to time as market conditions permit. For the six months ended June 30, 2000, United Dominion repurchased 23,540 Series A preferred shares at an average price of $19.90 per share and 364,811 Series B preferred shares at an average price of $18.54 per share. During the remainder of the year, United Dominion expects to continue to repay debt and repurchase preferred stock using proceeds from its property dispositions. Unsecured Credit Facilities In June 2000, United Dominion closed on a $375 million thee-year unsecured revolving credit facility (the "Credit Facility") with a consortium of banks. The Credit Facility, which extends until August 2003, replaces two lines of credit that allowed the company to borrow in aggregate up to $310 million. Under the Credit Facility, the company may borrow at a rate of LIBOR plus 100 basis points for LIBOR-based borrowings. This is equal to the rate the company was able to borrow under a $110 million line of credit arranged last year that was replaced by the new, expanded and longer-term Credit Facility. Under the agreement, we pay a facility fee, which is equal to 0.20% of the commitment. The Credit Facility is subject to customary financial covenants and limitations. The following table summarizes our unsecured credit facility borrowings for the three and six months ended June 30, 2000 (dollars in thousands):
Three months ended Six months ended June 30, 2000 June 30, 2000 ----------------------- ---------------------- Total line of credit $375,000 $375,000 Borrowings outstanding at end of period $187,300 $187,300 Maximum borrowings outstanding during the period $245,000 $308,000 Weighted average daily borrowings outstanding $201,641 $236,288 Weighted average daily nominal interest rate 7.15% 6.87% Weighted average daily effective interest rate 7.66% 7.13%
Funds from Operations Funds from operations ("FFO") is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from sales of property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. United Dominion computes FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trusts October 1, 1999 White Paper. 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 18 generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. The following table outlines United Dominion's FFO calculation for the three and six months ended June 30, 2000 (dollars in thousands):
Three Months Ended Six Months Ended June 30, June 30, --------------------- -------------------- 2000 1999 2000 1999 --------------------- -------------------- Net income $13,277 $40,800 $31,857 $60,882 Adjustments: Distributions to preferred shareholders (9,221) (9,440) (18,629) (18,879) Real estate depreciation, net of outside partners' interest 43,612 31,114 77,188 60,251 Gains on sale of real estate, net of outside partners' interest (5,615) (32,214) (8,148) (32,405) Minority interests of unitholders in operating partnership 294 3,098 962 3,981 Extraordinary item-early extinguishment of debt (586) (509) (358) (509) Impairment loss on real estate and investments 0 7,100 0 7,100 ---------- ---------- --------- ---------- Funds from operations-basic $41,761 $39,949 $82,872 $80,421 ========== ========== ========= ========== Adjustment: Distribution to preferred shareholders-Series D (Convertible) 3,825 3,787 7,650 7,573 ---------- ---------- --------- ---------- Funds from operations-diluted $45,586 $43,736 $90,522 $87,994 ========== ========== ========= ========== Weighted average number of common shares and OP Units outstanding - basic 110,774 112,688 110,590 112,751 Weighted average number of common shares and OP Units outstanding - diluted 123,281 125,009 123,069 125,068 FFO per common share-basic $ 0.38 $ 0.35 $ 0.75 $ 0.71 ========== ========== ========= ========== FFO per common share-diluted $ 0.37 $ 0.35 $ 0.74 $ 0.70 ========== ========== ========= ==========
The increase in FFO for the three and six months ended June 30, 2000 is primarily attributable to the net increase in property operating income generated from United Dominion's same communities and fee income recognized on the development joint venture as described below under "Apartment Community Operations." Results of Operations Net Income Available to Common Shareholders Net income available to common shareholders decreased $25.1 million and $26.6 million for the three and six-month periods ended June 30, 2000 compared to the same periods last year. For the three and six months ended June 30, 1999, United Dominion recognized $32.2 million and $32.4 million of gains on the sales of investments compared to $5.9 million and $8.5 million for the comparable periods in 2000. In addition, real estate depreciation increased significantly for the three and six months ended June 30, 2000 as a result of the catch up of depreciation expense on communities transferred from real estate held for disposition to real estate held for investment and, to a lesser extent, the impact of completed development communities (see Note 2 to the Consolidated Financial Statements). 19 Apartment Community Operations United Dominion's net income is primarily generated from the operations of its apartment communities. The following table summarizes the operating performance for United Dominion's apartment portfolio for each period (dollars in thousands):
