UDR, Inc. — Interim / Quarterly Report 2004

Nov 8, 2004

10-Q 1 d19793e10vq.htm FORM 10-Q e10vq PAGEBREAK

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

| þ | QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| --- | --- |
| For the quarterly period ended September 30,
2004 | |
| or | |
| o | 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)

Maryland	54-0857512
(State or other jurisdiction of incorporation of organization)	(I.R.S. Employer Identification No.)

1745 Shea Center Drive, Suite 200,

Highlands Ranch, Colorado 80129

(Address of principal executive offices — zip code)

(720) 283-6120

(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 such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares of the issuer’s common stock, $1 par value, outstanding as of November 3, 2004 was 132,533,584.

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UNITED DOMINION REALTY TRUST, INC.

FORM 10-Q

INDEX

PART I —
FINANCIAL INFORMATION
Item 1.	Condensed Consolidated
Financial Statements (unaudited)
	Consolidated Balance Sheets
as of September 30, 2004 and December 31, 2003	2
	Consolidated Statements of
Operations for the three and nine months ended
September 30, 2004 and 2003	3
	Consolidated Statements of
Cash Flows for the nine months ended September 30, 2004 and
2003	4
	Consolidated Statement of
Stockholders’ Equity for the nine months ended
September 30, 2004	5
	Notes to Consolidated
Financial Statements	6-14
Item 2.	Management’s Discussion
and Analysis of Financial Condition and Results of Operations	15-30
Item 3.	Quantitative and Qualitative
Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II —
OTHER INFORMATION
Item 2.	Unregistered Sales of Equity
Securities and Use of Proceeds	31
Item 6.	Exhibits	31
	Signatures	33
Computation of Ratio of Earnings to Fixed Charges
Rule 13a-14(a) Certification of the Chief Executive Officer
Rule 13a-14(a) Certification of the Chief Financial Officer
Section 1350 Certification of the Chief Executive Officer
Section 1350 Certification of the Chief Financial Officer

/TOC

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link1 "PART I -- FINANCIAL INFORMATION"

PART I — FINANCIAL INFORMATION

link1 "Item 1. FINANCIAL STATEMENTS"

ITEM 1. FINANCIAL STATEMENTS

UNITED DOMINION REALTY TRUST, INC.

link1 "CONSOLIDATED BALANCE SHEETS"

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

(Unaudited)

	September 30, — 2004	2003
ASSETS
Real estate owned:
Real estate held for investment	$ 4,595,713	$	4,039,411
Less: accumulated depreciation	(959,095	)	(834,209	)
	3,636,618		3,205,202
Real estate under development	60,062		29,715
Real estate held for disposition (net of
accumulated depreciation of $20,604 and $62,421)	106,956		220,004
Total real estate owned, net of accumulated
depreciation	3,803,636		3,454,921
Cash and cash equivalents	1,988		4,824
Restricted cash	6,454		7,540
Deferred financing costs, net	21,263		21,425
Investment in unconsolidated development joint
venture	607		1,673
Funds held in escrow from 1031 exchanges pending
the acquisition of real estate	—		14,447
Notes receivable	15,604		13,000
Other assets	40,987		25,256
Other assets — real estate held for
disposition	609		557
Total assets	$ 3,891,148	$	3,543,643
LIABILITIES AND STOCKHOLDERS’
EQUITY
Secured debt	$ 1,070,769	$	1,018,028
Unsecured debt	1,448,955		1,114,009
Real estate taxes payable	34,992		30,789
Accrued interest payable	17,814		12,892
Security deposits and prepaid rent	23,235		22,336
Distributions payable	42,986		40,623
Deferred gain on sale of depreciable property	4,040		—
Accounts payable, accrued expenses, and other
liabilities	45,374		44,913
Other liabilities — real estate held
for disposition	39		2,411
Total liabilities	2,688,204		2,286,001
Minority interests	86,837		94,206
Stockholders’ equity:
Preferred stock, no par value; $25 liquidation
preference, 25,000,000 shares authorized;
5,416,009 shares 8.60% Series B Cumulative
Redeemable issued and outstanding (5,416,009 in 2003)	135,400		135,400
2,000,000 shares 7.50% Series D Cumulative
Convertible Redeemable issued and outstanding (2,000,000 in 2003)	48,958		44,271
3,425,217 shares 8.00% Series E Cumulative
Convertible issued and outstanding (3,425,217 in 2003)	56,893		56,893
Common stock, $1 par value; 250,000,000 shares
authorized 127,818,582 shares issued and outstanding
(127,295,126 in 2003)	127,819		127,295
Additional paid-in capital	1,466,268		1,458,983
Distributions in excess of net income	(712,115	)	(651,497	)
Deferred compensation — unearned
restricted stock awards	(7,116	)	(5,588	)
Notes receivable from officer-stockholders	—		(459	)
Accumulated other comprehensive loss	—		(1,862	)
Total stockholders’ equity	1,116,107		1,163,436
Total liabilities and stockholders’ equity	$ 3,891,148	$	3,543,643

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

link1 "CONSOLIDATED STATEMENTS OF OPERATIONS"

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004	2003			2004	2003
REVENUES
Rental income	$ 155,136	$	141,863		$ 455,217	$	418,760
Non-property income	807		307		2,213		703
Total revenues	155,943		142,170		457,430		419,463
EXPENSES
Rental expenses:
Real estate taxes and insurance	17,271		16,047		53,910		48,146
Personnel	17,176		15,007		48,380		42,554
Utilities	9,864		8,819		28,218		25,156
Repair and maintenance	10,650		9,008		29,716		26,425
Administrative and marketing	5,568		5,210		16,286		15,424
Property management	4,413		4,252		13,163		12,631
Other operating expenses	289		302		850		912
Real estate depreciation and amortization	43,818		38,235		126,239		110,509
Interest	29,990		27,844		88,218		89,016
General and administrative	3,853		5,526		13,235		16,133
Hurricane related expenses	5,503		—		5,503		—
Impairment loss on investments	—		1,392		—		1,392
Other depreciation and amortization	836		780		2,590		2,250
Total expenses	149,231		132,422		426,308		390,548
Income before minority interests and discontinued
operations	6,712		9,748		31,122		28,915
Minority interests of outside partnerships	(52	)	—		(166	)	(614	)
Minority interests of unitholders in operating
partnerships	10		(145	)	(698	)	(88	)
Income before discontinued operations, net of
minority interests	6,670		9,603		30,258		28,213
Income from discontinued operations, net of
minority interests	21,146		10,841		41,380		21,156
Net income	27,816		20,444		71,638		49,369
Distributions to preferred
stockholders — Series B	(2,911	)	(2,911	)	(8,733	)	(8,733	)
Distributions to preferred
stockholders — Series D (Convertible)	(1,045	)	(3,053	)	(3,125	)	(10,482	)
Distributions to preferred
stockholders — Series E (Convertible)	(1,138	)	(1,138	)	(3,413	)	(1,365	)
Premium on preferred stock conversions	(1,562	)	(12,100	)	(4,687	)	(18,350	)
Net income available to common stockholders	$ 21,160	$	1,242		$ 51,680	$	10,439
Earnings per weighted average common
share — basic:
Income/(loss) from continuing operations
available to common stockholders, net of minority interests	$ 0.00	$	(0.08	)	$ 0.08	$	(0.10	)
Income from discontinued operations, net of
minority interests	$ 0.17	$	0.09		$ 0.33	$	0.19
Net income available to common stockholders	$ 0.17	$	0.01		$ 0.41	$	0.09
Earnings per weighted average common
share — diluted:
Income/(loss) from continuing operations
available to common stockholders, net of minority interests	$ 0.00	$	(0.08	)	$ 0.08	$	(0.10	)
Income from discontinued operations, net of
minority interests	$ 0.17	$	0.09		$ 0.32	$	0.19
Net income available to common stockholders	$ 0.17	$	0.01		$ 0.40	$	0.09
Common distributions declared per share	$ 0.2925	$	0.2850		$ 0.8775	$	0.8550
Weighted average number of common shares
outstanding — basic	127,182		116,350		127,099		112,252
Weighted average number of common shares
outstanding — diluted	128,197		116,350		128,063		112,252

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

link1 "CONSOLIDATED STATEMENTS OF CASH FLOWS"

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for share data)

(Unaudited)

