Item 1. BUSINESS - -----------------
General
United Dominion Realty Trust, Inc. ("United Dominion"), a Virginia corporation, is a self-administered equity real estate investment trust with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities nationwide.
Formed in 1972, United Dominion is headquartered in Richmond, Virginia with regional offices in Richmond, Dallas and Atlanta. The regional offices are responsible for the operation, acquisition, construction and asset management activities in their respective geographic regions. United Dominion had approximately 2,400 employees as of January 31, 2000.
The Company operates as a real estate investment trust under the applicable provisions of the Internal Revenue Code of 1986, as amended. To qualify, the Company must meet certain tests which, among other things, require that its assets consist primarily of real estate, its income be derived primarily from real estate and at least 95% of its taxable income be distributed to its common shareholders. Because the Company qualifies as a REIT, it is generally not subject to federal income taxes.
Business and Operating Strategies
The apartment industry has become increasingly competitive, as ownership has shifted to large companies with more resources and sophisticated management. In order to compete more effectively, United Dominion began a strategic repositioning in 1996, with the objective of being better positioned to achieve more consistent earnings growth in the future in order to increase shareholder value over the long-term. During the past several years, United Dominion implemented this strategy through the following:
. the acquisition of portfolios and mergers with companies primarily in different markets and different regions;
. the disposition of communities that do not meet the long-term strategic objectives set for the portfolio due to location, size, age, quality and/ or operating performance;
. the development of higher quality apartment communities in target markets that can provide higher returns on investment;
. the upgrade of our communities through various capital investments and through the addition of revenue enhancing and/or expense reducing features;
. building local operating management groups throughout the country in order to bring local market knowledge in order to run our business effectively;
. refocusing on serving our residents by providing high quality apartment homes and uncompromising service;
. the hiring of experienced corporate and operations staff; and
. the investment in efficient, scalable systems.
United Dominion believes that the repositioning strategy provides the following benefits:
. more consistent property net operating income growth;
. lower capital expenditures per apartment home;
. improved operating margins;
. operating efficiencies;
. increased cash flow per apartment home and per common share; and
. a balance between acquisitions and development that will provide better investment returns.
1999 Accomplishments
. Net operating income (property operating income less property operating expenses) from our same communities (those acquired or developed prior to January 1, 1998) increased 5.6% in 1999 compared to 1998; the third consecutive year same community net operating income growth has exceeded 5%;
. Completed seven development projects aggregating $120 million with 1,846 apartment homes in five different markets. Lease-ups were generally ahead of projected absorption at these communities;
. Return on investment of the American Apartment Communities II acquisition that occurred in December 1998 of 9.1%, which is better than the initial projection of 9.0%;
. Completed the disposition of $241 million of apartment homes that no longer met our investment criteria, which included exiting certain non-core markets including Greenville, South Carolina;
. Instituted a share repurchase program, which resulted in the buyback of $44 million of common and preferred stock and operating partnership units (OP Units);
. Repurchased $70 million of higher rate debt using proceeds from the disposition program in order to proactively manage the balance sheet;
. Paid dividends of $1.06 per share, which represents United Dominion's 23rd year of consecutive dividend increases to shareholders;
. Systems upgrades and technology initiatives that make United Dominion a leader in the apartment industry, which included the installation of the PeopleSoft financial system, the ongoing development of a web-based property management system and the ability to provide high-speed broadband Internet service to residents;
. Concluded the upgrade of our core portfolio of apartments, which included the addition of new features and enhanced amenities to attract resident customers; and
. Higher resident satisfaction as indicated by United Dominion winning the 1999 Level 1 National Multifamily Customer Service Award for Excellence.
Apartments and Markets Apartments
At December 31, 1999, United Dominion's apartment portfolio included 301 communities having a total of 82,154 completed apartment homes (See Item 2, Properties). In addition, United Dominion had three new communities and three additional phases to existing communities with 1,622 apartment homes under development at December 31, 1999. United Dominion's apartment communities consist primarily of upper and middle-income garden and townhouse communities that make up the broadest segment of the apartment market. Most of the communities are considered to be "A" and "B" grade quality that compete at or near the top of their respective markets. "A" grade communities are generally properties less than five years old with superior amenity packages. "B" grade communities are generally either of 1970's or 1980's construction, located in good neighborhoods. Management believes that these well-located apartments offer United Dominion a good combination of current income and longer-term income growth. As a result of the upgrade program, the overall quality of United Dominion's apartment portfolio has improved.
Markets
Geographic market diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability of United Dominion's earnings growth. In a given year, United Dominion will have some markets that are strong or recovering, some will be balanced and others may be softening. However, with its market diversification, United Dominion's aggregate results of operations are anticipated to be balanced from year to year.
During 1999, for the first time in United Dominion's history, we operated a national portfolio of apartment homes. In 1999, West Coast markets, including Seattle, Portland, Sacramento, San Francisco, the Monterey Peninsula and Southern California, became important markets for United Dominion, providing almost 20% of its property operating income by the fourth quarter. These markets have barriers to apartment construction, which limits new supply and offers the prospect for higher revenue growth in the future. In addition, new Midwest markets, including Columbus, Detroit and Indianapolis, provided another 8% of our property operating income. Most of the West and Midwest markets provided occupancy rates above the average of the portfolio during 1999. As a result of the geographic diversification, no single market is expected to provide more than 10% of our property net operating income in 2000.
United Dominion's three largest markets, Dallas, Houston and Orlando, provided above average rent growth in 1999. Although there has been an increase in multifamily permits in these markets, they have benefited from strong economic and job growth during the past several years.
During 1999, apartment supply and demand was in relative balance in most of United Dominion's markets. Although there was an increase in apartment construction in 1999, a strong economy led to good absorption of the new supply of apartments. In 1999, United Dominion experienced a slight increase in physical occupancy to 92.6% along with higher rent growth. A key objective for 2000 will be to grow average occupancy during a time when economic growth may slow slightly and new apartment home completions are near the levels where they have been the past two years. This can be achieved through aggressive property management, use of the Internet to lease apartments and use of revenue maintenance tools to manage vacant inventory.
Acquisitions and Mergers
During the past five years, United Dominion acquired 65,000 apartment homes as part of our strategy to diversify geographically. However, this pace slowed during 1999, with acquisitions being funded with disposition proceeds in order to complete 1031 tax-deferred exchanges. During 1999, using the proceeds from its disposition program, United Dominion acquired five communities with 1,230 apartment homes at a total cost of $74 million. The communities are located in markets that are considered strategically important to United Dominion, such as Baltimore, Maryland, South Florida and Riverside and San Diego, California where we have locally based infrastructure.
When evaluating potential acquisitions, United Dominion considers geographic location, construction quality, condition and design of the community, asset quality and age of the property, current and projected cash flow of the property, the ability to increase the value and cash flow of the property through upgrades and repositioning, potential for rent increases, competition from existing multifamily communities, anticipated new construction and the potential for economic growth in the market.
The following table summarizes United Dominion's growth during the last five years (dollars in thousands):
(a) Includes 7,550 apartment homes acquired in the ASR Merger on March 27, 1998 and 14,001 apartment homes acquired in the AAC Merger on December 7, 1998.
(b) Includes 14,320 completed apartment homes and 675 homes under development acquired in connection with the South West Merger on December 31, 1996.
During 2000, United Dominion does not anticipate acquiring communities except to reinvest a portion of the proceeds from property sales.
Prior to 1990, United Dominion was the only major publicly held REIT focusing predominantly on apartment investments. Since then, a number of new multifamily REITs have been formed. Some of these REITs may seek to be acquired by larger, more strongly capitalized REITs that have superior access to the capital markets. During the past few years, the apartment sector has undergone consolidation and United Dominion has been a major participant in this real estate consolidation process, completing the following mergers:
On December 31, 1996, United Dominion completed the acquisition of South West Property Trust Inc. ("South West") in a statutory merger (the "South West Merger"). South West was a publicly traded multifamily REIT that owned 44 communities with 14,320 apartment homes primarily located in Texas and several other Southwestern markets. The South West Merger provided the company with significant diversification beyond its traditional Southeast and Mid-Atlantic markets, expanding United Dominion into Southwestern markets.
On March 27, 1998, United Dominion completed the acquisition of ASR Investments Corporation ("ASR") in a statutory merger (the "ASR Merger"). ASR was a publicly traded multifamily REIT that owned 39 communities with 7,550 apartment homes located in Arizona, Texas, New Mexico and the state of Washington. The ASR Merger furthered the company's investment in Southwestern markets, provided an initial presence in the Pacific Northwest, and provided United Dominion with critical size in Houston and Phoenix.
On December 7, 1998, United Dominion completed the acquisition of American Apartment Communities II, Inc. (AAC) in a statutory merger (the "AAC Merger"). In connection with the acquisition of AAC, the Company acquired 53 communities with 14,001 apartment homes located primarily in California, the Pacific Northwest, the Midwest and Florida. The AAC Merger allowed United Dominion to enter into new major markets that are believed to have the potential for good long-term growth, such as, Portland, San Francisco, Sacramento, San Jose, Monterey, Los Angeles, Denver, Indianapolis and Detroit. In addition, it added size to our existing portfolios in Columbus, Tampa, South Florida and Seattle.
Development
During 1999, United Dominion continued to expand its development capability, both as a way of upgrading the portfolio and increasing investment options. There is balance between acquisition and development capabilities that will allow United Dominion to achieve better long-term investment returns.
During 1999, United Dominion continued its commitment to development as part of its strategic repositioning, shifting capital into development activity which can provide returns on investment (property operating income less property operating expenses divided by the average investment in real estate) in excess of 10% and away from lower yielding acquisitions. During 1999, United Dominion invested $114 million on the development of over 1,500 apartment homes, up from 890 homes completed during 1998. United Dominion believes that having a development capability provides the following benefits:
. returns on investment in excess of returns on acquisitions;
. control over the quality of the product which includes quality of features, size and floor plan;
. by acting as our own general contractor, we have more control over the schedule, including building delivery; and
. the ability to add presence in existing markets where we have a strong operating group in place.
During 2000, we plan to undertake a development joint venture with a financial partner. This will allow us to reduce our development capital commitment, generate fee income as the general contractor and developer and continue to increase our development expertise and capability.
In determining whether to develop in a certain market, United Dominion analyzes demographic and market data such as income levels, occupancy rates, household formation, employment growth and supply demand ratios.
Same Communities
United Dominion's net income is primarily generated from the operations of its apartment communities. During 1999, the company's same communities provided rental growth of 3.1% that was coupled with a 0.6% decrease in rental expenses. Average physical occupancy, rental rates, and operating margins at United Dominion's same communities during the comparable periods are set forth below:
1999 1998 1997 ------ ------ ------ Physical occupancy 93.1% 92.9% 92.6% Average monthly rental rates $ 631 $ 602 $ 572 Operating margin 61.3% 59.6% 57.3%
Over the past three years, United Dominion's strategic objectives include upgrading the apartment portfolio through the addition of features and initiatives to the communities that are appropriate for the market and which will support higher rents. United Dominion completed the same community upgrade program in 1999 as part of the strategic plan to improve the overall quality of the portfolio. United Dominion recognized the need to improve its asset quality in order to compete with an increase in the supply of newer communities, and consequently, embarked on the upgrade program. In addition, several initiatives which are considered revenue enhancing or expense reducing were underway that either allowed United Dominion to increase rents by more than the inflationary rate or allowed United Dominion to pass expenses to residents including: sub- metering of water and sewer to residents where local and state regulations allow, gating and fencing of apartment communities, installing monitoring devices such as intrusion alarms or controlled access devices, adding business and fitness centers and constructing carports, garages and self storage units. Capital expenditures decreased from 1998 as the overall age and physical condition of the apartment portfolio has improved.
Dispositions
As part of its strategic repositioning, United Dominion determined that it would selectively dispose of assets that are not in core markets, have a lower net operating income growth rate than the overall portfolio or no longer meet the operating and investment strategies of United Dominion. The disposition program allowed United Dominion to reduce the age of its existing portfolio, which should result in lower operating expense and capital expenditure growth associated with the older communities. During 1999, the focus of United Dominion's investment activities was the sale of non-strategic properties.