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------- ---------------------------------- 2000 1999 % Change 2000 1999 % Change ---------------------------------- ---------------------------------- Total Apartment Homes Property rental income $154,764 $154,064 0.5% $308,422 $307,485 0.3% Property rental expenses (excluding depreciation and amortization) (60,197) (61,763) -2.5% (119,614) (122,444) -2.3% ---------------------------------- ---------------------------------- Property operating income $94,567 $92,301 2.5% $188,808 $185,041 2.0% ================================== ================================== Weighted average number of homes 81,606 86,979 -6.2% 81,830 87,208 -6.2% Physical occupancy 94.3% 92.3% 2.0% 94.0% 92.1% 1.9%
For the three and six months ended June 30, 2000, total apartment community property operating income increased $2.3 million or 2.5% and $3.8 million or 2.0%, respectively. The strong increase in property operating income generated from our same community portfolio was partially offset by the loss of property operating income as a result of the company's disposition program during the past year. United Dominion's same communities (those communities acquired, developed and stabilized prior to January 1, 1999 and held on January 1, 2000 which consisted of 77,386 and 77,767 weighted average apartment homes for the three and six month comparative periods) provided 95% and 92% of its property operating income for the six months ended June 30, 2000 and 1999, respectively. During the first six months of 2000, same community property operating income increased 5.0% or $8.5 million compared to the first six months of 1999. The growth in property operating income resulted primarily from a 4.4% or $12.2 million increase in property rental income for the same communities over the same period in the prior year. The increase was primarily driven by a 1.6% increase in physical occupancy coupled with a 2.6% increase in average monthly rental rates. For the quarter, property operating income increased 5.2% or $4.4 million compared to the second quarter of 1999. The growth in property operating income resulted primarily from a 4.6% or $6.5 million increase in property rental income compared to the same period in the prior year, reflecting an increase in physical occupancy of 1.8% and a 2.6% increase in average monthly rental rates. During the first half of 2000, property operating expenses at these same communities increased 3.4%, or $3.7 million. The increase in property operating expenses was primarily due to (i) an increase in real estate taxes which are being accrued at higher rates in 2000 on the $1.4 billion of real estate acquired in 1998 in anticipation of reassessments, (ii) an increase in casualty insurance costs largely as a result of hurricane losses incurred in North Carolina over the past five years, and (iii) an increase in personnel costs, primarily in the service area due to higher wages and healthcare costs. As a result of the increase in property rental income exceeding the increase in property operating expenses, the operating margin (property operating income divided by property rental income) at the same communities improved 0.3% to 61.3% for the six month period ended June 30, 2000. For the quarter, property operating expenses increased 3.7% or $2.0 million compared to the same period in the prior year for same reasons as mentioned above. The operating margin improved 0.4% to 61.1%. The remaining 5% of United Dominion's property operating income during the first six months of 2000 was generated from its non-mature communities (those communities acquired and developed during 1999 and the first half of 2000). Non-mature property operating income was comprised primarily of $3.0 million and $5.3 million for the three and six month periods, respectively, generated by the successful lease-up of United Dominion's development communities which included 20 1,878 apartment homes constructed since January 1, 1999. In addition, the six communities with 1,497 apartment homes acquired by United Dominion during 1999 and 2000 provided an additional $1.8 million and $3.4 million of property operating income for the three and six months ended June 30, 2000, respectively. The increase in property operating income provided by the same communities, development communities and acquisition communities since June 30, 1999, was offset by the loss of property operating income due to the disposition of 9,400 apartment homes during 1999 and 2000. As a result of United Dominion's disposition program, the weighted average number of apartment homes declined 6.2% from June 30, 1999. Real Estate Depreciation Real estate depreciation increased $12.6 million or 40.0% and $17.1 million or 28.1% for the