	Nine Months Ended
	September 30,
	2004	2003
Operating Activities
Net income	$ 71,638	$	49,369
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization	133,278		122,524
Impairment loss on real estate and investments	—		1,392
Net gains on sales of land and depreciable
property	(35,239	)	(8,149	)
Minority interests	3,679		2,040
Gain on early debt retirement	—		(171	)
Amortization of deferred financing costs and other	4,985		4,902
Changes in operating assets and liabilities:
Increase in operating assets	(11,112	)	(8,624	)
Increase in operating liabilities	7,774		1,347
Net cash provided by operating activities	175,003		164,630
Investing Activities
Proceeds from sales of real estate investments,
net	144,790		79,083
Acquisition of real estate assets, net of
liabilities assumed and equity	(412,000	)	(159,792	)
Development of real estate assets	(13,433	)	(12,425	)
Capital expenditures and other major
improvements — real estate assets, net of escrow
reimbursement	(51,277	)	(38,797	)
Capital expenditures — non-real estate
assets	(1,194	)	(1,176	)
Decrease/(increase) in funds held in escrow from
tax free exchanges pending the acquisition of real estate	14,447		(14,447	)
Net cash used in investing activities	(318,667	)	(147,554	)
Financing Activities
Proceeds from the issuance of secured debt	—		37,415
Scheduled principal payments on secured debt	(38,848	)	(8,937	)
Non-scheduled principal payments and prepayment
penalties on secured debt	(21,474	)	(2,510	)
Proceeds from the issuance of unsecured debt	250,775		199,101
Payments and prepayment premiums on unsecured debt	(46,585	)	(207,307	)
Net proceeds/(repayment) of revolving bank debt	132,000		(67,100	)
Payment of financing costs	(3,745	)	(6,094	)
Proceeds from the issuance of common stock	3,770		166,151
Proceeds from the repayment of officer loans	459		2,030
Proceeds from the issuance of performance shares	80		1,000
Distributions paid to minority interests	(10,396	)	(6,758	)
Distributions paid to preferred stockholders	(15,254	)	(20,429	)
Distributions paid to common stockholders	(109,954	)	(93,779	)
Repurchase of common stock	—		(71	)
Net cash provided by/(used in) financing
activities	140,828		(7,288	)
Net (decrease)/increase in cash and cash
equivalents	(2,836	)	9,788
Cash and cash equivalents, beginning of period	4,824		3,152
Cash and cash equivalents, end of period	$ 1,988	$	12,940
Supplemental Information:
Interest paid during the period	$ 81,188	$	86,604
Non-cash transactions:
Conversion of operating partnership minority
interests to common stock (91,369 shares in 2004 and
70,451 shares in 2003)	733		1,056
Issuance of restricted stock awards	3,306		5,286
Issuance of preferred stock in connection with
acquisitions	—		58,811
Issuance of preferred operating partnership units
in connection with acquisitions	—		26,872
Cancellation of a note receivable with the
acquisition of a property	8,000		—
Secured debt assumed with the acquisition of a
property	113,063		—
Receipt of note receivable in connection with
sales of real estate investments	75,586		—
Deferred gain in connection with sales of real
estate investments	4,040		—

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

link1 "CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY"

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

								Deferred		Notes
								Compensation —		Receivable		Accumulated
Preferred Stock			Common Stock			Distributions		Unearned		from		Other
					Paid-in	in Excess of		Restricted		Officer —		Comprehensive
Shares		Amount	Shares	Amount	Capital	Net Income		Stock Awards		Stockholders		Loss		Total
Balance, December 31, 2003	10,841,226	$ 236,564	127,295,126	$ 127,295	$ 1,458,983	$ (651,497	)	$ (5,588	)	$ (459	)	$ (1,862	)	$ 1,163,436
Comprehensive income
Net income						71,638								71,638
Other comprehensive income:
Unrealized gain on derivative financial
instruments												1,862		1,862
Comprehensive income						71,638						1,862		73,500
Issuance of common shares to employees, officers,
and director- stockholders			245,208	246	2,064									2,310
Issuance of common shares through dividend
reinvestment and stock purchase plan			76,314	76	1,384									1,460
Issuance of restricted stock awards			110,565	110	3,196			(3,306	)					—
Adjustment for conversion of minority interests
of unitholders in operating partnerships			91,369	92	641									733
Principal repayments on notes receivable from
officer- stockholders										459				459
Accretion of premium on Series D redemptions		4,687				(4,687	)							—
Common stock distributions declared ($0.8775 per
share)						(112,298	)							(112,298	)
Preferred stock distributions
declared-Series B ($1.6125 per share)						(8,733	)							(8,733	)
Preferred stock distributions
declared-Series D ($1.5669 per share)						(3,125	)							(3,125	)
Preferred stock distributions
declared-Series E ($0.9968 per share)						(3,413	)							(3,413	)
Amortization of deferred compensation								1,778						1,778
Balance, September 30, 2004	10,841,226	$ 241,251	127,818,582	$ 127,819	$ 1,466,268	$ (712,115	)	$ (7,116	)	$ —		$ —		$ 1,116,107

See accompanying notes to consolidated financial statements.

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link1 "UNITED DOMINION REALTY TRUST, INC."

UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(UNAUDITED)

1. CONSOLIDATION AND BASIS OF PRESENTATION

United Dominion Realty Trust, Inc. is a self-administered real estate investment trust, or REIT, that owns acquires, renovates, develops, and manages middle-market apartment communities nationwide. The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P., (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”), (collectively, “United Dominion”). As of September 30, 2004, there were 130,397,811 units in the Operating Partnership outstanding, of which 120,294,591 units or 92.3% were owned by United Dominion and 10,103,220 units or 7.7% were owned by limited partners. As of September 30, 2004, there were 5,542,200 units in the Heritage OP outstanding, of which 5,186,945 units or 93.6% were owned by United Dominion and 355,255 units or 6.4% were owned by limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the Operating Partnership and the Heritage OP. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in United Dominion’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission as reissued, in an updated format, on the Current Report on Form 8-K filed August 20, 2004.

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, 2004 and results of operations for the interim periods ended September 30, 2004 and 2003. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. These reclassifications have no effect on United Dominion’s reported net income available to common stockholders and stockholders’ equity for 2003. During the third quarter of 2004, we recognized a $5.5 million charge to cover expenses associated with the damage in Florida caused by hurricanes Charley, Frances, and Jeanne.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1. REAL ESTATE HELD FOR INVESTMENT

At September 30, 2004, there are 261 communities with 75,082 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment, (dollars in thousands):

	September 30, — 2004	2003
Land and land improvements	$ 971,494	$	802,301
Buildings and improvements	3,395,263		3,028,452
Furniture, fixtures, and equipment	228,956		208,658
Real estate held for investment	4,595,713		4,039,411
Accumulated depreciation	(959,095	)	(834,209	)
Real estate held for investment, net	$ 3,636,618	$	3,205,202

1. INCOME FROM DISCONTINUED OPERATIONS

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

For purposes of these financial statements, FAS 144 results in the presentation of the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through September 30, 2004, as discontinued operations for all periods presented. The adoption of FAS 144 does not have an impact on net income available to common stockholders. FAS 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through September 30, 2004, within the Consolidated Statements of Operations for the quarters and the nine month periods ended September 30, 2004 and 2003, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2004 and 2003.

For the nine months ended September 30, 2004, United Dominion sold ten communities with 3,100 apartment homes. In conjunction with the sales, we received a note receivable for $75.6 million that bears interest at 7.0% and matures on December 31, 2004. As of September 30, 2004, the balance on the note receivable was $10.6 million. We recognized gains for financial reporting purposes of $35.2 million on these sales and will recognize $4.0 million in additional gains as the note receivable matures. At September 30, 2004, United Dominion had ten communities with a total of 2,361 apartment homes and a net book value of $102.4 million and two parcels of land with a net book value of $4.6 million included in real estate held for disposition. For the year ended December 31, 2003, United Dominion sold seven communities with a total of 1,927 apartment homes, two commercial properties and one parcel of land. The results of operations for these properties and the interest expense associated with the secured debt on these properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations, net of minority interests.”

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of income from discontinued operations for the three and nine months ended September 30, (dollars in thousands) :

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Rental income	$ 5,432	$	12,988	$	23,641	$	41,524
Rental expenses	2,389		5,793		10,236		17,415
Real estate depreciation	669		2,856		4,394		9,679
Other expenses	9		27		55		85
	3,067		8,676		14,685		27,179
Income before gain on sale of depreciable
property and minority interests	2,365		4,312		8,956		14,345
Net gain on sale of depreciable property	20,220		7,215		35,239		8,149
Income before minority interests	22,585		11,527		44,195		22,494
Minority interests on income from discontinued
operations	(1,439	)	(686	)	(2,815	)	(1,338	)
Income from discontinued operations, net of
minority interests	$ 21,146	$	10,841	$	41,380	$	21,156

1. SECURED DEBT

Secured debt on continuing and discontinued operations, which encumbers $1.6 billion or 33% of United Dominion’s real estate owned based upon book value ($3.2 billion or 67% of United Dominion’s real estate owned is unencumbered) consists of the following as of September 30, 2004 ( dollars in thousands ):