During the past three years, United Dominion sold approximately 15,000 of its slow-growth, non-core apartment homes while exiting certain markets which have proved to be less profitable. These sales allowed United Dominion to exit markets that had low growth opportunities and improve the average age of the apartment portfolio by selling communities with an average age of 25 years. Proceeds from the disposition program were used to strengthen the balance sheet by paying down debt, as well as to fund new development projects and to selectively repurchase shares of United Dominion's preferred and common stock.
At December 31, 1999, there were 37 communities with 7,182 apartment homes and four commercial properties classified as real estate held for disposition. United Dominion intends to sell 6,000 to 7,000 apartment homes during 2000, which will substantially complete the sale of its non-strategic assets. However, a REIT must constantly monitor and adjust its assets in order to achieve the best return on invested capital. Proceeds from the 2000 sales, expected to be at levels similar to 1999, are expected to be used to reduce debt, repurchase preferred shares, fund development activity and acquire communities through 1031 exchanges.
Financing
United Dominion's significant 1998 acquisition activity was financed primarily with debt, and to a lesser extent, preferred stock and Operating Partnership Units. Since completing these acquisitions, United Dominion's objective has been to maintain Baa2/BBB investment grade debt ratings and to improve its overall financial flexibility through proactive balance sheet management.
During the first half of 1999 United Dominion refinanced a significant portion of the debt that resulted from the 1998 acquisitions. During 1999, our two major financing activities consisted of selling $190 million of medium-term notes at a weighted average interest rate of 7.6% and closing on $195.7 million of a $200 million revolving credit facility with the Federal National Mortgage Association that had a weighted average interest rate of 6.3% at December 31, 1999.
During 1999, $141 million of the proceeds from the disposition program were used to repay $70 million of unsecured debt at a weighted average interest rate of 7.7% and to repurchase $43.5 million of common and preferred shares and OP Units. In addition, United Dominion was relieved of $57.7 million of mortgage debt. We expect to use a significant portion of our 2000 disposition proceeds to repay debt and repurchase common shares and Operating Partnership Units and further increase our financial flexibility.
Competition
In most of United Dominion's markets, the competition for residents among communities is extremely intense as some competing communities offer features that United Dominion's communities do not have. Also, some competing communities are larger and/or newer than United Dominion's communities. The competitive situation of each community varies and intensifies as additional properties are constructed.
Management believes that United Dominion, in general, is well positioned in terms of economic and other resources to compete effectively and intends to maintain its pricing discipline while continuing to pursue acquisitions that meet United Dominion's long-term investment objectives.
United Dominion believes it has certain competitive advantages that include:
. A fully integrated organization with property management, development, acquisition, redevelopment, marketing and financing expertise;
. geographic diversification of its apartment portfolio with market presence in over 30 markets across the country; and
. local presence in many of its major markets which allows us to become local market experts.
Environmental Regulations
To date, compliance with federal, state, and local environmental protection regulations has not had a material effect on the capital expenditures, earnings or competitive position of United Dominion. However, over the past few years, the issue has been raised regarding the presence of asbestos and other hazardous materials in existing real estate properties. United Dominion has a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigation and reports have been completed for each property owned. In addition, all proposed acquisitions are inspected prior to acquisition. Acquisitions through merger are inspected on a case by case basis given historical information available. The inspections are conducted by qualified environmental consultants, and the report issued is reviewed by United Dominion prior to the purchase or development of any property. Nevertheless, it is possible that United Dominion's environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist in which United Dominion is unaware. In some cases, United Dominion has abandoned otherwise economically attractive acquisitions because the costs of removal or control have been prohibitive and/or United Dominion has been unwilling to accept the potential risks involved. United Dominion does not believe it will be required to engage in any large-scale abatement at any of its properties as asbestos is managed in place in accordance with current environmental laws and regulations. Management believes that through professional environmental inspections and testing for asbestos and other hazardous materials, coupled with a conservative posture toward accepting known risk, United Dominion can minimize its exposure to potential liability associated with environmental hazards.
Recently enacted federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and will impose treble damages for failure to so notify. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and United Dominion
may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.
United Dominion is unaware of any environmental hazards at any of its properties which individually or in the aggregate may have a material adverse impact on its operations or financial position. United Dominion has not been notified by any governmental authority, and is not otherwise aware, of any material non- compliance, liability or claim relating to environmental liabilities in connection with any of its properties. United Dominion does not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on the company or its financial condition or results of operations. There can be no assurance, however, that future environmental laws, regulations or ordinances will not require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on United Dominion in the future, the costs of compliance could have a material adverse effect on United Dominion or its financial condition. To the best of its knowledge, United Dominion is in compliance with all applicable environmental rules and regulations.
Operating Partnership - United Dominion Realty, L.P.
On October 23, 1995, United Dominion organized United Dominion Realty, L.P. (the "Partnership") under the Virginia Revised Uniform Limited Partnership Act, as amended (the "Partnership Act"). United Dominion is the sole General Partner of the Partnership and currently holds a 90.8% interest. The Partnership is intended to assist United Dominion in competing for the acquisition of properties that meet United Dominion's investment strategies from seller partnerships, some or all of whose partners may wish to defer taxation of gain realized on sale through an exchange of partnership interests.
The Partnership was organized under a First Amended and Restated Agreement of Limited Partnership dated as of December 31, 1995 which was subsequently amended in the Second Amended and Restated Agreement of Limited Partnership dated as of August 30, 1997 and later amended by the Third Amended and Restated Agreement of Limited Partnership dated as of December 7, 1998 (the "Partnership Agreement"). A summary of certain provisions of the Partnership Agreement is set forth below. The summary does not purport to be complete and is subject to and qualified in its entirety by reference to applicable provisions of the Partnership Act and the complete Partnership Agreement. The Partnership Agreement is filed as an exhibit to United Dominion's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Admission of Limited Partners; Investment Agreements
United Dominion presently intends to limit admission to the Partnership to Limited Partners who are "accredited investors," as defined in Rule 501(a) under the Securities Act of 1933, as amended (the "Securities Act"). Limited Partners will be admitted upon executing and delivering to United Dominion an Investment Agreement (the "Investment Agreement") and delivering to the Partnership the consideration prescribed therein. In the Investment Agreement, the prospective Limited Partner makes both representations as to his status as an accredited investor and other representations and agreements regarding the Units (defined below) to be issued to him, thus, assuring compliance with the Securities Act. Any rights to Securities Act registration of the Common Stock of United Dominion issued to such Limited Partner upon redemption of his Units (see "Redemption Rights" below), will also be set forth in the Investment Agreement or a separate registration rights agreement.
Units
The interests in the Partnership of the Partnership's limited partners (the "Limited Partners") are represented by units of limited partnership interest (the "Units"). All holders of Units are entitled to share in the cash distributions from, and in the profits and losses of, the Partnership. Distributions by the Partnership are made equally for each Unit outstanding except that outside partners have first priority as described in the "Distributions" section. As the Partnership's sole General Partner, United Dominion intends to make distributions per Unit in the same amount as the cash dividends paid by United Dominion on each share of Common Stock. However, because Partnership properties, which are the primary source of cash available for distribution to Unit holders, are significantly fewer than properties held directly by United Dominion and may not perform as well, there can be no assurance that distributions per Unit will always equal Common Stock dividends per share. A distribution made to United Dominion that enables it to maintain its REIT status (see "Management and Operations" below) may deplete cash otherwise available to Unit holders. The Partnership may borrow from United Dominion for the purpose of equalizing per Unit and per Common share distributions, but neither the Partnership nor United Dominion is under any obligation regarding Partnership borrowings for this or any other
purpose.
The Limited Partners have the rights to which limited partners are entitled under the Partnership Act. The Units are illiquid, they are not registered for secondary sale under any securities laws, state or federal, and they cannot be transferred by a holder except as provided in the Partnership Agreement and unless they are registered as such or an exemption from such registration is available. Except as provided in any Investment Agreement or other agreement with a partner, neither the Partnership nor United Dominion is under any obligation to effect any such registration or to establish any such exemption. The Partnership Agreement imposes additional restrictions on the transfer of Units, as described below under "Transferability of Interests."
Management and Operations
United Dominion, as the sole General Partner of the Partnership, has full, exclusive and complete responsibility and discretion in the management and control of the Partnership. The Limited Partners have no authority to transact business for, or participate in the management activities or decisions of the Partnership.
The Partnership Agreement requires that the Partnership be operated in a manner that will enable United Dominion to both satisfy the requirements for being classified as a REIT and avoid any federal income tax liability. The General Partner is expressly directed, notwithstanding anything to the contrary in the Partnership Agreement, to cause the Partnership to distribute amounts (including proceeds of Partnership borrowings) that sufficiently enable United Dominion to pay distributions to its shareholders that are required in order to maintain REIT status and to avoid income tax or excise tax liability.
Ability to Engage in Other Businesses; Conflicts of Interest
United Dominion and other persons (including officers, directors, employees, agents and other affiliates of United Dominion) are not prohibited under the Partnership Agreement from engaging in other business activities, including business activities substantially similar or identical to those of the Partnership. United Dominion will not be required to present any business opportunities to the Partnership or to any Limited Partner.
Borrowing by the Partnership
The General Partner is authorized under the Partnership Agreement to cause the Partnership to borrow money and to issue and guarantee debt as it deems necessary for the conduct of the activities of the Partnership. Such debt may be secured by mortgages, deeds of United Dominion, pledges or other liens on the assets of the Partnership.
Reimbursement of General Partner; Transactions with the General Partner and its Affiliates
The General Partner will receive no compensation for its services as General Partner of the Partnership. However, as a partner in the Partnership, the General Partner has the same right to allocations of profit and loss and distributions as other partners of the Partnership. In addition, the Partnership will reimburse the General Partner for all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Partnership and any offering of Units or other partnership interests, and for the pro rata share of the expenses of any offering of securities of United Dominion some or all of the proceeds of which are contributed to the Partnership.
Liability of General Partner and Limited Partners
The General Partner is liable for all general obligations of the Partnership to the extent not paid by the Partnership. The General Partner is not liable for the non-recourse obligations of the Partnership.
The Limited Partners are not required to make further capital contributions to the Partnership after their respective initial contributions are fully paid. Assuming that a Limited Partner acts in conformity with the provisions of the Partnership Agreement, the liability of the Limited Partner for obligations of the Partnership under the Partnership Agreement and Partnership Act will be limited to, subject to certain possible exceptions, the loss of the Limited Partner's investment in the Partnership.
The Partnership is qualified to conduct business in each state in which it owns property and may qualify to conduct business in other jurisdictions. Maintenance of limited liability may require compliance with certain legal requirements of those jurisdictions and certain other jurisdictions. Limitations on the liability of a limited partner for the obligations of a limited partnership have not clearly been established in many states. Accordingly, if it were determined that the
right, or exercise of the right by the Limited Partners, to make certain amendments to the Partnership Agreement or to take other action pursuant to the Partnership Agreement constituted "control" of the Partnership's business for the purposes of the statutes of any relevant state, the Limited Partners might be held personally liable for the Partnership's obligations. The Partnership will operate in a manner the General Partner deems reasonable, necessary and appropriate to preserve the limited liability of the Limited Partners.
Exculpation and Indemnification of the General Partner
If acting in good faith, the Partnership Agreement provides that the General Partner will incur no liability for monetary damages to the Partnership or any Limited Partner for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission. In addition, the General Partner is not responsible for any misconduct or negligence on the part of its agents, provided the General Partner appointed such agents in good faith.
The Partnership Agreement also provides for indemnification of the General Partner, the directors, officers and employees of the General Partner, and such other persons as the General Partner may from time to time designate, against any and all losses, claims, damages, liabilities (joint or several), expenses (including reasonable legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, that relate to the operations of the Partnership in which any such indemnitee may be involved, or is threatened to be involved, unless it is established that (i) the act or omission of such indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty, (ii) such indemnitee actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, such indemnitee had reasonable cause to believe that the act or omission was unlawful.