three and six months ended June 30, 2000, respectively, over the same period last year. This increase is primarily attributable to the catch up of depreciation expense on communities transferred from real estate held for disposition to real estate held for investment and to a lesser extent, the impact of completed development communities (see Note 2 to the Consolidated Financial Statements). Interest Expense Interest expense increased $834,000 and $1.8 million for the three and six months ended June 30, 2000, respectively, over the same period last year. For the six month period, the weighted average amount of debt outstanding decreased 2.8% or $61.4 million from 1999 levels and the weighted average interest rate increased from 7.4% in 1999 to 7.5% in 2000. For the three month period, the weighted average amount of debt outstanding decreased 2.9% or $62.4 million in 2000 as compared to the same period in the prior year and the weighted average interest rate increased from 7.4% in 1999 to 7.6% in 2000. The weighted average amount of debt employed during 2000 was lower as disposition proceeds were used to repay outstanding debt. The increase in the average interest rate during 2000 reflects the reliance on higher rate short-term bank borrowings which had higher interest rates when compared to the same period in the prior year. For the three and six months ended June 30, 2000, total interest capitalized was $1.0 million and $2.0 million, respectively, compared to $1.5 million and $3.2 million, respectively, for the comparable periods last year. General and Administrative During the three and six months ended June 30, 2000, general and administrative expenses increased $948,000 or 34.5%, and $1.1 million or 17.4% over 1999, reflecting a full year's impact of United Dominion's investment in professional staff, technology and scaleable accounting and information systems and the effect of additional franchise taxes in Tennessee as a result of a change in the state law regarding franchise taxes. Gains on Sales of Investments For the three and six months ended June 30, 2000, United Dominion recognized gains for financial reporting purposes of $5.9 million and $8.5 million, respectively, compared to $32.2 million and $32.4 million for the comparable periods last year. Changes in the level of gains recognized from period to period reflect the changing level of United Dominion's divestiture activity from period to period as well as the extent of gains related to specific properties sold. Discount on Preferred Share Repurchases For the six months ended June 30, 2000, United Dominion recognized a $2.2 million discount on preferred share repurchases. The discount on preferred share repurchases represents the difference between the carrying value and the purchase price of the preferred shares. Inflation United Dominion believes that the direct effects of inflation on United Dominion's operations have been inconsequential. Substantially all of the company's leases are for a term of one year or less which generally minimizes United Dominion's risk from the adverse effects of inflation. 21 Information Technology United Dominion is currently engaged in the development of a web-based apartment operating system (the "system") to enable management to capture, review and analyze data to a greater extent than is possible using available existing commerical software. United Dominion believes the new system will enable it to become a more efficient provider of a high quality living environment for its residents, and provide the scalability necessary to support future growth. These development activities are being conducted through a joint venture with two other public multifamily real estate investment trusts. The system development process is currently managed by the employees of United Dominion and its joint venture partners who have significant related project management experience. The actual programming and documentation of the system is being conducted by employees and third party consultants under the supervision of these experienced project managers. Current projections indicate that total development costs through the end of the year will be approximately $8.5 million (including hardware costs and expenses, the costs of employees and related overhead, and the costs of engaging third party consultants) and that United Dominion's share of such development costs will be approximately 45%. The system is currently projected to begin on-site testing (i.e., a "beta test") in December of 2000 and the first release is scheduled for initial implementation late in the first quarter of 2001. Neither United Dominion nor its joint venture partner has been engaged in the development of systems software. There are several risks associated with the development of the system 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 system may not have the functionality and efficiencies desired. Taxable REIT Subsidiary In December 1999, the REIT Modernization Act ("RMA") was signed into law. The RMA