			Weighted	Weighted — Average	Number of
	Principal Outstanding		Average	Years to	Communities
			Interest Rate	Maturity	Encumbered
	September 30,	December 31,
	2004	2003	2004	2004	2004
Fixed Rate Debt
Mortgage notes payable	$ 230,799	$ 174,520	6.42 %	6.5	13
Tax-exempt secured notes payable	39,345	42,540	6.13 %	17.0	4
Fannie Mae credit facilities	288,875	288,875	6.40 %	6.3	9
Fannie Mae credit facilities — swapped	—	17,000	—	—	—
Total fixed rate secured debt	559,019	522,935	6.39 %	7.1	26
Variable Rate Debt
Mortgage notes payable	45,842	46,185	2.93 %	7.2	4
Tax-exempt secured note payable	7,770	7,770	1.42 %	23.4	1
Fannie Mae credit facilities	387,469	370,469	2.06 %	12.6	51
Freddie Mac credit facility	70,669	70,669	2.07 %	6.3	8
Total variable rate secured debt	511,750	495,093	2.13 %	11.4	64
Total secured debt	$ 1,070,769	$ 1,018,028	4.35 %	9.2	90

Weighted average years to maturity include certain extension options.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Approximate principal payments due during each of the next five calendar years and thereafter, as of September 30, 2004, are as follows (dollars in thousands):

	Fixed Rate	Variable Rate	Total — Secured
Year	Maturities	Maturities	Maturities
2004	$ 1,482	$ 88	$ 1,570
2005	20,146	4,633	24,779
2006	61,039	3,706	64,745
2007	8,693	70,669	79,362
2008	11,854	—	11,854
Thereafter	455,805	432,654	888,459
	$ 559,019	$ 511,750	$ 1,070,769

1. UNSECURED DEBT

A summary of unsecured debt as of September 30, 2004 and December 31, 2003 is as follows ( dollars in thousands ):

	2004	2003
Commercial Banks
Borrowings outstanding under an unsecured credit
facility due March 2006(a)	$ 269,900	$ 137,900
Senior Unsecured Notes —
Other
7.67% Medium-Term Notes due January 2004	—	46,585
7.73% Medium-Term Notes due April 2005	21,100	21,100
7.02% Medium-Term Notes due November 2005	49,760	49,760
Verano Construction Loan due February 2006	24,820	—
7.95% Medium-Term Notes due July 2006	85,374	85,374
7.07% Medium-Term Notes due November 2006	25,000	25,000
7.25% Notes due January 2007	92,255	92,255
4.30% Medium-Term Notes due July 2007	50,000	—
4.50% Medium-Term Notes due March 2008	200,000	200,000
ABAG Tax-Exempt Bonds due August 2008	46,700	46,700
8.50% Monthly Income Notes due November 2008	29,081	29,081
4.25% Medium-Term Notes due January 2009	50,000	50,000
6.50% Notes due June 2009	200,000	200,000
3.90% Medium-Term Notes due March 2010	50,000	—
5.13% Medium-Term Notes due January 2014	200,000	75,000
8.50% Debentures due September 2024	54,118	54,118
Other(b)	847	1,136
	1,179,055	976,109
Total Unsecured Debt	$ 1,448,955	$ 1,114,009

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

| (a) | United Dominion has a three-year
$500 million unsecured revolving credit facility. If United
Dominion receives commitments from additional lenders or if the
initial lenders increase their commitments, United Dominion will
be able to increase the credit facility to $650 million. At
United Dominion’s option, the credit facility can be
extended for one year to March 2007. |
| --- | --- |
| (b) | Represents deferred gains from the termination of
interest rate risk management agreements. |

1. FINANCIAL INSTRUMENTS

United Dominion accounts for its derivative instruments in accordance with Statements of Financial Accounting Standards No. 133 and No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” At September 30, 2004, United Dominion has no derivative financial instruments reported on its Consolidated Balance Sheet. Prior to their maturity, United Dominion’s derivative financial instruments consisted of interest rate swap agreements that were designated as cash flow hedges of debt with variable interest rate features, and as qualifying hedges for financial reporting purposes. For a derivative instrument that qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

The fair value of United Dominion’s derivative instruments were reported on the balance sheet at their current fair value. The estimated fair value for our interest rate swaps relied on prevailing market interest rates. The interest rate swap agreements were designated with all or a portion of the principal balance and term of a specific debt obligation. Each interest rate swap involved the periodic exchange of payments over the life of the related agreement. An amount received or paid on the interest rate swap was recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt based on the accrual method of accounting. The related amount payable to and receivable from counterparties was included in other liabilities and other assets, respectively.

1. 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 upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on United Dominion’s average stock price.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share data):

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Numerator for basic and diluted earnings per
share — Net income available to common stockholders	$ 21,160	$	1,242	$	51,680	$	10,439
Denominator:
Denominator for basic earnings per
share —
Weighted average common shares outstanding	127,794		116,865		127,694		112,662
Non-vested restricted stock awards	(612	)	(515	)	(595	)	(410	)
	127,182		116,350		127,099		112,252
Effect of dilutive securities:
Employee stock options and non-vested restricted
stock awards	1,015		—		964		—
Denominator for diluted earnings per share	128,197		116,350		128,063		112,252
Basic earnings per share	$ 0.17	$	0.01	$	0.41	$	0.09
Diluted earnings per share	$ 0.17	$	0.01	$	0.40	$	0.09

The effect of the conversion of the operating partnership units, Series A Out-Performance Partnership Units, and convertible preferred stock is not dilutive and is therefore not included in the above calculations. If the operating partnership units were converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2004 would be 8,677,459 and 8,681,292 weighted average common shares, and 8,541,946 and 7,602,342 weighted average common shares for the three and nine months ended September 30, 2003. If the Series A Out-Performance Partnership Units were converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2004 would be 1,791,329 weighted average common shares, and 1,853,204 weighted average common shares for the three and nine months ended September 30, 2003. If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2004 would be 6,502,140 weighted average common shares, and 12,655,986 and 12,200,073 weighted average common shares for the three and nine months ended September 30, 2003, respectively.

1. STOCK-BASED COMPENSATION

United Dominion has elected to follow the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for its employee stock options because the alternative fair value accounting provided for under Statement No. 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of United Dominion’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth United Dominion’s earnings and earnings per share had United Dominion’s stock-based compensation expense been determined based upon the fair value method at the date of grant, consistent with the provisions of SFAS 123 (dollars in thousands, except per share data) :

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Reported net income available to common
stockholders	$ 21,160	$	1,242	$	51,680	$	10,439
Stock-based employee compensation cost included
in net income	693		947		1,790		2,003
Stock-based employee compensation cost that would
have been included in net income under the fair value method	(703	)	(1,021	)	(1,867	)	(2,226	)
Adjusted net income available to common
stockholders	$ 21,150	$	1,168	$	51,603	$	10,216
Earnings per common share — basic
As reported	$ 0.17	$	0.01	$	0.41	$	0.09
Pro forma	$ 0.17	$	0.01	$	0.41	$	0.09
Earnings per common share — diluted
As reported	$ 0.17	$	0.01	$	0.40	$	0.09
Pro forma	$ 0.16	$	0.01	$	0.40	$	0.09

1. COMPREHENSIVE INCOME

Total comprehensive income for the three and nine months ended September 30, 2004 and 2003 was $27.8 million and $73.5 million for 2004 and $22.2 million and $56.5 million for 2003, respectively. The difference between net income and total comprehensive income is primarily due to the fair value accounting for interest rate swaps.

1. COMMITMENTS AND CONTINGENCIES

Commitments

United Dominion is committed to completing its real estate under development, which has an estimated cost to complete of $63.0 million at September 30, 2004.

Contingencies

Series B Out-Performance Program

In May 2003, the stockholders of United Dominion approved the Series B Out-Performance Program (the “Series B Program”) pursuant to which certain executive officers of United Dominion (the “Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in a limited liability company (the “Series B LLC”), the only asset of which is a special class of partnership units of United Dominion Realty, L.P. (“Series B Out-Performance Partnership Shares” or “Series B OPPSs”) . The purchase price for the Series B OPPSs was determined by United Dominion’s board of directors to be $1 million, assuming 100% participation, and was based upon the advice of an

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

independent valuation expert. The Series B Program will measure the cumulative total return on our common stock over the 24-month period from June 1, 2003 to May 31, 2005.

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

At the conclusion of the measurement period, if United Dominion’s total cumulative return satisfies these criteria, the Series B LLC as holder of the Series B OPPSs will receive (for the indirect benefit of the Participants as holders of interests in the Series B LLC) distributions and allocations of income and loss from the Operating Partnership (accounted for on a consistent basis with all other OP Units) equal to the distributions and allocations that would be received on the number of OP Units obtained by:

| i. determining the amount by which the
cumulative total return of United Dominion’s common stock
over the measurement period exceeds the greater of the
cumulative total return of the Morgan Stanley REIT Index, which
is the peer group index, or the minimum return (such excess
being the “excess return”); |
| --- |
| ii. multiplying 5% of the excess return by
United Dominion’s market capitalization (defined as the
average number of shares outstanding over the 24-month period,
including common stock, OP Units, outstanding options, and
convertible securities) multiplied by the daily closing price of
United Dominion’s common stock, up to a maximum of 2% of
market capitalization; and |
| iii. dividing the number obtained in
(ii) by the market value of one share of United
Dominion’s common stock on the valuation date, determined
by the volume-weighted average price per day of common stock for
the 20 trading days immediately preceding the valuation
date. |

If, on the valuation date, the cumulative total return of United Dominion’s common stock does not meet the minimum return, then the participants will forfeit their entire initial investment.