Sale of Assets; Merger
Under the Partnership Agreement, the General Partner generally has the exclusive authority to determine whether, when and on what terms the assets of the Partnership will be sold or on which the Partnership will merge or consolidate with another entity.
Removal of the General Partner; Transfer of General Partner's Interest
The Partnership Agreement does not authorize the Limited Partners to remove the General Partner and the Limited Partners have no right to remove the General Partner under the Partnership Act. The General Partner may not transfer any of its interest as General Partner and withdraw as General Partner, except (a) to a wholly-owned subsidiary of the General Partner or the owner of all the ownership interests in the General Partner, (b) in connection with a merger or sale of all or substantially all of the assets of the General Partner or (c) as a result of the bankruptcy of the General Partner. A substitute or additional General Partner may be admitted upon compliance with the applicable provisions of the Partnership Agreement, including delivery by counsel for the Partnership of an opinion that admission of such General Partner will not cause (i) the Partnership to be classified other than as a partnership for federal income tax purposes or (ii) the loss of any Limited Partner's limited liability. The General Partner may not sell all or substantially all of its assets, or enter into a merger, unless the sale or merger includes the sale of all or substantially all of the assets of, or the merger of, the Partnership and the Limited Partners receive for each Unit substantially the same consideration as the holder of one share of Common Stock.
Transferability of Interests
A Limited Partner generally may not transfer his interest in the Partnership without the consent of the General Partner which may be withheld at its absolute discretion. The General Partner may require, as a condition of any transfer, that the transferring Limited Partner assume all costs incurred by the Partnership in connection with such a transfer.
Redemption Rights
Each Limited Partner has the right (the "Redemption Right"), subject to the purchase right of the General Partner described below, to cause the redemption of such Limited Partner's Units for cash in an amount per Unit equal to the average of the closing sale prices of the Common Stock of United Dominion on the New York Stock Exchange (the "NYSE") for the ten trading days immediately preceding the date of receipt by the General Partner of notice of such Limited Partner's exercise of the Redemption Right provided that such Units have been outstanding for at least one year. Subject to certain restrictions intended to prevent undesirable tax consequences and assure compliance with the Securities Act, a Limited Partner may exercise the Redemption Right at any time but not more than twice within the
same calendar year and not with respect to less than 1,000 Units (or all Units owned by such Limited Partner, if less than 1,000). A Limited Partner that exercises the Redemption Right shall be deemed to have offered to sell the Units to be redeemed to the General Partner, and the General Partner may elect to purchase such Units by paying to such Limited Partner either the redemption price in cash or by delivering to such Limited Partner a number of shares of Common Stock of the Company equal to the product of the number of such Units, multiplied by the "Conversion Factor," which is 1.0, subject to customary antidilution provisions in the event of stock dividends on or subdivisions or combinations of the Common Stock subsequent to issuance of such Units. Any Common Stock issued to the redeeming Limited Partner will be listed on the NYSE and, if to the extent provided in such Redeeming Partner's Investment Agreement or other agreement, registered under the Securities Act and/or entitled to rights to Securities Act registration.
No Withdrawal of Capital by Limited Partners
No Limited Partner has the right to withdraw any part of his capital contribution to the Partnership or interest thereon or to receive any distribution, except as provided in the Partnership Agreement.
Issuance of Additional Limited Partnership Interests and Other Partnership Securities
The General Partner is authorized, without the consent of the Limited Partners, to cause the Partnership to issue additional Units or other Partnership securities to the partners or to other persons on such terms and conditions and for such consideration, including cash or any property or other assets permitted by the Partnership Act, as the General Partner deems appropriate.
Meetings
The Partnership Agreement does not provide for annual meetings of the Limited Partners, and the General Partner does not anticipate calling such meetings.
Amendment of Partnership Agreement
Amendments to the Partnership Agreement may, with four exceptions, be made by the General Partner without the consent of the Limited Partners. Any amendment to the Partnership Agreement which would (i) affect the Conversion Factor or the Redemption Rights of the Limited Partners, (ii) adversely affect the rights of the Limited Partners to receive distributions payable to them under the Partnership Agreement, or (iii) alter the Partnership's profit and loss allocations shall require the consent of Limited Partners. Any amendment that would impose any obligation upon the Limited Partners to make additional capital contributions to the Partnership shall require the consent of each Limited Partner owning more than 50% of the percentage interests in the Partnership.
Books and Reports
The General Partner is required to keep at the specified office of the Partnership the Partnership's books and records, including copies of the Partnership's federal, state and local tax returns, a list of the partners and their last known business addresses, the Partnership Agreement, the Partnership certificate and all amendments thereto and any other documents and information required under the Partnership Act. Any partner or his duly authorized representative, upon paying duplicating, collection and mailing costs, is entitled to inspect or copy such records during ordinary business hours.
The General Partner will furnish to each Limited Partner, as soon as practicable after the close of each fiscal year, an annual report containing financial statements of the Partnership (or United Dominion, if consolidated financial statements including the Partnership are prepared) for such fiscal year. The financial statements will be audited by accountants selected by the General Partner. In addition, as soon as practicable after the close of each fiscal quarter (other than the last quarter of the fiscal year), the General Partner will furnish to each Limited Partner a quarterly report containing unaudited financial statements of the Partnership (or the Company and the Partnership, consolidated).
The General Partner will furnish to each Limited Partner, within 75 days after the close of each fiscal year of the Partnership, the tax information necessary to file such Limited Partner's individual tax returns.
Loans to Partnership
The Partnership Agreement provides that the General Partner may borrow additional Partnership funds for any Partnership purpose from the General Partner or a subsidiary or subsidiaries of the General Partner or otherwise.
Adjustments of Capital Accounts and Percentage Interests
A separate capital account will be established and maintained for each Partner. The General Partner shall revalue the property of the Partnership to its fair market value (as determined by the General Partner, in its sole discretion) in accordance with applicable federal income tax regulations if: (i) a new or existing general or limited partner of the Partnership (a Partner or collectively Partners) acquires an additional interest in the Partnership in exchange for more than a de minimis capital contribution, (ii) the Partnership distributes to a Partner more than a de minimis amount of Partnership property as consideration for a Partnership interest or (iii) the Partnership is liquidated for federal income tax purposes. When the Partnership's property is revalued by the General Partner, the capital accounts of the partners shall be adjusted in accordance with such regulations, which generally requires such capital accounts to be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the Partners pursuant to the Partnership Agreement if there were a taxable disposition of such property for its fair market value on the date of the revaluation.
If the number of outstanding Units increases or decreases during a taxable year, each Partner's percentage interest in the Partnership shall be adjusted by the General Partner as of the effective date of each such increase or decrease to a percentage equal to the number of Units held by such Partner divided by the aggregate number of Units outstanding, after giving effect to such increase or decrease, and profits and losses for the year will be allocated among the Partners in a manner selected by the General Partner to give appropriate effect to such adjustments.
Registration Rights
Limited Partners have no rights to Securities Act registration of any Common Stock of United Dominion received in connection with redemption of Units except as provided in their respective Investment Agreements or other agreements with United Dominion.
Tax Matters; Profit and Loss Allocations
Pursuant to the Partnership Agreement, the General Partner is the "tax matters" partner of the Partnership and, as such, has the authority to handle tax audits and to make tax elections under the Code on behalf of the Partnership.
Profits of the Partnership are to be allocated first to partners in proportion to and up to the amount of cash distributions, and second in accordance with the respective partnership interests. Losses are allocated in accordance with each partners percentage interest.
Distributions
The Partnership Agreement provides that the General Partner shall distribute cash quarterly, in amounts determined by the General Partner in its sole discretion (i) first to the outside limited partners, (ii) second to United Dominion (or appropriate subsidiary) until United Dominion has received an amount equal to prior distributions to the outside limited partners, and (iii) third, to the outside limited partners and United Dominion (or the appropriate subsidiary) in accordance with their percentage interests in the Partnership. Also, the amount of cash distributable to a Limited Partner who has not been a Limited Partner for the full quarter for which the distribution is paid is subject to pro rata reduction. Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any Partner loans, any remaining assets of the Partnership will be distributed to all Partners with positive capital accounts in accordance with their respective positive capital account balances. If the General Partner has a negative balance in its capital account following a liquidation of the Partnership, it will be obligated to contribute cash to the Partnership equal to the negative balance in its capital account.
Term
The Partnership will continue until December 31, 2051, or until sooner dissolved upon (i) the bankruptcy, dissolution, death or withdrawal of a General Partner (unless the Limited Partners elect to continue the Partnership by electing by unanimous consent a substitute General Partner within 90 days of such occurrence), (ii) the passage of 90 days after the sale or other disposition of all or substantially all the assets of the Partnership, (iii) the redemption of all Limited Partners' interests in the Partnership or (iv) election by the General Partner. Upon dissolution of the Partnership, the General Partner will proceed to liquidate the assets of the Partnership and distribute the proceeds remaining after payment or adequate provision for payment of all debts and obligations of the Partnership as provided in the Partnership Agreement.
Item 2.
Item 2. Properties Real Estate Owned
The table below sets forth a summary by major geographic market of United Dominion's real estate portfolio at December 31, 1999. See also Notes 1 and 2 to the Consolidated Financial Statements and Schedule III - Summary of Real Estate Owned.
(A) These communities are encumbered by the following: (i) 21 communities encumbered by two REMIC financings aggregating $59.2 million, (ii) 19 communities encumbered by one secured note payable in the amount of $195.7 million and (iii) 29 communities encumbered by two fixed rate debt aggregating $161.5 million. The amount of debt is not included in the encumbrances shown for the individual markets.
(B) Average Monthly Rental Rates for the Year Ended December 31, 1999, represents potential rent collections (gross potential rents less market adjustments), which approximates net effective rents. These amounts exclude the 1999 acquisitions.
(C) Includes four commercial properties and one parcel of land included in real estate held for disposition.
Item 3.
Item 3. LEGAL PROCEEDINGS - ---------------------------
Neither United Dominion nor any of its apartment communities is presently subject to any material litigation nor, to United Dominion's knowledge, is any litigation threatened against United Dominion or any of the communities, other than routine actions arising in the ordinary course of business. Some of these routine actions are expected to be covered by liability insurance, and none are expected to have a material adverse effect on the business or financial condition or results of operations of United Dominion.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of United Dominion's fiscal year ended December 31, 1999.
Executive Officers of the Registrant - ------------------------------------
The executive officers of United Dominion, listed below, serve in their respective capacities for approximate one year terms.
Name Age Office Since - ---- --- ------ -----
John P. McCann 55 Chairman of the Board 1974 and Chief Executive Officer
John S. Schneider 61 Vice-Chairman of the Board, 1996 Chief Operations Officer and President
A. William Hamill 52 Executive Vice President 1999 and Chief Financial Officer
Richard A. Giannotti 44 Senior Vice President and Director 1985 of Development-East
Mark E. Wood 55 Senior Vice President and Director 1996 of Development-West
Katheryn E. Surface 41 Senior Vice President, Corporate 1992 Secretary and General Counsel
Kevin W. Walsh 45 Senior Vice President of 1999 Finance
Curt W. Carter 43 Senior Vice President and Director 1985 of Apartment Operations-Northern Region
Robert L. Landis 41 Senior Vice President and Director 1996 of Apartment Operations-Western Region
Walter J. Lamperski 42 Senior Vice President and Director 1996 of Apartment Operations-Southern Region
Blake W. Clemens 42 Senior Vice President and Director 1998 of Acquisitions
Thomas J. Corcoran 53 Senior Vice President and Director of Human Resources 1997
Patrick S. Gregory 50 Senior Vice President and Director of Information Technology 1997
Mr. McCann has been United Dominion's managing Chief Executive Officer since 1974. Mr. McCann was elected Chairman of the Board in 1996.
Mr. Schneider is the former Chief Executive Officer and Chairman of the Board of South West Property Trust Inc. (South West). Mr. Schneider was employed with the investment banking firm of Donaldson, Lufkin and Jenrette until from 1967 until 1973, when he co-founded a predecessor firm to South West. Mr. Schneider was elected Vice Chairman of the Board and Executive Vice President in 1996 in connection with the merger with South West and President in 1998.