contains several provisions that, when effective in 2001, will allow REIT's to compete more effectively in the real estate industry by allowing REIT's to offer the same types of services as other competitors in the marketplace. The most important feature of the RMA is the allowance for REIT's to create a taxable REIT subsidiary ("TRS") that can provide services to residents and others without disqualifying the rents that a REIT receives from its residents. REIT's will be allowed, through a TRS, to provide a wide range of increasingly important services that residents have come to expect. In addition, the TRS will allow REIT's to generate new sources of income for REIT shareholders. Effective January 1, 2001, a REIT can own 100% of the stock of a TRS. However, the legislation contains a number of safeguards that would limit the size of a TRS to ensure that REIT's remain focused on their core business of owning and operating real estate assets. Furthermore, the RMA changes the minimum distribution requirement from 95% to 90% of the REIT's taxable income. This will allow REIT's to retain a greater level of capital, which can be used to invest back into expenditures to maintain the quality of their real estate assets as well as repay outstanding debt. 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. 22 PART II Item 1. LEGAL PROCEEDINGS --------------------------- United Dominion and its subsidiaries are engaged in various litigations and have a number of unresolved claims pending, including, but not limited to, litigation concerning water billing activities. The ultimate liability in respect of such litigations and claims cannot be determined at this time. United Dominion is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to be material in relation to the consolidated financial statements of United Dominion. Item 2. CHANGES IN SECURITIES ----------------------------- None Item 3. DEFAULT UPON SENIOR SECURITIES -------------------------------------- None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ None Item 5. OTHER INFORMATION ------------------------- None Item 6. EXHIBITS AND REPORTS ON FORM 8-K ---------------------------------------- (a) The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. (b) Reports on Form 8-K A Form 8-K was filed with the Securities and Exchange Commission on February 25, 2000. The filing reported United Dominion's 1999 fourth quarter and year to date results of operations as reported on its Press Release issued on February 1, 2000. 23 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 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 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. 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.
24 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 Exhibit 4(i)(d)(a) to the Company's Form 10-Q Agreement dates as of September 14, for the quarter ended September 30, 1999. 1999, between the Company and ChaseMellon Shareholders 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 June 1, 2000, 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 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 Company's Annual Report the Company and Richard Giannotti on Form 10-K for the year ended December 31, dated December 8, 1998. 1998.
25 10(iv) Employment Agreement between Exhibit 10(iv) to the Company's Quarterly Report the Company and A. William Hamill on Form 10-Q for the quarter ended September 30, dated September 30, 1999. 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. 10(ix) Description of Restricted Stock Exhibit 10(ix) to the Company's Annual Report Awards Program. on Form 10-K for the year ended December 31, 1999. 10(x) Description of United Dominion Exhibit 10(x) to the Company's Annual Realty Trust, Inc. Shareholder Report on Form 10-K for the year ended Value Plan. December 31, 1999. 10(xi) Description of United Dominion Exhibit 10(xi) to the Company's Annual Realty Trust, Inc. Executive Report on Form 10-K for the year ended Deferral Plan. December 31, 1999. 10(xii) Employment Agreement between Exhibit 10(xii) to the Company's Annual the Company and Curtis W. Carter Report on Form 10-K for the year ended dated December 8, 1998. December 31, 1999. 10(xiii) Employment Agreement between Exhibit 10(xiii) to the Company's Annual the Company and Mark E. Wood Report on Form 10-K for the year ended dated March 21, 2000. December 31, 1999.
26 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges. 27 Financial Data Schedule Filed electronically with the Securities and Exchange Commission.
27 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. United Dominion Realty Trust, Inc. ---------------------------------- (registrant) Date: August 11, 2000 /s/ A. William Hamill --------------------- --------------------------------- A. William Hamill Executive Vice President and Chief Financial Officer Date: August 11, 2000 /s/ Robin R. Flanagan --------------------- --------------------------------- Robin R. Flanagan Vice President and Chief Accounting Officer 28