1. RELATED PARTY TRANSACTIONS

United Dominion’s notes receivable from certain officers matured in June 2004. The purpose of the loans was for the borrowers to purchase shares of United Dominion’s common stock pursuant to United Dominion’s 1991 Stock Purchase and Loan Plan. The loans were evidenced by promissory notes between the borrowers and United Dominion and secured by a pledge of the shares of common stock.

In addition, United Dominion had entered into a Servicing and Purchase Agreement (the “Servicing Agreement”) with SunTrust Bank (the “Bank”) whereby United Dominion acted as servicing agent for and to purchase certain loans made by the Bank to officers and directors of United Dominion (the “Borrowers”) to finance the purchase of shares of United Dominion’s common stock. The loans were evidenced by promissory notes (“Notes”) between each Borrower and the Bank. The Servicing Agreement provided that the Bank could require United Dominion to purchase the Notes upon an event of default by the Borrower or United Dominion and at certain other times during the term of the Servicing Agreement. All of the Notes matured in June 2004. At that time, all outstanding Notes were paid and the Servicing Agreement was terminated.

1. SUBSEQUENT EVENTS

In August 2004, United Dominion entered into an agreement to acquire a portfolio of 16 garden-style communities with 4,646 existing homes (“The Essex Portfolio”), located in California and Oregon, from Essex Apartment Value Fund, an affiliate of Essex Property Trust. Subsequent to September 30, 2004,

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

United Dominion took over the management of two communities, River Terrace and Coronado at Newport-South (650 units), and purchased an additional seven communities (1,904 units) included in The Essex Portfolio for a total consideration of $322.1 million.

On October 7, 2004, United Dominion completed the sale of $100 million of 5.00% senior unsecured notes due January 2012 and $25 million of 4.30% senior unsecured notes due July 2007 under its $1.5 billion shelf registration statement. The $25 million in notes represents a re-opening of the 4.30% senior notes due July 2007 issued by United Dominion in June 2004, and these notes will constitute a single series of notes, bringing the aggregate principal amount outstanding of the 4.30% senior notes to $75 million. The net proceeds of $124.4 million from these issuances were used to fund the acquisition of apartment communities.

On November 1, 2004, United Dominion completed the sale of $100 million of 5.25% senior unsecured notes due January 2015 under its $1.5 billion shelf registration statement. The net proceeds of $99.0 million from this issuance were used to fund the acquisition of apartment communities.

On November 2, 2004, United Dominion completed the sale of 3.5 million shares of common stock at a public offering price of $20.50 under its $1.5 billion shelf registration statement. On November 2, 2004, United Dominion sold an additional 525,000 shares of common stock at a public offering price of $20.50 per share in connection with the exercise of the underwriter’s over-allotment option. The net proceeds of $81.9 million were used to reduce outstanding balances under our $500 million unsecured revolving credit facility, which was used to fund the acquisition of apartment communities.

In October 2004, we filed a prospectus supplement under the Securities Act of 1933 relating to the offering of up to five million shares of our common stock that we may issue and sell through an agent from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. These sales will be made under our $1.5 billion shelf registration statement pursuant to a sales agreement that we entered into with the agent in July 2003. The sales price of the common stock that may be sold under the sales agreement will be no lower than the minimum price designated by us prior to the sale. As of September 30, 2004, we had not sold any shares of common stock pursuant to the sales agreement. As of November 8, 2004, we have sold a total of 472,000 shares of common stock pursuant to the sales agreement at a weighted average sales price of $20.36, for net proceeds to us of approximately $9.4 million.

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link1 "Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Dominion Realty Trust, Inc. to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Business Overview

We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. We were formed in 1972 as a Virginia corporation and we changed our state of incorporation from Virginia to Maryland in 2003. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.

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At September 30, 2004, our portfolio included 271 communities with 77,443 apartment homes nationwide. The following table summarizes our market information by major geographic markets (includes real estate held for disposition, real estate under development, and land, but excludes commercial properties):

					Three Months Ended		Nine Months Ended
As of September 30, 2004					September 30, 2004		September 30, 2004
Number of	Number of	Percentage of		Carrying	Average	Average	Average	Average
Apartment	Apartment	Carrying		Value	Physical	Collections Per	Physical	Collections Per
Communities	Homes	Value		(in thousands)	Occupancy	Occupied Home	Occupancy	Occupied Home
Southern California	17	4,423	12.1%	$ 576,918	94.4%	$ 791	94.5%	$ 742
Houston, TX	21	6,034	5.6%	268,994	91.2%	619	91.0%	629
Northern California	7	2,024	4.5%	215,758	94.8%	1,096	94.4%	1,074
Orlando, FL	14	4,140	4.5%	215,308	95.3%	711	94.0%	706
Metropolitan DC	7	2,245	4.4%	210,695	96.9%	1,093	96.3%	1,061
Raleigh, NC	11	3,663	4.4%	210,560	93.3%	632	93.1%	638
Dallas, TX	11	3,590	4.1%	196,893	96.1%	647	96.0%	621
Tampa, FL	11	3,836	4.1%	194,585	95.3%	720	94.7%	713
Phoenix, AZ	10	2,779	3.6%	173,736	91.3%	663	91.4%	670
Baltimore, MD	10	2,118	3.4%	160,016	96.5%	930	96.2%	823
Columbus, OH	6	2,530	3.2%	152,072	92.1%	660	91.8%	670
Nashville, TN	9	2,580	3.2%	151,375	95.0%	691	94.4%	623
Monterey Peninsula, CA	8	1,604	3.0%	141,716	92.5%	919	92.1%	923
Charlotte, NC	9	2,378	2.9%	135,683	92.4%	537	91.7%	516
Richmond, VA	9	2,636	2.8%	135,104	94.2%	757	94.2%	749
Arlington, TX	8	2,656	2.7%	126,281	93.1%	632	93.0%	633
Greensboro, NC	8	2,123	2.2%	106,948	92.7%	589	93.0%	588
Seattle, WA	6	1,575	2.1%	99,207	92.4%	747	93.3%	759
Denver, CO	3	1,484	2.1%	99,058	94.0%	643	93.3%	642
Wilmington, NC	6	1,868	1.9%	93,026	97.5%	658	95.4%	643
Portland, OR	6	1,490	1.9%	91,586	91.6%	462	91.4%	467
Austin, TX	5	1,425	1.7%	81,920	89.1%	653	90.6%	547
Atlanta, GA	6	1,426	1.6%	74,856	92.9%	611	91.8%	616
Columbia, SC	6	1,584	1.3%	64,452	93.7%	609	93.1%	602
Jacksonville, FL	3	1,157	1.3%	60,809	93.5%	695	93.6%	700
Norfolk, VA	6	1,438	1.2%	58,155	96.6%	793	96.6%	780
Lansing, MI	4	1,226	1.1%	52,497	91.9%	620	92.0%	631
Other Southwestern	12	4,100	4.4%	208,271	93.8%	616	93.5%	620
Other North Carolina	8	1,893	1.6%	77,969	95.9%	625	96.1%	619
Other Midwestern	7	1,188	1.4%	66,493	93.1%	683	93.0%	687
Other Southeastern	3	1,153	1.3%	60,819	93.0%	552	93.5%	557
Other Mid-Atlantic	6	1,156	1.2%	55,778	94.8%	837	94.2%	817
Other Virginia	3	820	1.0%	46,892	93.5%	939	92.3%	919
Other Florida	5	1,101	0.9%	45,198	95.3%	677	94.3%	665
Real Estate Under Development	—	—	0.7%	35,622	—	—	—	—
Land	—	—	0.6%	29,053	—	—	—	—
Total	271	77,443	100.0%	$ 4,774,303	93.9%	$ 703	93.5%	$ 690

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Liquidity and Capital Resources

Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes. We routinely use our 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 sale of real estate have been used for both investing and financing activities.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings under credit arrangements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through long-term secured and unsecured borrowings, the disposition of properties, and the issuance of additional debt or equity securities. We believe that our net cash provided by operations will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements in both the short- and long-term. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from cash flow from property operations.

We have a shelf registration statement filed with the Securities and Exchange Commission which provides for the issuance of up to an aggregate of $1.5 billion in common shares, preferred shares, and debt securities to facilitate future financing activities in the public capital markets. This shelf registration statement replaces our previous $1.0 billion shelf registration statement and includes $331.3 million of unissued securities carried forward from the previous $1.0 billion shelf registration statement. During the nine months ended September 30, 2004, we completed various financing activities under our shelf registration statements. These activities are summarized in the section entitled “Financing Activities” that follows. As of September 30, 2004, approximately $1.45 billion of equity and debt securities remained available for issuance under our new $1.5 billion shelf registration statement. Access to capital markets is dependent on market conditions at the time of issuance.