Mr. Hamill joined United Dominion as Executive Vice President and Chief Financial Officer in October 1999. Prior to joining United Dominion, Mr. Hamill was the Chief Financial Officer of Union Camp Corporation. Mr. Hamill also previously served as an investment banker with Morgan Stanley & Co. Incorporated, where he was a managing director.
Mr. Giannotti joined United Dominion as Director of Development and Construction in September 1985. He was elected Assistant Vice President in 1988, Vice President in 1989 and Senior Vice President in 1996. In 1998, Mr. Giannotti was elected Director of Development-East.
Mr. Wood joined United Dominion as Vice President of Construction in connection with the merger of South West in 1996. He was promoted to Senior Vice President and Director Development -West in 1998.
Ms. Surface joined United Dominion in 1992 as Assistant Vice President and Legal Counsel, elected General Counsel, Corporate Secretary and Vice President in 1994 and elected to Senior Vice President in 1997.
Mr. Walsh joined United Dominion as Vice President of Finance in May 1998. In 1999, Mr. Walsh was elected to Senior Vice President. Prior to joining United Dominion, Mr. Walsh was the Vice President of Finance and Treasurer of Tultex Corporation. His experience also includes fifteen years in corporate banking with predecessors to both First Union and NationsBank.
Mr. Carter joined United Dominion in 1991 as an Assistant Vice President of Apartment Operations. In 1992, he was promoted to Vice President of Apartment Operations. In 1995, he was elected Regional Vice President- Northern Region, and in 1997 was promoted to Senior Vice President and Director of Apartment Operations- Northern Region.
Mr. Landis joined United Dominion in 1996 as Regional Vice President- Florida Region and was promoted in 1997 to Senior Vice President and Director of Apartment Operations-Florida Region. During 1998, Mr. Landis became the Senior Vice President and Director of Apartment Operations-Western Region. Prior to joining United
Dominion, he was Vice President of Asset Management and Property Management for CRI/CAPREIT, Inc.
Mr. Lamperski joined United Dominion in 1996 as the Regional Vice President-Southern Region and was promoted in 1997 to Senior Vice President and Director of Apartment Operations-Southern Region. From February 1990 to August 1996, he was Vice President and Director of Property Management for Steven D. Bell, a property management company located in Greensboro, North Carolina.
Mr. Clemens joined United Dominion in 1998 as a Vice President and Director of Acquisitions and was promoted to Senior Vice President in 1999. Prior to joining United Dominion, Mr. Clemens was the Vice President of Acquisitions for McNeil Real Estate Management Company from 1996 to 1998. Prior to this, Mr. Clemens was the Vice President of Acquisitions and Finance at Insignia Commercial Group, Incorporated.
Mr. Corcoran joined United Dominion in 1997 as the Assistant Vice President of Human Resources and was promoted to Vice President in 1998 and Senior Vice President in 1999. Prior to joining United Dominion, Mr. Corcoran was the Vice President of Human Resources for Acordia, Inc., a national insurance brokerage firm from 1993 to 1995.
Mr. Gregory joined United Dominion in 1997 as the Vice President and Director Information Technology and was promoted to Senior Vice President in 1999. From 1976 to 1997, Mr. Gregory was employed by Crestar Bank as a New Technology Analyst.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------
United Dominion's Common Stock is traded on the New York Stock Exchange (NYSE) under the symbol UDR. The following tables set forth the quarterly high and low sale prices per common share reported on the NYSE for each quarter of the last two years. Distribution information for Common Stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
COMMON STOCK Distributions High Low Declared
1st Quarter $14 13/16 $13 3/4 $.2625 2nd Quarter 14 1/2 13 5/16 .2625 3rd Quarter 14 1/16 10 11/16 .2625 4th Quarter 11 3/4 10 1/16 .2625
1st Quarter $11 1/4 $ 9 1/16 $.2650 2nd Quarter 11 15/16 9 13/16 .2650 3rd Quarter 12 1/16 10 3/4 .2650 4th Quarter 11 5/8 9 1/8 .2650
United Dominion determined that, for federal income tax purposes, approximately 58.6% of the distributions for each of the four quarters of 1999 represented ordinary income to its shareholders, 29.2% represented return of capital to its shareholders and 12.2% represented long-term capital gain to its shareholders.
On March 21, 2000, the closing sale price of the Common Stock was $9 7/8 per share on the NYSE, and there were 8,874 holders of record of the 103,127,425 shares of Common Stock.
United Dominion pays regular quarterly distributions to holders of shares of Common Stock. Future distributions by United Dominion will be at the discretion of its Board of Directors after considering the company's actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors. The annual distribution payment for calendar year 1999 necessary for United Dominion to maintain its status as a REIT was approximately $.78 per share. United Dominion paid total distributions of $1.06 per share for 1999.
SERIES A PREFERRED STOCK
United Dominion's Series A Preferred Stock ("Series A Preferred") and Series B Preferred Stock ("Series B Preferred") is traded on the New York Stock Exchange (NYSE) under the symbol "UDRpfa" and "UDRpfb", respectively. The following tables set forth the quarterly high and low sale prices per share reported on the NYSE for each quarter of the last two years for the Series A Preferred and Series B Preferred. Distribution information for the Series A Preferred and Series B Preferred reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
Distributions High Low Declared 1st Quarter $26 11/16 $26 1/8 $.5775 2nd Quarter 26 7/8 25 3/4 .5775 3rd Quarter 25 15/16 24 1/2 .5775 4th Quarter 25 11/16 24 3/8 .5775
1st Quarter $25 1/8 $24 $.5775 2nd Quarter 25 1/4 23 13/16 .5775 3rd Quarter 25 1/16 20 9/16 .5775 4th Quarter 22 3/8 17 13/16 .5775
On or after April 24, 2000, the Series A Preferred Stock may be redeemed for cash at a redemption price of $25 per share, plus accrued and unpaid dividends from the proceeds from the sale of additional capital stock (common or preferred).
SERIES B PREFERRED STOCK
Distributions High Low Declared 1st Quarter $27 3/8 $26 3/16 $.5375 2nd Quarter 26 1/2 25 5/8 .5375 3rd Quarter 26 13/16 24 9/16 .5375 4th Quarter 25 7/8 24 9/16 .5375
1st Quarter $26 1/16 $24 $.5375 2nd Quarter 25 1/2 23 5/8 .5375 3rd Quarter 25 5/16 20 1/4 .5375 4th Quarter 22 5/8 15 5/8 .5375
The Series B Preferred Stock may be redeemed beginning May 29, 2007 at the sole option of United Dominion at a redemption price of $25 per share, plus accrued and unpaid dividends from the proceeds from the sale of additional capital stock (common or preferred).
SERIES D PREFERRED STOCK
On December 7, 1998, in connection with the acquisition of American Apartment Communities II, Inc. (AAC), United Dominion issued eight million shares of Series D Convertible Redeemable Preferred Stock (Series D) to one of the sellers of AAC. The Series D is convertible into 1.5385 shares of common stock at the option of the holder at any time at $16.25 per share. The Series D is not redeemable prior to December 7, 2003. On or after this date, United Dominion may, at its option, redeem all or part of the Series D at a price per share of $25, plus accrued and unpaid dividends from the proceeds from the sale of additional capital stock (common or preferred). Distributions declared for 1999 were $1.89 per share or $.4725 per quarter. The Series D is not listed on any exchange.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
United Dominion has a Dividend Reinvestment and Stock Purchase Plan under which holders of Common and Preferred Stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of United Dominion's Common Stock at a discount.
OPERATING PARTNERSHIP UNITS
From time to time, United Dominion issues shares of its common stock in exchange for Operating Partnership Units (OP Units) tendered to United Dominion's operating partnership, United Dominion Realty L.P., for redemption in accordance with the provisions of the Agreement of Limited Partnership of United Dominion Realty L.P. Such shares are issued based on the exchange ratio of one share for each OP Unit. During 1999, United Dominion issued a total of 71,373 shares of common stock in exchange for OP Units.
Item 6.
Item 6. SELECTED FINANCIAL DATA - --------------------------------
The following table sets forth selected consolidated financial and other information for United Dominion as of and for each of the years in the five year period ended December 31, 1999. The table should be read in conjunction with the Consolidated Financial Statements of United Dominion Realty Trust, Inc. and the Notes thereto included elsewhere herein.
Selected Financial Data
(a) From 1996 to 1998, United Dominion completed the following statutory mergers: (i) South West Property Trust, Inc. on December 31, 1996 for an aggregate purchase price of $572 million, (ii) ASR Investments Corporation Inc. on March 27, 1998 for an aggregate purchase price of $323 million, and (iii) American Apartment Communities II on December 7, 1998, for an aggregate purchase price of $794 million.
(b) Funds from operations ("FFO") is defined as income before gains (losses) on sales of investments, minority interests and extraordinary items (computed in accordance with generally accepted accounting principles) plus real estate depreciation, less preferred dividends and after adjustment for significant non-recurring items, if any. This definition conforms to recommendations set forth in a White Paper adopted by the National Association of Real Estate Investment Trusts (NAREIT) in early 1995. United Dominion considers FFO in evaluating property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of United Dominion's activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.
(c) Reflects the adjustment for internal acquisition costs that were capitalized prior to March 19, 1998.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy and rental expense growth. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of United Dominion Realty Trust, Inc. ("United Dominion") to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting United Dominion, or its properties, adverse changes in the real estate markets and general and local economies and business conditions. Although United Dominion believes that the assumptions underlying the forward- looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by United Dominion or any other person that the results or conditions described in such statements or the objectives and plans of United Dominion will be achieved. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of United Dominion appearing elsewhere in this annual report.
United Dominion is a real estate investment trust ("REIT") with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities nationwide. Management's strategy is to be a national, highly efficient provider of quality apartment homes. During the past several years, United Dominion has implemented this strategy through the acquisition of portfolios of higher quality communities, the disposition of non-strategic communities, a greater commitment to development and the upgrade of its core portfolio of apartment communities. Through a combination of dispositions and acquisitions over the past two years, United Dominion aggressively moved the company into better performing markets with attractive prospects for long-term growth. During this same period, more emphasis has been placed on higher quality development projects. This strategy resulted in the upgrade of the overall quality and average age of United Dominion's portfolio which is now solidly positioned with "B" and "A" grade communities. United Dominion seeks to be a market leader by operating a sufficiently sized portfolio of apartments within each of its target markets in order to drive down operating costs through economies of scale and management efficiencies. United Dominion believes that geographic market diversification increases investment opportunities and decreases the risk associated with cyclical local real estate markets and economies.
At December 31, 1999, United Dominion owned 301 communities containing 82,154 apartment homes nationwide, including 37 communities with 7,182 completed apartment homes included in real estate held for disposition and 330 recently completed apartment homes included in real estate under development.
The following table summarizes United Dominion's apartment market information by major geographic markets and other geographic areas (including real estate under development and excluding four commercial properties):
Liquidity and Capital Resources
United Dominion expects to meet its short-term financial requirements through net cash provided by operations and borrowings under its unsecured bank lines of credit. United Dominion believes that cash provided by operations will be adequate to meet normal operating requirements and payment of distributions by United Dominion in accordance with REIT requirements in both the short and long- term. In addition, budgeted capital expenditures and monthly principal amortization of debt are also expected to be funded from net cash provided by operating activities.
United Dominion meets certain long-term liquidity requirements, such as scheduled debt maturities, development activity and significant capital improvements through: (i) the issuance of long-term secured and unsecured borrowings, (ii) proceeds from the sales of assets, (iii) common and preferred stock offerings, (iv) retained operating cash flow and (v) the use of unused credit facilities. To facilitate future fund raising activities in the public capital markets, management believes that it is prudent to maintain shelf registration statement capacity. In this regard, United Dominion filed such a shelf registration statement in December 1999 providing for the issuance of up to $700 million in common shares, preferred shares and debt securities.
In March 2000, United Dominion sold $100 million of senior unsecured notes due March 2003 at an interest rate of 8.625%. The proceeds from the offering were used to prepay certain mortgage debt and repay revolving bank debt.
United Dominion currently plans to establish during 2000, a program for the sale of up to $150 million aggregate principal amount of medium-term notes.
United Dominion has no significant maturities of debt until the fourth quarter of 2000 at which time approximately $175 million of secured and unsecured debt will mature. At this time, management expects to refinance the maturing debt with debt of similar characteristics and prevailing market rates.
The following discussion explains the changes in net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities which are presented in United Dominion's Consolidated Statements of Cash Flows.
Operating Activities
For the year ended December 31, 1999, United Dominion's cash flow from operating activities was $190.9 million compared to $152.9 million in 1998. The increase was primarily due to the increased operating income from United Dominion's acquired communities as well as increases in property operating income achieved through higher rent growth as discussed under "Results of Operations".
Investing Activities
For the year ended December 31, 1999, net cash used in investing activities was $34.3 million compared to $276.1 million for 1998, a decrease of $241.8 million. During 1999, United Dominion shifted its focus from the acquisition of real estate assets to the disposition and development of real estate assets. Changes in the level of investing activities from period to period reflect the changing levels of United Dominion's acquisition, capital expenditure, development and disposition programs, as well as the impact of the capital market environment on these activities.
Disposition of Investments
As part of its strategic repositioning, United Dominion determined that it would selectively dispose of assets that are not in core markets, have a lower net operating income growth rate than the overall portfolio or no longer meet the operating and investment strategies of United Dominion. The disposition program allows United Dominion to reduce the age of its existing portfolio, which should result in lower operating expense and capital expenditure growth associated with the older communities.
During 1999, United Dominion sold 36 communities with 7,443 apartment homes for an aggregate sales price of $241.2 million and recognized gains for financial reporting purposes of $38.0 million. These sales allowed United Dominion to exit certain markets that had low growth opportunities and improve the average age of the company's overall apartment portfolio by selling communities with an average age of 25
years. During 1998, 18 communities with 5,318 apartment homes and an average age of 25 years were sold for an aggregate sales price of $156.6 million, which resulted in gains for financial reporting purposes of $26.7 million.
Proceeds from the disposition program were used to strengthen the balance sheet by paying down debt, as well as to fund new development projects and to selectively repurchase shares of United Dominion's preferred and common stock. Where necessary to defer capital gain taxes, disposition proceeds have been reinvested in strategically attractive communities.
United Dominion intends to sell 6,000 to 7,000 apartment homes during 2000. Proceeds from the 2000 dispositions, expected to be at levels similar to 1999, are to be used to reduce debt, repurchase preferred shares, fund development activity and acquire communities through 1031 exchanges.
Subsequent to year-end, United Dominion sold three communities for approximately $18.5 million. In addition, United Dominion entered into contracts to sell two communities with 285 apartment homes for an aggregate sales price in excess of $17 million. For financial reporting purposes, aggregate gains on the sales of investments are not expected to be material. The transactions are expected to close during the first and second quarters of 2000; however, there can be no assurance that these transactions will be consummated as planned.
Real Estate under Development
During 1999, United Dominion continued its commitment to development as part of its strategic repositioning, shifting capital into development activity and away from lower yielding acquisitions. During 1999, the development of over 1,500 homes was completed, up from 890 homes during 1998. Development activity is focused in core markets that have locally based development teams and strong operations managers in place.
During 1999, the following development projects were completed:
The following projects are under development at December 31, 1999:
In addition to the apartment homes under development at December 31, 1999, United Dominion has land held for future development with a carrying value of $37.9 million. Future development activity will be based upon the availability of capital and real estate fundamentals. Additional development starts planned in 2000 are expected to be undertaken with financial partners through joint venture arrangements.
Acquisitions
During 1999, United Dominion curtailed its active pace of acquisitions, investing in new communities only when necessary to complete 1031 exchanges in order to defer taxes on large capital gains. During 1999, using proceeds from its disposition program, United Dominion acquired five communities with 1,230 apartment homes at a total cost (including closing costs) of $74.3 million or $60,400 per home during 1999. These communities are located in markets that are considered strategically important to United Dominion, such as Baltimore, Maryland, South Florida and Riverside and San Diego, California.
During 2000, United Dominion does not anticipate acquiring communities except to reinvest a portion of the proceeds from property dispositions in order to defer taxes on capital gains.
Capital Expenditures
United Dominion capitalizes those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
During 1999, United Dominion substantially completed the upgrade program which was part of the strategic plan to improve the overall quality of its portfolio. Capital expenditures decreased from 1998 as the overall age and physical condition of the apartment portfolio has improved. For the year ended December 31, 1999, $32.8 million or $639 per home was spent on capital expenditures for United Dominion's same communities (those acquired or developed prior to January 1, 1998). These capital improvements included recurring capital expenditures, including floor coverings, HVAC equipment, roofs, appliances, landscaping, siding, parking lots and other non-revenue enhancing capital expenditures, which aggregated $19.8 million or $386 per home. In addition, non-recurring / revenue enhancing capital expenditures, including water sub-metering, gating and access systems, the additions of microwaves, washer-dryers, interior upgrades and new business and fitness centers totaled $13.0 million or $253 per home for the year ended December 31, 1999. United Dominion reduced capital expenditures related to same communities throughout 1999, but will continue to selectively add revenue- enhancing improvements, which are budgeted to provide a high return on investment. Capital expenditures during 2000 are expected to be at levels similar to 1999.
In addition to capital improvements to its same communities, United Dominion invested approximately $42 million or $1,220 per home on its non-mature communities (those acquired or developed subsequent to January 1, 1998) during 1999, which includes both recurring and revenue enhancing capital improvements.
Financing Activities
Net cash used in financing activities during 1999 was $175.0 million compared to net cash provided by financing activities of $148.9 million for 1998. During 1999, as part of its strategic plan to improve its balance sheet position, United Dominion used approximately 60% of the proceeds from its disposition program to pay down secured and unsecured debt. The remaining proceeds were used to acquire assets where necessary to complete 1031 exchanges and, to a lesser extent, to repurchase shares of preferred and common stock.
In January 1999, United Dominion established a program for the sale of up to $200 million aggregate principal amount of medium-term notes (the "MTN Program"). For the year ended December 31, 1999, United Dominion sold an aggregate of $190 million of senior unsecured notes under the MTN Program with a weighted average interest rate of 7.61%. Net proceeds from the offerings were used to repay amortizing unsecured debt, repay maturing mortgage debt, repay a $75 million senior unsecured note that matured in April 1999 and repay revolving bank debt.
During 1999, United Dominion closed on $195.7 million of a $200 million revolving credit facility with the Federal National Mortgage Association (the "FNMA Credit Facility"). The FNMA Credit Facility is for an initial term of five years, bears interest at a floating rate which can be fixed for periods of up to 270 days, and can be extended for an additional five or ten years at United Dominion's discretion. The FNMA Credit Facility had a weighted average interest rate of 6.32% at December 31, 1999. United Dominion used interest rate swap agreements to limit its interest rate exposure on $57 million of this borrowing (see Secured Credit Facilities in Note 3). The proceeds from the FNMA Credit Facility were used to repay a $91 million secured credit facility assumed in connection with the American Apartment Communities II transaction, to replace $58 million in maturing secured debt and the remaining proceeds were used to repay revolving bank debt.
United Dominion issued 1.6 million shares of its common stock and received $16.7 million under its Dividend Reinvestment and Stock Purchase Plan during 1999 that included $1.2 million in optional cash investments and $15.5 million of reinvested dividends.
For the year ended December 31, 1999, United Dominion paid distributions to its common shareholders and unitholders in its operating partnerships aggregating $118.8 million. The distribution to common shareholders and holders of operating partnership units equates to a dividend rate of $1.06 per share or unit. In addition, $35.0 million of preferred dividends were paid to Series A, B and D preferred shareholders.
In June 1999, the Board of Directors authorized the repurchase of up to 5.5 million common shares, or 5% of the total common shares outstanding, using proceeds from the disposition program. Such purchases will be made from time to time in the open market or in privately negotiated transactions; the timing, volume and price of such purchases will be at the discretion of management and the Board of Directors. For the year ended December 31, 1999, United Dominion repurchased 2.6 million common shares at an average price of $11.22 per share. The Board of Directors, also approved the repurchase of up to $25 million of United Dominion's Series A and Series B Cumulative Redeemable Preferred Stock from time to time as market conditions permit. For the year ended December 31, 1999, United Dominion repurchased 31,440 Series A preferred shares at an average price of $19.76 per share and 53,700 Series B preferred shares at an average price of $18.35 per share. In addition, United Dominion redeemed one million operating partnership units for $12.0 million.
During 1999, using proceeds from its disposition program, United Dominion repurchased $70.0 million of certain of its higher rate outstanding unsecured debt with a weighted average yield of 7.74%. In addition, in connection with the disposition program, United Dominion was relieved of $57.7 million of mortgage debt and $9.3 million of revolving bank debt.
Credit Facilities
United Dominion has a $200 million three-year unsecured revolving credit facility (the "Bank Credit Facility") which expires in August 2000 and a $110 million one-year unsecured line of credit (the "Line of Credit") which expires in August 2000 that are provided by a consortium of banks. Under the Bank Credit Facility, pricing is based upon the higher of United Dominion's senior unsecured debt ratings from Standard & Poor's Corporation and Moody's Investor Services that are currently BBB and Baa2, respectively. At these rating levels, interest under the Bank Credit Facility is LIBOR plus 0.50% and interest under the Line of Credit is LIBOR plus 1.0%. However, these rates are subject to change as United Dominion's credit ratings change. The Bank Credit Facility also includes a $100 million competitive bid option, which allows United Dominion to solicit bids from participating banks at rates below the contractual rate. At December 31, 1999, $277.6 million was outstanding under these credit facilities leaving $32.4 million available for use.
The Bank Credit Facility and Line of Credit are subject to customary financial covenants and limitations.
Derivative Instruments
United Dominion, from time to time, uses derivative instruments to synthetically alter on-balance sheet liabilities or to hedge anticipated financing transactions. Derivative contracts did not have a material impact on the results of operations during 1999.
Market Risk
United Dominion is exposed to market risk principally from interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. United Dominion does not hold financial instruments for trading purposes, but rather issues these financial instruments to finance owning and managing real estate. United Dominion's interest rate sensitivity position is managed by its treasury department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. United Dominion's earnings are affected by changes in short-term interest rates on its variable rate debt and the repricing of fixed rate debt. A large portion of United Dominion's market risk is exposure to short-term interest rates from variable rate borrowings outstanding under its bank credit facilities, which totaled $277.6 million at December 31, 1999. The impact on United Dominion's financial statements of refinancing fixed rate debt that matured during 1999 was not material.
At December 31, 1999, the notional value of United Dominion's derivative products for the purpose of managing interest rate risk was $177 million of interest rate swaps under which United Dominion pays a fixed rate of interest and receives a variable rate. These agreements effectively fix $177 million of United Dominion's variable rate notes payable to a weighted average fixed rate of 6.78% (see Note 5 - Financial Instruments). At December 31, 1999, the fair market value of the interest rate swaps in a favorable value position to United Dominion would have been $626 thousand. If interest rates were 100 basis points more or less at December 31, 1999, the fair market value of the interest rate swaps would have increased or decreased $500 thousand, respectively.
If market interest rates for variable rate debt averaged 100 basis points more in 2000 than they did during 1999, United Dominion's interest expense, after considering the effects of its interest rate swap agreements, would increase, and income before taxes would decrease by $4.0 million. Comparatively, if market interest rates for variable rate debt averaged 100 basis points more in 1999 than it did in 1998, United Dominion's interest expense, after considering the effects of its interest rate swap agreements, would increase, and income before taxes would decrease by $4.0 million. If market rates for fixed rate debt were 100 basis points higher at December 31, 1999, the fair value of fixed rate debt would have decreased from $1.55 billion to $1.50 billion. If market interest rates for fixed rate debt were 100 basis points lower at December 31, 1999, the fair value of fixed rate debt would have increased from $1.55 billion to $1.62 billion.