On October 7, 2004, United Dominion completed the sale of $100 million of 5.00% senior unsecured notes due January 2012 and $25 million of 4.30% senior unsecured notes due July 2007 under its $1.5 billion shelf registration statement. The $25 million in notes represents a re-opening of the 4.30% senior notes due July 2007 issued by United Dominion in June 2004, and these notes will constitute a single series of notes, bringing the aggregate principal amount outstanding of the 4.30% senior notes to $75 million. The net proceeds of $124.4 million from these issuances were used to fund the acquisition of apartment communities. On November 1, 2004, United Dominion completed the sale of $100 million of 5.25% senior unsecured notes due January 2015 under its $1.5 billion shelf registration statement. The net proceeds of $99.0 million were used to fund the acquisition of apartment communities. On November 2, 2004, United Dominion completed the sale of 3.5 million shares of common stock at a public offering price of $20.50 under its $1.5 billion shelf registration statement, and sold an additional 525,000 shares of common stock at a public offering price of $20.50 per share in connection with the exercise of the underwriter’s over-allotment option. The net proceeds of $81.9 million were used to reduce outstanding balances under our $500 million unsecured revolving credit facility, which was used to fund the acquisition of apartment communities.

In October 2004, we filed a prospectus supplement under the Securities Act of 1933 relating to the offering of up to five million shares of our common stock that we may issue and sell through an agent from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. These sales will be made under our $1.5 billion shelf registration statement pursuant to a sales agreement that we entered into with the agent in July 2003. The sales price of the common stock that may be sold under the sales agreement will be no lower than the minimum price designated by us prior to the sale. As of September 30, 2004, we had not sold any shares of common stock pursuant to the sales agreement. As

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of November 8, 2004, we have sold a total of 472,000 shares of common stock pursuant to the sales agreement at a weighted average sales price of $20.36, for net proceeds to us of approximately $9.4 million.

In July 2004, Moody’s Investors Service upgraded our rating on our senior unsecured debt from Baa3 to Baa2 and our preferred stock from Ba1 to Baa3 with a stable outlook.

Future Capital Needs

Future development expenditures are expected to be funded primarily through joint ventures, with proceeds from the sale of property, with construction loans and, to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be financed through the issuance of equity and debt securities, the issuance of operating partnership units, the assumption or placement of secured and/or unsecured debt, and by the reinvestment of proceeds from the sale of properties.

During the remainder of 2004, we have approximately $1.6 million of secured debt maturing that we anticipate repaying with proceeds from borrowings under our secured or unsecured credit facilities, or the issuance of new unsecured debt securities or equity.

Critical Accounting Policies and Estimates

Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) derivatives and hedging activities, and (4) real estate investment properties. Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2003. There have been no significant changes in our critical accounting policies from those reported in our 2003 Annual Report on Form 10-K. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.

Statements of Cash Flow

The following discussion explains the changes in net cash provided by operating activities and net cash provided by or used in investing and financing activities that are presented in our Consolidated Statements of Cash Flows.

Operating Activities

For the nine months ended September 30, 2004, our cash flow provided by operating activities was $175.0 million compared to $164.6 million for the same period in 2003. The increase in cash flow from operating activities resulted primarily from a $7.3 million increase in property operating activities, and a $2.9 million decrease in general and administrative expense.

Investing Activities

For the nine months ended September 30, 2004, net cash used in investing activities was $318.7 million compared to $147.6 million for the same period in 2003. Changes in the level of investing activities from period to period reflects our strategy as it relates to our acquisition, capital expenditure, development, and disposition programs, as well as the impact of the capital market environment on these activities, all of which are discussed in further detail below.

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Acquisitions

During the nine months ended September 30, 2004, we acquired 17 apartment communities with 4,299 apartment homes and one parcel of land. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in the fast growing Southern California, Florida, and Metropolitan DC markets over the past two years. During the remainder of 2004, we plan to continue to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including past performance, expected job growth, portfolio diversification, location of current holdings, current and anticipated housing supply and demand, and the ability to attract and support household formation.

Capital Expenditures

In conformity with accounting principles generally accepted in the United States, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.

During the first nine months of 2004, we spent $51.3 million or $677 per home on capital expenditures for all of our communities, excluding development. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, siding, parking lots, and other non-revenue enhancing capital expenditures, which aggregated $25.8 million or $340 per home. In addition, revenue enhancing capital expenditures, including water sub-metering, the initial installation of microwaves or washer-dryers, and extensive interior upgrades (including kitchen and bathroom remodeling) totaled $25.3 million or $334 per home and major renovations totaled $0.2 million or $3 per home for the nine months ended September 30, 2004.

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

	Nine Months Ended September 30,			Nine Months Ended September 30,
	(dollars in thousands)			(per home)
	2004	2003	% Change	2004	2003	% Change
Turnover capital expenditures	$ 12,745	$ 11,618	9.7 %	$ 168	$ 157	7.0 %
Other recurring capital expenditures	13,013	16,249	-19.9 %	172	219	-21.5 %
Total recurring capital expenditures	25,758	27,867	-7.6 %	340	376	-9.6 %
Revenue enhancing improvements	25,322	8,200	208.8 %	334	111	200.9 %
Major renovations	197	2,730	-92.8 %	3	37	-91.9 %
Total capital improvements	$ 51,277	$ 38,797	32.2 %	$ 677	$ 524	29.2 %
Repair and maintenance	31,400	29,638	5.9 %	414	400	3.5 %
Total expenditures	$ 82,677	$ 68,435	20.8 %	$ 1,091	$ 924	18.1 %

Total capital improvements increased $12.5 million or $153 per home for the first nine months of 2004 compared to the same period in 2003. We will continue to selectively add revenue enhancing improvements which we believe will provide a return on investment substantially in excess of our cost of capital. Recurring capital expenditures during 2004 are currently expected to be approximately $490 per home.

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Real Estate Under Development

Development activity is focused in core markets in which we have strong operations in place. For the nine months ended September 30, 2004, we invested approximately $13.4 million on development projects, an increase of $1.0 million from $12.4 million for the same period in 2003.

The following projects were under development as of September 30, 2004:

	Apartment	Apartment		Cost to Date	Budgeted Cost	Estimated — Cost Per	Expected — Completion
Location	Homes	Homes		(In thousands)	(In thousands)	Home	Date
Verano at Town Square	Rancho Cucamonga, CA	414	—	$ 24,400	$ 65,100	$ 157,200	1Q06
Mandalay on the Lake	Irving, TX	369	—	8,600	30,900	83,700	1Q06
		783	—	$ 33,000	$ 96,000	$ 122,600

In addition, we own eight parcels of land that we continue to hold for future development that had a carrying value at September 30, 2004 of $27.0 million. Five of the eight parcels represent additional phases to existing communities as we plan to add apartment homes adjacent to currently owned communities that are in improving markets.

Disposition of Investments

For the nine months ended September 30, 2004, we sold ten communities with 3,100 apartment homes for a gross consideration of $158.5 million. In conjunction with the sales, we received a note receivable for $75.6 million that bears interest at 7.0% and matures on December 31, 2004. As of September 30, 2004, the balance on the note receivable was $10.6 million. We recognized gains for financial reporting purposes of $35.2 million on these sales and will recognize $4.0 million in additional gains as the note receivable matures. Proceeds from the sales were used primarily to reduce debt.

During 2004, we plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital into markets that would enhance future growth rates and economies of scale. We intend to use proceeds from 2004 dispositions to acquire communities, fund development activity, and reduce debt.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2004, was $140.8 million compared to net cash used in financing activities of $7.3 million for the same period in 2003. As part of the plan to improve our balance sheet, we utilized proceeds from dispositions, equity and debt offerings, and refinancings to extend maturities, pay down existing debt, and purchase new properties.

The following is a summary of our financing activities for the nine months ended September 30, 2004:

| • | Repaid $60.3 million of secured debt and
$46.6 million of unsecured debt. |
| --- | --- |
| • | Sold $125 million aggregate principal amount
of 5.13% senior unsecured notes due January 2014
($75 million in January and $50 million in March)
under our previous medium-term note program. These notes
represent a re-opening of the 5.13% senior notes due
January 2014 that we issued in October 2003, and these notes
constitute a single series of notes, bringing the aggregate
principal amount outstanding of the 5.13% senior notes to
$200 million. The net proceeds from the issuances of
$126.0 million were used to repay secured and unsecured
debt obligations maturing in the first quarter of 2004 and to
fund the acquisition of apartment homes. |
| • | Sold $50 million aggregate principal amount
of 3.90% medium-term notes due March 2010 in March 2004 under
our previous medium-term note program. The net proceeds from the
issuance of approximately $49.4 million were used to fund
the acquisition of apartment communities. |

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| • | Replaced our previous $1.0 billion shelf
registration statement with a new shelf registration statement
for $1.5 billion in debt securities and preferred and
common stock in June 2004. The new $1.5 billion shelf
registration statement includes $331.1 million of unissued
securities carried forward from our previous shelf registration
statement. |
| --- | --- |
| • | Sold $50 million aggregate principal amount
of 4.30% medium-term notes due July 2007 in June 2004 under our
new $750 million medium-term note program. The net proceeds
from the issuance of approximately $49.8 million will be
used to fund acquisitions of apartment communities and repay
amounts outstanding on our $500 million unsecured credit
facility. |
| • | In conjunction with an acquisition, we assumed a
secured mortgage of $61.8 million that amortizes principal
monthly and has a balloon payment of $52.6 million due June
2013. |
| • | Moody’s Investors Service upgraded our
rating on our senior unsecured debt from Baa3 to Baa2 and our
preferred stock from Ba1 to Baa3 with a stable outlook in July
2004. |

Credit Facilities

We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million and one with Freddie Mac for $72 million. As of September 30, 2004, $676.3 million was outstanding under the Fannie Mae credit facilities leaving $183.7 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten years, bear interest at floating and fixed rates, and can be extended for an additional five years at our discretion. As of September 30, 2004, $70.7 million had been funded under the Freddie Mac credit facility leaving $1.3 million of unused capacity. The Freddie Mac credit facility is for an initial term of five years with an option for us to extend for an additional four-year term at the then market rate. As of September 30, 2004, aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities were $747 million. We have $288.9 million of the funded balance fixed at a weighted average interest rate of 6.4%. The remaining balance on these facilities is currently at a weighted average variable rate of 2.1%.

We have a $500 million three-year unsecured revolving credit facility that matures in March 2006. If we receive commitments from additional lenders or if the initial lenders increase their commitments, we will be able to increase the credit facility to $650 million. At our option, the maturity date of the credit facility can be extended one year to March 2007. Based on our current credit rating, the credit facility bears interest at a rate equal to LIBOR plus 90 basis points. As of September 30, 2004, $269.9 million was outstanding under the credit facility leaving $230.1 million of unused capacity.

The Fannie Mae, Freddie Mac, and bank revolving credit facilities are subject to customary financial covenants and limitations.

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

	Three Months Ended	Twelve Months Ended
	September 30, 2004	December 31, 2003
Total revolving credit facility	$ 500,000	$ 500,000
Borrowings outstanding at end of period	269,900	137,900
Weighted average daily borrowings during the
period	94,565	171,179
Maximum daily borrowings during the period	287,200	272,800
Weighted average interest rate during the period	2.1 %	2.1 %
Weighted average interest rate at end of period	2.1 %	1.6 %
Weighted average interest rate at end of
period — after giving effect to swap agreements	2.1 %	4.2 %

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Derivative Instruments

As part of our overall interest rate risk management strategy, we have used derivatives as a means to fix the interest rates of variable rate debt obligations or to hedge anticipated financing transactions. Our derivative transactions used for interest rate risk management included various interest rate swaps with indices that related to the pricing of specific financial instruments of the company. We believe that we appropriately controlled our interest rate risk through the use of derivative instruments. During the nine months ended September 30, 2004, the fair value of our derivative instruments improved from an unfavorable $1.6 million at December 31, 2003, to $0 at September 30, 2004. This decrease is primarily due to the normal progression of the fair market value of our derivative instruments towards zero as they matured. As of September 30, 2004, all of United Dominion’s interest rate swap agreements had matured.

Funds from Operations

Funds from operations, or FFO, is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We compute FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trust’s (“NAREIT”) April 1, 2002 White Paper. We consider FFO in evaluating property acquisitions and our operating performance, and believe that FFO should be considered along with, but not as an alternative to, net income as a measure of our operating performance. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.

Historical cost accounting for real estate assets in accordance with generally accepted accounting principles implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance and defines FFO as net income (computed in accordance with accounting principles generally accepted in the United States), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The use of FFO, combined with the required presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We generally consider FFO to be a useful measure for reviewing our comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. We believe that FFO is the best measure of economic profitability for real estate investment trusts.

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The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three and nine months ended September 30, (dollars and shares in thousands) :

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Net income	$ 27,816	$	20,444	$	71,638	$	49,369
Adjustments:
Distributions to preferred stockholders	(5,094	)	(7,102	)	(15,271	)	(20,580	)
Real estate depreciation and amortization, net of
outside partners’ interest in 2003	43,818		38,235		126,239		110,074
Minority interests of unitholders in operating
partnership	(10	)	145		698		88
Real estate depreciation related to
unconsolidated entities	70		52		207		137
Discontinued Operations:
Real estate depreciation	669		2,856		4,394		9,679
Minority interests of unitholders in operating
partnership	1,439		686		2,815		1,338
Net gain on sale of depreciable property	(20,220	)	(7,215	)	(35,239	)	(8,149	)
Funds from operations
(“FFO”) — basic	$ 48,488	$	48,101	$	155,481	$	141,956
Distributions to preferred
stockholders — Series D and E (Convertible)	2,183		4,191		6,538		11,847
Funds from operations —
diluted	$ 50,671	$	52,292	$	162,019	$	153,803
Gains on the disposition of real estate developed
for sale — diluted	—		812		—		812
FFO with gains on the disposition of real
estate developed for sale — diluted	$ 50,671	$	53,104	$	162,019	$	154,615
Weighted average number of common shares and OP
units outstanding — basic	135,859		124,892		135,780		119,855
Weighted average number of common shares, OP
units, and common stock equivalents outstanding —
diluted	145,168		140,424		145,038		134,870

In the computation of diluted FFO, OP units, out-performance partnership units, and the shares of Series D and Series E convertible preferred stock are dilutive; therefore, they are included in the diluted share count. For the three and nine months ended September 30, 2004, distributions to preferred stockholders exclude $1.6 million and $4.7 million, respectively, related to a premium on preferred stock conversions. For both the three and nine months ended September 30, 2003, distributions to preferred stockholders exclude $12.1 million and $18.4 million, respectively, related to a premium on preferred stock conversions.

Gains from the disposition of real estate investments developed for sale is defined as net sales proceeds less a tax provision (such development by REITs must be conducted in a TRS) and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains/losses on real estate developed for sale to be a meaningful supplemental measure of performance because of the short-term use of funds to produce a profit that differs from the traditional long-term investment in real estate for REITs.

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The following is a reconciliation of GAAP gains from the disposition of real estate developed for sale to gross gains from the disposition of real estate developed for sale for the three and nine months ended September 30, (dollars in thousands) :

	Three Months Ended
	September 30,		September 30,
	2004	2003	2004		2003
GAAP gains on the disposition of real estate
developed for sale	$ —	$ 1,249	$	—	$ 1,249
Less: accumulated depreciation	—	(437	)	—	(437	)
Gains on the disposition of real estate developed
for sale	$ —	$ 812	$	—	$ 812

The following table is our reconciliation of FFO share information to weighted average common shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for the three and nine months ended September 30, (shares in thousands) :

September 30,				September 30,
2004		2003		2004		2003
Weighted average number of common shares and OP
units outstanding — basic	135,859		124,892		135,780		119,855
Weighted average number of OP units outstanding	(8,677	)	(8,542	)	(8,681	)	(7,603	)
Weighted average number of common shares
outstanding — basic per the Consolidated Statements of
Operations	127,182		116,350		127,099		112,252
Weighted average number of common shares, OP
units, and common stock equivalents outstanding —
diluted	145,168		140,424		145,038		134,870
Weighted average number of OP units outstanding	(8,677	)	(8,542	)	(8,681	)	(7,603	)
Weighted average number of Series A OPPSs
outstanding	(1,792	)	(1,853	)	(1,792	)	(1,853	)
Weighted average number of Series D
preferred shares outstanding	(3,077	)	(9,231	)	(3,077	)	(10,820	)
Weighted average number of Series E
preferred shares outstanding	(3,425	)	(3,425	)	(3,425	)	(1,380	)
Weighted average number of stock options
outstanding	—		(1,023	)	—		(962	)
Weighted average number of common shares
outstanding — diluted per the Consolidated Statements
of Operations	128,197		116,350		128,063		112,252

FFO also does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by generally accepted accounting principles, as a measure of liquidity. Additionally, it is not necessarily indicative of cash availability to fund cash needs.