These amounts are determined by considering the impact of the hypothetical interest rates on United Dominion's borrowing cost and interest rate swap agreements. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in United Dominion's financial structure.
Results of Operations
United Dominion's net income is primarily generated from the operations of its apartment communities.
1999-vs-1998
For 1999, net income available to common shareholders increased $7.2 million, with a corresponding increase of $.05 for both basic and diluted earnings per share, compared to 1998. The increase per share was primarily attributable to aggregate gains on the sale of investments of $38.0 million ($.37 per share) for the year ended December 31, 1999, compared to $26.7 million ($.27 per share) in 1998. However, the increases associated with the gain on sales of investments were moderated in part due to the $19.3 million of impairment losses recorded during 1999. United Dominion's non-mature communities with 31,454 apartment homes at December 31, 1999 provided a substantial portion of the increase in United Dominion's operating income during 1999.
1998-vs-1997
For 1998, net income available to common shareholders decreased $4.1 million, with a corresponding decrease of $.12 and $.11 for basic and diluted earnings per share, respectively, compared to 1997. The
decrease per share was primarily attributable to the $15.6 million ($.15 per share) loss on the termination of an interest rate risk management agreement during the fourth quarter of 1998. Net income available to common shareholders for the year ended December 31, 1998 included aggregate gains on the sales of investments of $26.7 million ($.27 per share) compared to $12.7 million ($.15 per share) in 1997.
The following is a combined summary of the operating performance for United Dominion's apartment portfolio (dollars in thousands):
Same Communities
1999-vs-1998 (51,316 apartment homes)
In 1999, property rental income grew 3.1%, or approximately $11.1 million, reflecting an increase in average monthly rental rates of 3.4% while physical occupancy remained constant at 93.1%.
For 1999, property operating expenses at these same communities decreased 0.6%, or $827 thousand. Utility expense decreased due to the continued transfer of water and sewer costs to residents, repair and maintenance expense decreased as a result of the upgrade program and taking more turnover work in-house and property management expenses decreased due to better economies of scale. However, these decreases were offset by an increase in personnel costs due to higher salaries and benefit costs, an increase in real estate taxes, the addition of monitored alarms in more communities and higher technology costs.
As a result of the increase in property rental income and the decrease in property operating expenses, the operating margin (property operating income divided by property rental income) improved 1.5% to 61.3%.
1998-vs-1997 (47,875 apartment homes)
Compared to the same period in 1997, property rental income from these communities grew 3.5%, or approximately $11.0 million, reflecting an increase in average monthly rental rates of 3.4%. During 1998, physical occupancy of 92.9% was the same as reported in 1997.
For 1998, property operating expenses at these communities were unchanged. Utility expenses decreased as a result of United Dominion's water and sewer sub- metering initiative and repair and maintenance expenses decreased as United Dominion continued to benefit from a centralized purchasing initiative and the upgrade program. However, these expense decreases were offset by increases in real estate taxes primarily in certain Florida and Texas markets and increases in personnel costs as United Dominion experienced pressure on wages due to low unemployment and tighter job markets.
Due to the increase in property rental income and the unchanged property operating expenses, the operating margin improved 1.4% to 59.5%.
Non-Mature Communities
1999-vs-1998
Property rental income and property operating expenses increased from 1998 to 1999 directly as a result of the increase in the weighted average number of apartment homes owned during 1999. For the year ended December 31, 1999, average economic occupancy was 88.2%, and the operating margin was 58.8% for the non- mature communities.
United Dominion's non-mature apartment portfolio can be categorized as follows for the years ended December 31, 1999 and 1998:
1998 Acquisitions - -----------------
American Apartment Communities II, Inc. (AAC)
On an average investment of $761 million, the AAC portfolio (13,728 homes net of sales) provided a first year return on investment (property rental income less property operating expenses divided by the average capital investment in real estate) of 9.1% which is slightly better than the projection of 9.0%. These communities achieved physical occupancy of 93.6%, which is higher than United Dominion's average physical occupancy primarily due to the California markets included in this portfolio. For the year, these communities had an economic occupancy of 92.1% and an operating margin of 62.7%.
1998 Acquisitions (Excluding AAC)
For the 13,577 homes (net of sales) acquired in 1998, the return on investment for the year ended December 31, 1999, on an average investment of $611 million was 8.4%. This return on investment was below amounts projected for 1999, however, these communities continue to be upgraded, repositioned and selectively sold, which is expected to improve overall operating results over the long-term. These communities had an economic occupancy of 88.8% and an operating margin of 57.8%.
1999 Acquisitions - -----------------
Included in this category are five communities with 1,230 apartment homes acquired by United Dominion during 1999 that are projected to provide a first year return on investment of 9.0% on an initial investment of $74 million. These communities did not have a material impact on 1999 results of operations.
Disposition Communities - -----------------------
Included in this category are the 12,761 apartment homes sold for an aggregate sales price of $398 million as part of United Dominion's strategic repositioning (see Disposition of Investments under Liquidity and Capital Resources) since January 1, 1998. The communities sold during 1999 and 1998 had a capitalization rate (budgeted property operating income less a reserve placement divided by the sales price) in the 10% range.
Development Communities - -----------------------
United Dominion developed 2,404 homes at various times since January 1, 1998, which included the completion of six new communities and one additional phase to an existing community during 1999. Once stabilized, development communities are projected to generate an average return on investment in the 10% range, however, the full impact on property operating income is not realized until after the communities are stabilized, which is generally six months after construction is completed. United Dominion considers a development community stabilized on the earlier to occur of (i) one year after completion of construction or (ii) attainment of 90% physical occupancy. Construction activity is staged to allow for leasing and occupancy during the construction period in order to minimize the lease-up period subsequent to the completion of construction.
1998-vs-1997
Property rental income and property operating expenses increased from 1997 to 1998 directly as a result of the increase in the weighted average number of apartment homes owned during 1998. For the year ended December 31, 1998, average economic occupancy was 88.6%, and the operating margin was 55.7% for the non- mature communities.
1997 Acquisitions - -----------------
On an average investment of $355 million, the 1997 acquisitions which consisted of 8,524 apartment homes provided a 9.1% return on investment during 1998. For the year, these communities had economic occupancy of 91.5% and an operating margin of 56.6%. During 1998, property operating expenses were adversely impacted by (i) an increase in real estate taxes due to reassessments at several Florida communities and (ii) the delay in United Dominion's implementation of its water billing and reimbursement schedule for these communities.
1998 Acquisitions - -----------------
1998 Single Acquisitions
On an average investment of $312 million, the 1998 acquisitions which consisted of 6,959 apartment homes provided an annualized return on investment of 8.7%. These results were below the full year forecasted return on investment of 9.0% as a result of delays in water billing and reimbursement and market softness in San Antonio and Phoenix where United Dominion acquired communities in 1998.
ASR Investments Corporation (ASR)
A total of 7,550 apartment homes were included in the ASR merger on March 27, 1998, which provided the largest increase in property rental income and property operating expenses for United Dominion's apartment portfolio during 1998. The annualized return on investment for the ASR properties was 7.3% on an average investment of $313 million during 1998. The under-performance of this portfolio was primarily attributable to weak markets in Phoenix, Tucson and Albuquerque and certain assets were undergoing upgrading and repositioning. For the year ended December 31, 1998, these communities had economic occupancy of 87.9% and an operating margin of 49.3%.
American Apartment Communities (AAC)
This included 14,001 apartment homes in the AAC merger on December 7, 1998 for an initial investment of $767 million. This acquisition did not have a material effect on 1998 results of operations.
Disposition Communities - ------------------------
During 1998 and 1997, United Dominion sold approximately $225 million of real estate consisting of 30 communities with 7,888 apartment homes, the net proceeds from which were used to acquire newer communities that provide higher long-term returns on investment than the communities being sold. The properties sold during 1998 had a capitalization rate (budgeted property operating income less a replacement reserve divided by the sales price) in excess of 10%.
Development Communities - -----------------------
These communities consisted of 1,957 apartment homes in five new communities and five additional phases to existing communities developed from January 1, 1997 to December 31, 1998. Once stabilized, development communities are projected to generate an average return on investment in excess of 10%.
Interest Expense
During 1999, interest expense increased $47.5 million over the corresponding amount in 1998 as the weighted average amount of debt employed during 1999 was higher than it was in 1998 ($2.1 billion in 1999 versus $1.5 billion in 1998). The increase in the weighted average amount of debt employed in 1999 is primarily due to debt assumed during 1998 to fund United Dominion's investment activities. The weighted average interest rate on this debt was 7.4% in both 1999 and 1998. For 1999, 1998 and 1997, total interest capitalized was $5.2 million, $3.4 million and $2.6 million, respectively.
For 1998, interest expense increased $27.2 million over 1997. The weighted average amount of debt employed during 1998 was higher than it was in 1997 ($1.5 billion in 1998 versus $1.0 billion in 1997) which accounted for the majority of the increase in interest expense. The weighted average interest rate on this debt was slightly lower than it was in 1997, decreasing from 7.5% in 1997 to 7.4% in 1998 reflecting greater usage of lower rate short-term bank borrowings in 1998 ($238.6 million weighted average outstanding in 1998 versus $74.6 million in 1997).
General and Administrative
During the year ended December 31, 1999, general and administrative expenses increased $3.7 million, or 36.6%, over 1998, primarily due to the expanded operations of United Dominion and its continued investment in professional staff, technology and scaleable accounting and information systems.
During 1998, general and administrative expenses increased by $3.1 million over 1997. In 1998, United Dominion incurred increases in most of its general and administrative expense categories which was directly attributable to the expanded operations of United Dominion and its investment in infrastructure. The largest increases occurred in payroll and payroll-related expenses. General and administrative expense as a percentage of rental income increased 0.3% from 1.8% during 1997 to 2.1% during 1998 primarily due to (i) the added infrastructure costs incurred due to the expanded operations of United Dominion and (ii) the change in accounting for internal acquisition costs subsequent to March 19, 1998.
Impairment Loss
For the year ended December 31, 1999, United Dominion recognized $18.3 million in impairment losses on its real estate portfolio. At the beginning of June 1999, United Dominion embarked on an accelerated disposition plan for non- strategic properties. As a result of the review of its real estate apartment portfolio, 21 properties included in real estate held for investment were moved to real estate held for disposition during the second quarter. Accordingly, through the review and analysis of communities targeted for strategic disposition, an aggregate $7.1 million impairment loss was recognized on five communities in the second quarter. Based on United Dominion's review and analysis of the sales planned for 2000 and the periodic evaluation of its apartment portfolio, an additional $11.2 million impairment loss was recognized in the fourth quarter of 1999, related principally to communities acquired in the ASR merger in 1998.
During 1997, the company recorded and impairment loss of $1.4 million relating to two communities included in United Dominion's real estate held for investment. These communities were subsequently moved to real estate held for disposition based upon management's decision to dispose of these properties.
Distributions to Preferred Shareholders
Distributions to preferred shareholders totaled $37.7 million for 1999 compared to $23.6 million for 1998. The increase was a result of the issuance of eight million shares of Series D 7.50% Cumulative Convertible Redeemable Preferred Stock in December 1998.
Distributions to preferred shareholders totaled $23.6 million for the year ended December 31, 1998 compared to $17.3 million for 1997. The increase was a result of the issuance of six million shares of Series B 8.60% Cumulative Redeemable Preferred Stock in May 1997.
age of 25
Inflation
United Dominion believes that the direct effects of inflation on United Dominion's operations have been inconsequential.
Information Technology
United Dominion is currently engaged in the development of an innovative on-site property management system (the "system") to enable management to capture, review and analyze data to a greater extent than is possible using available existing commercial software. United Dominion believes the new system will enable it to become a more efficient provider of a high quality living environment for its residents, and provide the scalability necessary to support future growth. These development activities are being conducted through a joint venture with another public multifamily real estate company. The system development process is currently managed by the employees of United Dominion and its joint venture partner who have significant related project management experience. The actual programming and documentation of the system is being conducted by employees and third party consultants under the supervision of these experienced project managers.