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The following is a presentation of cash flow metrics based on generally accepted accounting principles for the three and nine months ended September 30 ( dollars in thousands ):

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Net cash provided by operating activities	$ 68,242	$	63,824	$	175,003	$	164,630
Net cash (used in)/provided by investing
activities	(201,932	)	9,797		(318,667	)	(147,554	)
Net cash provided by/(used in) financing
activities	134,925		(62,308	)	140,828		(7,288	)

Results of Operations

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

Net Income Available to Common Stockholders

Net income available to common stockholders was $21.2 million ($0.17 per diluted share) for the quarter ended September 30, 2004, compared to $1.2 million ($0.01 per diluted share) for the same period in the prior year. The increase for the quarter ended September 30, 2004 when compared to the same period in 2003 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this report:

| • | $13.0 million more in gains recognized from
the sale of depreciable property; |
| --- | --- |
| • | a $10.5 million decrease in premiums paid on
preferred stock conversions; |
| • | a $2.7 million increase in operating results; |
| • | $2.0 million less in preferred stock
distributions; |
| • | a $1.7 million decrease in general and
administrative expense; |
| • | $1.4 million less in impairment loss on
investments; and |
| • | a $0.5 million increase in non-property
income. |

These increases in income were partially offset by a charge of $5.5 million for hurricane related expenses, a $3.4 million increase in depreciation and amortization expense, and a $2.1 million increase in interest expense during the third quarter of 2004 when compared to the same period in 2003.

Net income available to common stockholders was $51.7 million ($0.40 per diluted share) for the nine months ended September 30, 2004, compared to $10.4 million ($0.09 per diluted share) for the same period in the prior year. The increase for the nine months ended September 30, 2004 when compared to the same period in 2003 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this report:

| • | $27.1 million more in gains recognized from
the sale of depreciable property; |
| --- | --- |
| • | a $7.3 million increase in operating results; |
| • | a $13.7 million decrease in premiums paid on
preferred stock conversions; |
| • | $5.3 million less in preferred stock
distributions; |
| • | a $2.9 million decrease in general and
administrative expense; |
| • | a $1.5 million increase in non-property
income; |

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| • | $1.4 million less in impairment loss on
investments; and |
| --- | --- |
| • | a $0.8 million decrease in interest expense. |

These increases in income were partially offset by a charge of $5.5 million for hurricane related expenses and a $10.4 million increase in depreciation and amortization expense during the first nine months of 2004 when compared to the same period in 2003.

Apartment Community Operations

Our net income is primarily generated from the operation of our apartment communities. The following table summarizes the operating performance of our total apartment portfolio for each of the periods presented (dollars in thousands ):

	Three Months Ended September 30, — 2004	2003		% Change		Nine Months Ended September 30, — 2004	2003		% Change
Property rental income	$ 160,399	$	154,631		3.7 %	$ 478,482	$	459,306		4.2 %
Property operating expense*	(62,864	)	(59,780	)	5.2 %	(186,725	)	(174,855	)	6.8 %
Property operating income	$ 97,535	$	94,851		2.8 %	$ 291,757	$	284,451		2.6 %
Weighted average number of homes	76,149		75,555		0.8 %	76,222		74,330		2.5 %
Physical occupancy**	93.9	%	93.0	%	0.9 %	93.5	%	93.3	%	0.2 %

• Excludes depreciation, amortization, and property management expenses.

** Based upon weighted average stabilized homes.

The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the three and nine months ended September 30, (dollars in thousands) :

	Three Months Ended
	September 30,			September 30,
	2004	2003		2004		2003
Property operating income	$ 97,535	$	94,851	$	291,757	$	284,451
Commercial operating income	115		116		355		713
Non-property income	807		307		2,213		703
Real estate depreciation and amortization	(44,487	)	(41,091	)	(130,633	)	(120,188	)
Interest	(29,990	)	(27,844	)	(88,218	)	(89,016	)
General and administrative and property management	(8,266	)	(9,778	)	(26,398	)	(28,764	)
Hurricane related expenses	(5,503	)	—		(5,503	)	—
Impairment loss on investments	—		(1,392	)	—		(1,392	)
Other operating expenses	(1,134	)	(1,109	)	(3,495	)	(3,247	)
Net gain on sale of depreciable property	20,220		7,215		35,239		8,149
Minority interests	(1,481	)	(831	)	(3,679	)	(2,040	)
Net income per the Consolidated Statement of
Operations	$ 27,816	$	20,444	$	71,638	$	49,369

Same Communities

Our same communities (those communities acquired, developed, and stabilized prior to September 30, 2003 and held on September 30, 2004, which consisted of 66,925 apartment homes) provided 86% of our property operating income for the nine months ended September 30, 2004.

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For the third quarter of 2004, same community property operating income decreased 0.3% or $0.3 million compared to the same period in 2003. The decrease in property operating income was primarily attributable to a 1.3% or $1.9 million increase in revenues from rental and other income that was offset by a 4.0% or $2.2 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 12.3% or $1.3 million decrease in vacancy loss, and a 14.9% or $0.6 million increase in utility reimbursement income. Physical occupancy increased 0.9% to 94.0%.

The increase in property operating expenses was primarily driven by a 10.5% or $1.0 million increase in repair and maintenance costs, a 5.8% or $0.9 million increase in personnel costs, and a 4.1% or $0.4 million increase in utilities expense.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property operating income divided by property rental income) decreased 1.0% to 60.8%.

For the nine months ended September 30, 2004, same community property operating income decreased 2.1% or $5.3 million compared to the same period in 2003. The overall decrease in property operating income was primarily attributable to a 0.2% or $0.7 million increase in revenues from rental and other income that was offset by a 3.8% or $6.0 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 15.0% or $1.7 million increase in utility reimbursement income, a 5.0% or $1.5 million decrease in vacancy loss, and a 4.5% or $0.6 million decrease in concession expense. These increases in income were offset by a 0.9% or $3.8 million decrease in rental rates. Physical occupancy increased 0.3% to 93.6%.

The increase in property operating expenses was primarily driven by a 5.4% or $2.2 million increase in personnel costs, a 6.7% or $1.8 million increase in repair and maintenance costs, a 3.6% or $0.9 million increase in utilities expense, an 8.5% or $0.7 million increase in insurance costs, and a 1.3% or $0.5 million increase in property taxes.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin decreased 1.4% to 60.8%.

Non-Mature Communities

The remaining 14% of our property operating income during the first nine months of 2004 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed during 2003 and 2004, sold properties, and those properties classified as real estate held for disposition). The 28 communities with 7,813 apartment homes that we acquired during 2003 and 2004 provided $26.0 million of property operating income. The ten communities with 3,100 apartment homes sold during 2004 provided $4.6 million of property operating income. In addition, our development communities, which included 178 apartment homes constructed since January 1, 2003, provided $0.7 million of property operating income during 2004, the ten communities with 2,361 apartment homes classified as real estate held for disposition provided $8.7 million of property operating income, and other non-mature communities provided $1.2 million of property operating income for the nine months ended September 30, 2004.

Real Estate Depreciation and Amortization

For the three and nine months ended September 30, 2004, real estate depreciation and amortization on both continuing and discontinued operations increased 8.3% or $3.4 million and 8.7% or $10.4 million, respectively, compared to the same period in 2003, primarily due to the overall increase in the weighted average number of apartment homes.

Interest Expense

For the three months ended September 30, 2004, interest expense on both continuing and discontinued operations increased 7.7% or $2.1 million from the same period in 2003 primarily due to debt issuances. For the quarter ended September 30, 2004, the weighted average amount of debt outstanding

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increased 17.9% or $373.3 million compared to the prior year. However, this was partially offset by the weighted average interest rate declining from 5.4% to 4.8% during 2004. The weighted average amount of debt outstanding during 2004 is higher than 2003 as acquisition costs in 2004 have been funded, in most part, by the issuance of debt. The decrease in the weighted average interest rate during 2004 reflects our ability to take advantage of lower interest rates through refinancing and the utilization of variable rate debt.

For the nine months ended September 30, 2004, interest expense on both continuing and discontinued operations decreased 0.9% or $0.8 million from the same period in 2003 primarily due to debt refinancings and decreasing interest rates. For the nine months ended September 30, 2004, the weighted average amount of debt outstanding increased 10.9% or $223.9 million compared to the prior year. However, this was more than offset by the weighted average interest rate declining from 5.5% to 4.9% during 2004. The weighted average amount of debt outstanding during 2004 is higher than 2003 as acquisition costs in 2004 have been funded, in most part, by the issuance of debt. The decrease in the weighted average interest rate during 2004 reflects our ability to take advantage of lower interest rates through refinancing and the utilization of variable rate debt.

General and Administrative

For the three months ended September 30, 2004, general and administrative expenses decreased $1.7 million or 30.3% compared to the same period in 2003 primarily as a result of a decrease in incentive compensation expense. For the nine months ended September 30, 2004, general and administrative expense decreased $2.9 million or 18.0% over the comparable period in 2003. The decrease for the nine-month period was primarily due to a decrease in incentive compensation expense, legal, and recruiting expenses.

Hurricane Related Expenses

During the third quarter of 2004, we recognized a $5.5 million charge to cover expenses associated with the damage in Florida caused by hurricanes Charley, Frances, and Jeanne. United Dominion reported that 25 of its 34 Florida communities were affected by the hurricanes.

Impairment Loss on Investments

During the third quarter of 2003, we recognized a $1.4 million charge for the write-off of United Dominion’s investment in Realeum, Inc., and unconsolidated development joint venture created to develop web-based solutions for multi-family property and portfolio management.

Gains on Sales of Land and Depreciable Property

For the three and nine months ended September 30, 2004, we recognized gains for financial reporting purposes of $20.2 million and $35.2 million, respectively, compared to $7.2 million and $8.1 million for the comparable period in 2003. Changes in the level of gains recognized from period to period reflect the changing level of our divestiture activity from period to period, as well as the extent of gains related to specific properties sold.

Inflation

We believe that the direct effects of inflation on our operations have been immaterial. Substantially all of our leases are for a term of one year or less which generally minimizes our risk from the adverse effects of inflation.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

Factors Affecting Our Business and Prospects

There are many factors that affect our business and the results of our operations, some of which are beyond our control. These factors include:

| • | unfavorable changes in apartment market and
economic conditions that could adversely affect occupancy levels
and rental rates, |
| --- | --- |
| • | the failure of acquisitions to achieve
anticipated results, |
| • | possible difficulty in selling apartment
communities, |
| • | the timing and closing of planned dispositions
under agreement, |
| • | competitive factors that may limit our ability to
lease apartment homes or increase or maintain rents, |
| • | insufficient cash flow that could affect our debt
financing and create refinancing risk, |
| • | failure to generate sufficient revenue, which
could impair our debt service payments and distributions to
stockholders, |
| • | development and construction risks that may
impact our profitability, |
| • | potential damage from natural disasters,
including hurricanes and other weather-related events, which
could result in substantial costs, |
| • | delays in completing developments and lease-ups
on schedule, |
| • | our failure to succeed in new markets, |
| • | changing interest rates, which could increase
interest costs and affect the market price of our securities, |
| • | potential liability for environmental
contamination, which could result in substantial costs, and |
| • | the imposition of federal taxes if we fail to
qualify as a REIT in any taxable year. |

For a discussion of these and other factors affecting our business and prospects, see “Item 1. — Business — Factors Affecting Our Business and Prospects” in our Annual Report on Form 10-K for the year ended December 31, 2003. In addition, stockholders should consider the following risk factor:

Our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report will also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. While we feel that our key controls are currently effective, we continue to enhance our internal controls over financial reporting by

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adding additional resources in key functional areas and bringing all of our operations up to the level of documentation, segregation of duties, and systems security necessary, as well as transactional control procedures required, under the new standard issued by the Public Company Accounting Oversight Board.

We are currently performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of December 31, 2004 (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.

link1 "Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK"

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

United Dominion is exposed to interest rate changes associated with our unsecured credit facility and other variable rate debt as well as refinancing risk on our fixed rate debt. United Dominion’s involvement with derivative financial instruments is limited and we do not expect to use them for trading or other speculative purposes. In prior periods, United Dominion had used derivative instruments solely to manage its exposure to interest rates.

See our Annual Report on Form 10-K for the year ended December 31, 2003 “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of September 30, 2004, our market risk has not changed materially from the amounts reported on our Annual Report on Form 10-K for the year ended December 31, 2003.

link1 "Item 4. CONTROLS AND PROCEDURES"

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2004, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. In addition, our Chief Executive Officer and our Chief Financial Officer concluded that during the quarter ended September 30, 2004, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.

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link1 "PART II -- OTHER INFORMATION"

PART II — OTHER INFORMATION

link1 "Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS"

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 3, 1999, our Board of Directors authorized the repurchase in open market transactions, in block transactions, or otherwise, of up to 5.5 million shares of common stock. On December 5, 2000, our Board of Directors authorized the purchase of up to an additional 5.5 million shares of common stock in open market transactions, in block purchases or otherwise. As of September 30, 2004, we have repurchased a total of 8,749,763 shares of common stock under this program. As disclosed in the table below, we did not purchase any shares of our common stock during the quarter ended September 30, 2004.

			Total Number — of Shares	Maximum — Number of
			Purchased as	Shares that
			Part of Publicly	May Yet Be
	Total Number	Average	Announced	Purchased
	of Shares	Price Per	Plans or	Under the Plans
Period	Purchased	Share	Programs	or Programs
July 1, 2004 through July 31, 2004	0	N/A	0	2,250,237
August 1, 2004 through August 31, 2004	0	N/A	0	2,250,237
September 1, 2004 through September 30,
2004	0	N/A	0	2,250,237
Total	0	N/A	0	2,250,237

link1 "Item 6. EXHIBITS"

ITEM 6. EXHIBITS

Exhibit No.		Description
2	.1	Agreement of Purchase and Sale dated as of
August 13, 2004, by and between United Dominion Realty,
L.P., a Delaware limited partnership, as Buyer, and Essex The
Crest, L.P., a California limited partnership, Essex
El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(1)
2	.2	First Amendment to Agreement of Purchase and Sale
dated as of September 29, 2004, by and between United
Dominion Realty, L.P., a Delaware limited partnership, as Buyer,
and Essex The Crest, L.P., a California limited partnership,
Essex El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(2)
2	.3	Second Amendment to Agreement of Purchase and
Sale dated as of October 26, 2004, by and between United
Dominion Realty, L.P., a Delaware limited partnership, as Buyer,
and Essex The Crest, L.P., a California limited partnership,
Essex El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(3)
12		Computation of Ratio of Earnings to Fixed Charges.
31	.1	Rule 13a-14(a) Certification of the Chief
Executive Officer.
31	.2	Rule 13a-14(a) Certification of the Chief
Financial Officer.
32	.1	Section 1350 Certification of the Chief
Executive Officer.
32	.2	Section 1350 Certification of the Chief
Financial Officer.

(1) Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated September 28, 2004 and filed with the Securities and Exchange Commission on September 29, 2004 (Commission File No. 1-10524).

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Table of Contents

| (2) | Incorporated by reference to Exhibit 2.2 of
the Company’s Current Report on Form 8-K dated
September 29, 2004 and filed with the Securities and
Exchange Commission on October 5, 2004 (Commission
File No. 1-10524). |
| --- | --- |
| (3) | Incorporated by reference to Exhibit 2.3 of
the Company’s Current Report on Form 8-K/A dated
September 29, 2004 and filed with the Securities and
Exchange Commission on November 1, 2004 (Commission
File No. 1-10524). |

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link1 "SIGNATURES"

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED DOMINION REALTY TRUST, INC.
(Registrant)

Date: November 8, 2004

/s/ CHRISTOPHER D. GENRY
Christopher D. Genry
Executive Vice President and Chief Financial
Officer

Date: November 8, 2004

/s/ SCOTT A. SHANABERGER
Scott A. Shanaberger
Senior Vice President and Chief Accounting
Officer

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Table of Contents

EXHIBIT INDEX

Exhibit No.		Description
2	.1	Agreement of Purchase and Sale dated as of
August 13, 2004, by and between United Dominion Realty,
L.P., a Delaware limited partnership, as Buyer, and Essex The
Crest, L.P., a California limited partnership, Essex
El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(1)
2	.2	First Amendment to Agreement of Purchase and Sale
dated as of September 29, 2004, by and between United
Dominion Realty, L.P., a Delaware limited partnership, as Buyer,
and Essex The Crest, L.P., a California limited partnership,
Essex El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(2)
2	.3	Second Amendment to Agreement of Purchase and
Sale dated as of October 26, 2004, by and between United
Dominion Realty, L.P., a Delaware limited partnership, as Buyer,
and Essex The Crest, L.P., a California limited partnership,
Essex El Encanto Apartments, L.P., a California limited
partnership, Essex Hunt Club Apartments, L.P., a California
limited partnership, and the other signatories named as Sellers
therein.(3)
12		Computation of Ratio of Earnings to Fixed Charges.
31	.1	Rule 13a-14(a) Certification of the Chief
Executive Officer.
31	.2	Rule 13a-14(a) Certification of the Chief
Financial Officer.
32	.1	Section 1350 Certification of the Chief
Executive Officer.
32	.2	Section 1350 Certification of the Chief
Financial Officer.

| (1) | Incorporated by reference to Exhibit 2.1 of
the Company’s Current Report on Form 8-K dated
September 28, 2004 and filed with the Securities and
Exchange Commission on September 29, 2004 (Commission
File No. 1-10524). |
| --- | --- |
| (2) | Incorporated by reference to Exhibit 2.2 of
the Company’s Current Report on Form 8-K dated
September 29, 2004 and filed with the Securities and
Exchange Commission on October 5, 2004 (Commission
File No. 1-10524). |
| (3) | Incorporated by reference to Exhibit 2.3 of
the Company’s Current Report on Form 8-K/A dated
September 29, 2004 and filed with the Securities and
Exchange Commission on November 1, 2004 (Commission
File No. 1-10524). |