Current projections indicate that total development costs over a three-year period will be approximately $7.5 million (including hardware costs and expenses, the costs of employees and related overhead, and the costs of engaging third party consultants) and that such development costs will be shared on an equal basis by the joint venture partners. Once developed, the system would be used in place of current property management information systems for which a license fee is paid to third parties.
The system is currently projected to undergo an on-site test (i.e., a "beta test") during the third quarter of 2000 and the system should be functional by the fourth quarter of 2000.
Neither United Dominion nor its joint venture partner have been engaged in the development of systems software. There are several risks associated with the development of the system for internal use, such as: (i) the inability to maintain the schedule or budget that has been projected for the development and implementation of the software, and (ii) the system may not have the functionality and efficiencies desired.
Year 2000
United Dominion completed the transition to the Year 2000 with all of its computer platforms Year 2000 compliant and the transition took place without incident. There have been no reported problems with any equipment or software, nor have any disruptions with suppliers or vendors occurred. United Dominion will continue to monitor its systems in 2000 to insure that any latent issues with Year 2000 are identified and addressed.
Taxable REIT Subsidiary
In December 1999, the REIT Modernization Act ("RMA") was signed into law. The RMA contains several provisions that, when effective in 2001, will allow REIT's to compete more effectively in the real estate industry by allowing REIT's to offer the same types of services as other competitors in the marketplace. The most important feature of the RMA is the allowance for REIT's to create a taxable REIT subsidiary ("TRS") that can provide services to residents and others without disqualifying the rents that a REIT receives from its residents.
Under the prior law, REIT's were not allowed to provide non-customary or tenant specific services to its residents, such as concierge services, beyond a de minimus amount. As the apartment industry has become a competitive customer focused business, these constraints inhibited REIT's from maintaining a competitive edge in attracting and maintaining residents. As such, the RMA has several significant benefits for the REIT industry REIT's will be allowed, through a TRS, to provide a wide range of increasingly important services that residents have come to expect. In addition, the TRS will allow REIT's to generate new sources of income for REIT shareholders.
Effective January 1, 2001, a REIT can own 100% of the stock of a TRS. However, the legislation contains a number of safeguards that would limit the size of a TRS to ensure that REIT's remain focused on their core business of owning and operating real estate assets.
The RMA provides another significant change to the existing law. The RMA changes the minimum distribution requirement from 95% to 90% of the REIT's taxable income. This will allow REIT's to retain a greater level of capital which can be used to invest back into expenditures to maintain the quality of their real estate assets as well as repay outstanding debt.
During 2000, United Dominion will determine the best uses of the TRS in order to be in a position to take full advantage of the opportunities the new legislation has to offer in 2001.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------------------------------------------------------------------
Information required by this regarding Quantitative and Qualitative Disclosures about Market Risk is included in Part II, Item 7
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -----------------------------------------------------
See Index to Consolidated Financial Statements and Schedule on page 45 of this Annual Report on Form 10-K.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------
None.
Part III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
Incorporated herein by reference from United Dominion's Proxy Statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 9, 2000.
Information required by this item regarding the executive officers of United Dominion is included in Part I of this Annual Report on Form 10-K in the section entitled "Executive Officers of the Registrant".
Item 11.
Item 11. EXECUTIVE COMPENSATION - --------------------------------
Incorporated herein by reference from United Dominion's Proxy Statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 9, 2000.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
Incorporated herein by reference from United Dominion's Proxy Statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 9, 2000.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
Incorporated herein by reference from United Dominion's Proxy Statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 9, 2000.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) (1&2) See Index to Consolidated Financial Statements and Schedule on page 45 of this Annual Report on Form 10-K.
(3) Exhibits
The exhibits listed below are filed as part of this Annual Report. References under the caption Location to exhibits, forms, or other filings indicate that the form or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference.
21 The Company has the following subsidiaries, all of which but United Dominion Realty, L.P. are wholly owned. The Company owns general and limited partnership interests in United Dominion Realty, L.P., constituting 90.8% of the aggregate partnership interest.
United Dominion Realty Trust, Inc. The Commons of Columbia, Inc. UDRT of Virginia, Inc. United Dominion Residential, Inc. UDR at Marble Hill, LLC United Dominion Realty, L.P. UDRT of North Carolina, L.L.C. UDRT of Alabama, Inc. Cleary Court Property Owners' Association, Inc.
UDR South Carolina Trust UDR Western Residential, Inc. SWPT II Arizona Properties, Inc. SRL Amarillo Investors, Inc. Little Rock Apartment Management, Inc. SWP Arkansas Properties, Inc. SWP Developers, Inc. SWP Depositor, Inc. South West REIT Holding, Inc. South West Properties, L.P. SWP REMIC Properties II, Inc. SWP REMIC Properties II-A, L.P. SWP Creeks Properties, Inc. UDR Summit Ridge, L.P. SWP Woodscape Properties, Inc. SWP Woodscape Properties I, L.P. SWP Properties, Inc. SWP Properties I, L.P. South West Property Apartments, L.P. UDR Pecan Grove, L.P. UDR Camino Village, L.P. United Sub, Inc. ASR Acquisition Sub, Inc. UDR Audubon, L.P. UDR Villages of Thousand Oaks, L.P. UDR Cimarron City, L.P. UDR Kenton, L.P.
ASR Investments Corporation Heritage Communities L.P. Heritage SGP Corporation Heritage - Aspen Court L.P. Heritage - Gentry Place L.P. Heritage - Greenwood Creek L.P. Heritage - Highlands of Preston L.P. Heritage - 14400 Montfort L.P. Heritage - Preston Park L.P. Heritage - Smith Summit L.P. Heritage - Springfield L.P. Heritage - Briar Park L.P. Heritage - Chelsea Park L.P. Heritage - Country Club Place L.P. Heritage - Ivystone L.P. Heritage - London Park L.P. Heritage - Marymont L.P. Heritage - Riverway L.P. Heritage - Timbercreek Landings L.P. Heritage - Campus Commons North, L.L.C. Heritage - Campus Commons South, L.L.C. Heritage - Court, L.L.C. Heritage - On The Boulevard, L.L.C. Heritage - Pacific South Center, L.L.C.
Heritage - Arbor Terrace I, L.L.C. Heritage - Arbor Terrace II, L.L.C. ASR Properties, Inc. ASC Properties, Inc. ASC-I Properties, Inc. ASC-II Properties, Inc. ASC-III Properties, Inc. ASC-IV Properties, Inc. ASC-V Properties, Inc. Rescap Inc. Rescap Manager Limited Partnership Contempo Heights L.L.C. La Privada L.L.C. Finisterra Apartments L.L.C. ASV-I Properties, Inc. ASV-II Properties, Inc. ASV-III Properties, Inc. ASV-IV Properties, Inc. ASV-V Properties, Inc. ASV-VI Properties, Inc. ASV-VII Properties, Inc. ASV-VIII Properties, Inc. ASV-IX Properties, Inc. ASV-X Properties, Inc. ASV-XI Properties, Inc. ASV-XII Properties, Inc. ASV-XIII Properties, Inc. ASV-XIV Properties, Inc. ASV-XV Properties, Inc. ASV-XVI Properties, Inc. ASV-XVII Properties, Inc. Heritage Residential Group, Inc. RMA Investments Holdings, Inc. CIMSA Financial Corporation RMA Investments I, Inc. RMA Investments II, Inc. Cholla Estates Construction L.L.C. ASR Finance Corporation Southwest Capital Mortgage Funding L.P. ASR Mortgage Acceptance, Inc. UDR Developers, Inc. UDR Texas Properties, L.P. UDR of Tennessee, L.P. UDR Seniors Housing, L.P. UDR Aspen Creek, LLC United Dominion Residential Ventures, L.L.C.
American Apartment Communities Holdings, Inc. AAC Funding II, Inc. AAC Funding III, Inc. AAC Funding IV, Inc. AAC Seattle I, Inc.
FMP Member, Inc. AAC Funding IV LLC AAC Funding Partnership II AAC Funding Partnership III AAC Vancouver I, L.P. AAC/FSC Crown Pointe Investors, LLC AAC/FSC Hilltop Investors, LLC AAC/FSC Seattle Properties, LLC CMP-1, LLC Coastal Anaheim Properties, LLC Coastal Long Beach Properties, LLC Coastal Monterey Properties LLC Fountainhead Apartments Limited Partnership Governour's Square of Columbus Co. Jamestown of St. Matthews Co. Northbay Properties II, L.P. Parker's Landing Venture I Parker's Landing Venture II Polo Chase Venture Limited Partnership Regency Park, L.P. Sunset Company Tivoli of Columbus Limited Partnership Windward Point, LLC Winterland San Francisco Partners Woodlake Village, L.P. UDR Virginia Properties, LLC UDR California Properties, L.L.C. UDR Florida Properties, L.L.C. UDR Holdings, LLC UDR Lakeside Mills, LLC UDR Maryland Properties, LLC
23 Consent of Independent Filed herewith. Auditors
27 Financial Data Schedule Filed electronically with the Securities and Exchange Commission.
Exhibits 10(i) through 10(v) inclusive, are management contracts or compensatory plans or arrangements required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on February 25, 2000. The filing reported United Dominion's 1999 fourth quarter and year to date results of operations as reported on its Press Release issued on February 1, 2000.
A Form 8-K was filed with the Securities and Exchange Commission on December 22, 1999. The filing reported United Dominion's 1999 dispositions and plans for 2000 dispositions as reported on its Press Release issued on December 16, 1999.
A Form 8-K was filed with the Securities and Exchange Commission on March 29, 1999. The filing reported pro forma financial information with respect to the American Apartment Communities II, Inc. merger.
A Form 8-K was filed with the Securities and Exchange Commission on January 20, 1999. The filing reported pro forma financial information with respect to the American Apartment Communities II, Inc. merger.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
United Dominion Realty Trust, Inc. - ---------------------------------- (registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 17, 2000 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ John P. McCann /s/ Jeff C. Bane - ------------------------------------- ----------------------------------- John P. McCann Jeff C. Bane Chairman of the Board and Chief Director Executive Officer
/s/ Lynne Sagalyn - ------------------------------------- ___________________________________ Lynne Sagalyn Mark J. Sandler Director Director
/s/ John S. Schneider /s/ Robert W. Scharar - ------------------------------------- ----------------------------------- John S. Schneider Robert W. Scharar Director, Vice Chairman of the Board, Director President and Chief Operating Officer
_____________________________________ ___________________________________ Robert P. Freeman Jon A. Grove Director Director
/s/ James D. Klingbeil /s/ Barry M. Kornblau - ------------------------------------- ----------------------------------- James D. Klingbeil Barry M. Kornblau Director Director
/s/ R. Toms Dalton /s/ Robin R. Flanagan - ------------------------------------- ----------------------------------- R. Toms Dalton Robin R. Flanagan Director Vice President, Controller-Corporate Accounting and Chief Accounting Officer
/s/ A. William Hamill - ------------------------------------- A. William Hamill Executive Vice President and Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
UNITED DOMINION REALTY TRUST, INC.
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
Report of Independent Auditors ------------------------------
The Board of Directors and Shareholders United Dominion Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of United Dominion Realty Trust, Inc. (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimate made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Dominion Realty Trust, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
Richmond, Virginia January 31, 2000
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
See accompanying notes to consolidated financial statements.
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except per share data)
See accompanying notes to consolidated financial statements.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Formation United Dominion Realty Trust, Inc., a Virginia corporation, was formed in 1972. United Dominion operates within one defined business segment with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities nationwide. At December 31, 1999, United Dominion owned 301 communities with 82,154 completed apartment homes and had three communities and three additional phases to existing communities with 1,622 apartment homes under development.
Basis of presentation The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P., (the "Operating Partnership"), and Heritage Communities L.P. (collectively, "United Dominion"). As of December 31, 1999, there were 74,463,788 units in the Operating Partnership outstanding, of which, 67,619,425, or 90.8%, were owned by United Dominion and 6,844,363, or 9.2%, were owned by non-affiliated limited partners. In connection with the acquisition of ASR Investment Corporation in March 1998, United Dominion acquired Heritage Communities L.P., a Delaware limited partnership (the "Heritage OP"). As of December 31, 1999, there were 4,502,668 units in the Heritage OP outstanding, of which 3,839,330, or 85.3%, were owned by United Dominion and 663,338 units, or 14.7%, were owned by non-affiliated limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the operating partnerships. All significant inter-company accounts and transactions have been eliminated in consolidation.
Income taxes United Dominion is operated as, and elects to be taxed as, a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Generally, a REIT that complies with the provisions of the Code and distributes at least 95% of its taxable income to its shareholders will not be subject to U.S. federal income taxes. Accordingly, no provision has been made for federal income taxes. However, United Dominion is subject to certain state and local excise or franchise taxes.
The differences between net income available to common shareholders for financial reporting purposes and taxable income before dividend deductions relate primarily to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The temporary differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.
For income tax purposes, distributions paid to common shareholders consist of ordinary income, capital gains, return of capital or a combination thereof. For the three years ended December 31, 1999, distributions paid per common share were taxable as follows:
1999 1998 1997 ------ ------ ------ Ordinary income $ .620 $.913 $.727 Long-term capital gain .129 --- .021 Return of capital .309 .127 .249 ------ ----- ----- $1.058 $1.040 $.997 ====== ====== =====
Dividends declared on all series of United Dominion's preferred stock represent ordinary income to preferred stockholders for tax purposes in the year paid.
Use of estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Reclassifications Certain reclassifications have been made to amounts in prior years' financial statements to conform with current year presentation.
Cash and cash equivalents Cash and cash equivalents include all cash and liquid investments with maturities of three months or less when purchased.
Real estate Real estate assets held for investment are carried at historical cost less accumulated depreciation less any recorded impairment losses.
Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Significant expenditures for improvements, renovations and replacements related to the acquisition and improvement of real estate assets are capitalized at cost and depreciated over their estimated useful lives.
United Dominion recognizes impairment losses on long-lived assets used in operations when there is an event or change in circumstance that indicates an impairment in the value of an asset and the undiscounted future cash flows are not sufficient to recover the asset's carrying value. If such indicators of impairment are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Real estate is classified as real estate held for disposition when management has committed to sell and is actively marketing the property, and United Dominion expects to dispose of these properties within the next twelve months. Real estate held for disposition is carried at the lower of cost, net of accumulated depreciation or fair value less the cost to dispose, determined on an asset by asset basis. Depreciation is not recorded on real estate held for disposition and gains (losses) from initial and subsequent adjustments to the carrying value of the assets, if any, are recorded as a separate component of income from continuing operations.
Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which is 35 years for buildings, 10 to 35 years for major improvements, and 5 to 20 years for furniture, fixtures, equipment and other assets.
All development projects and related carrying costs are capitalized and reported on the balance sheet as "real estate under development" until such time as the development project is completed. Upon completion, the total cost of the building and associated land is transferred to real estate held for investment and the assets are depreciated over their estimated useful lives. The cost of development projects includes interest, real estate taxes, insurance and allocated development overhead during the construction period.
Interest and real estate taxes incurred during the development period are capitalized as part of the real estate under development to the extent that such charges do not cause the carrying value of the asset to exceed its net realizable value. During 1999, 1998 and 1997, total interest capitalized was $5.2 million, $3.4 million and $2.6 million, respectively.
Commencing with the adoption of EITF No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" in March 1998, United Dominion expenses direct internal costs of identifying and acquiring operating properties.
Revenue recognition United Dominion's apartment homes are leased under operating leases with terms generally of one year or less. Rental income is recognized after it is earned and paid.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Restricted cash Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and replacement reserves and security deposits.
Deferred financing costs Deferred financing costs include fees and other costs incurred to obtain debt financings and are generally amortized on a straight- line basis, which approximates the effective interest method, over a period not to exceed the term of the related debt. Unamortized financing costs are written- off when debt is retired before its maturity date.
Interest rate swap agreements United Dominion enters into interest rate swap agreements to alter the interest rate characteristics of outstanding debt instruments. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. The interest rate swaps involve the periodic exchange of payments over the life of the related agreements. Amounts received or paid on the interest rate swaps are 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 amounts payable to and receivable from counterparties are included in other liabilities and other assets, respectively. The fair value of and changes in the fair value as a result of changes in market interest rates for the interest rate swap agreements are not reflected in the financial statements.
Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized into interest expense over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. There were no gains or losses on terminations of interest rate swap agreements recognized by United Dominion for the periods presented.
Any interest rate swap agreements that are not designated with outstanding debt or notional amounts of interest rate swap agreements in excess of the original amounts of the underlying debt obligations are recorded as an asset or liability at fair value, with the changes in the fair value recorded in other income or expense (fair value method).
Interest rate risk management agreements United Dominion enters into interest rate futures contracts to hedge interest rate risk associated with anticipated debt transactions. United Dominion follows SFAS No. 80, "Accounting for Futures Contracts," which permits hedge accounting for anticipatory transactions meeting certain criteria. Gains and losses, if any, on these transactions are deferred as an adjustment to the carrying amount of the outstanding debt and amortized over the term of the related debt as an adjustment to interest expense. The fair values of interest rate risk management agreements are not recognized in the financial statements. At the time the anticipated transaction is no longer likely to occur, United Dominion would mark the derivative instrument to market and would recognize any adjustment in the consolidated statement of operations.
Earnings per share Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based on common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on United Dominion's average stock price. The early extinguishment of debt does not have an effect on the earnings per share calculation for the periods presented. The following table sets forth the computation of basic and diluted earning per share (dollars in thousands, except per share amounts):
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
The effect of the conversion of the operating partnership units and convertible preferred stock is not dilutive and is therefore not included as a dilutive security in the earnings per share computation. The weighted average effect of the conversion of the operating partnership units for the years ended December 31, 1999, 1998 and 1997 was 8,180,409, 2,963,427, and 317,120, respectively. The weighted average effect of the conversion of the convertible preferred stock for the years ended December 31, 1999 and 1998 was 12,307,692 and 809,273, respectively.
Minority interests in operating partnerships Interests in operating partnerships held by limited partners are represented by operating partnership units (OP Units). The operating partnerships' income is allocated to holders of OP Units based upon net income available to common shareholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions and profits and losses are allocated to minority interests in accordance with the terms of the individual partnership agreements. OP Units can be exchanged for cash or shares of United Dominion's common stock on a one-for-one basis, at the option of United Dominion. OP Units as a percentage of total OP Units and shares outstanding was 6.8%, 7.7% and 1.1% at December 31, 1999, 1998 and 1997, respectively.
Minority interest in other partnerships United Dominion has limited partners in certain real estate partnerships acquired as part of the acquisition of American Apartment Communities II on December 7, 1998. Net income for these partnerships is allocated based on the percentage interest owned by these limited partners in each respective real estate partnership.
Stock based compensation United Dominion has elected to follow 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 SFAS No. 123, "Accounting for Stock Based Compensation," requires 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.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Impact of recently issued accounting standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"), as amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133," which is required to be adopted in years beginning after June 15, 2000. Statement 133 permits early adoption as of the beginning of any fiscal quarter after its issuance, however, United Dominion does not anticipate adopting Statement 133 until such time as it is required. Statement 133 will require United Dominion to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. United Dominion has not yet determined what the effect of Statement 133 will be on earnings and the financial position of United Dominion, however, management does not anticipate that the adoption of Statement 133 will have a significant effect on earnings or the financial position of United Dominion.
2. REAL ESTATE OWNED
United Dominion operates in over 30 major markets dispersed throughout a 22 state area. At December 31, 1999, the company's largest apartment market was Dallas, Texas, where it owned 9.7% of its apartment homes, based upon carrying value. Excluding Dallas, United Dominion did not own more than 5.5% of its apartment homes in any one market, based upon carrying value.
The following table summarizes real estate held for investment at December 31, (dollars in thousands):
The following is a summary of real estate owned by market at December 31, 1999 (dollars in thousands): Real Estate Held for Investment by Market (in order of carrying value and excluding real estate under development):
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Real Estate Held for Disposition (B)
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
(A) There are 21 communities encumbered by two REMIC financings aggregating $59.2 million, 19 communities encumbered by one secured note payable aggregating $195.7 million and 29 communities encumbered by fixed rate debt aggregating $161.5 million. The amount of this debt is not included in the encumbrances shown for the individual markets or in real estate held for disposition.
(B) Real estate held for disposition contributed property operating income (property rental income less property rental expenses) in the aggregate amount of approximately $25.2 million for the year ended December 31, 1999. The properties classified as held for disposition at December 31, 1999 reflect properties management has committed to sell during the next twelve months.
For the year ended December 31, 1999, United Dominion recognized $18.3 million in impairment losses on its real estate owned. At the beginning of June 1999, United Dominion embarked on an accelerated disposition plan for non-strategic properties. Accordingly, through the review and analysis of communities targeted for strategic disposition which included exiting one of United Dominion's major markets and planned sales in 2000, an aggregate $14.8 million impairment loss was recognized on assets held for disposition. An impairment loss was indicated as a result of the net book value of the assets held for disposition being greater than the estimated fair market value less the cost of disposal.
In connection with the periodic evaluation of its apartment portfolio, United Dominion recorded a $3.5 million impairment loss on three communities acquired in the ASR merger in 1998 which are classified in real estate held for investment. An impairment loss was indicated as the sum of the estimated future cash flows from the assets was deemed to be less than their carrying amounts.
The following is a reconciliation of the carrying amount of real estate held for investment at December 31, (dollars in thousands):
The following is a reconciliation of accumulated depreciation for real estate held for investment at December 31, (dollars in thousands):
* Includes $1,157, $1,095 and $752 for 1999, 1998 and 1997, respectively, classified as "Other depreciation and amortization" in the Consolidated Statements of Operations.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
3. SECURED DEBT
Secured debt, which encumber $1.9 billion or 48.0% of United Dominion's real estate owned, ($2.1 billion or 52.0% of United Dominion's real estate owned is unencumbered) consist of the following at December 31, 1999 (dollars in thousands):
(a) Includes fair value adjustments aggregating $14.8 million recorded in connection with two statutory mergers consummated in 1998.
Fixed Rate Debt
Mortgage Notes Payable Fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2000 through June 2034 and carry interest rates ranging from 7.13% to 9.58%.
Tax-Exempt Secured Notes Payable Fixed rate mortgage notes payable which secure tax-exempt housing bond issues mature at various dates through November 2025 and carry interest rates from 6.13% to 8.50%. Interest on these notes is generally payable in semi-annual installments.
REMIC Financings United Dominion has two fixed rate REMIC Financings which bear interest of 7.01% and 8.50% and mature in December 2000 and February 2001, respectively. United Dominion makes monthly installments of principal and interest over the term of the REMIC Financings.
Secured Credit Facilities On March 18, 1999, United Dominion closed on the first part of a $200 million revolving credit facility with the Federal National Mortgage Association (the "FNMA Credit Facility"). The FNMA Credit Facility is for an initial term of five years, bear interest at a floating rate which can be fixed for periods of up to 270 days, and can be extended for an additional five or ten years at United Dominion's discretion. The $102.3 million initially borrowed under the terms of the FNMA Credit Facility had an interest rate of 5.70%. In April 1999, United Dominion borrowed an additional $16.6 million at an interest rate of 5.68% and $10.7 million at an interest rate of 5.72%. In August, an additional $66.1 million was borrowed under the FNMA Credit Facility at an interest rate of 6.53%. At December 31, 1999, the FNMA Credit Facility had a weighted average floating rate of interest of 6.32%. In order to limit a portion of its interest rate exposure on the Credit Facility, United Dominion entered into three forward rate swap agreements. These agreements have an aggregate notional value of $57 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreements effectively change United Dominion's interest rate exposure on $57 million of
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
secured debt from a variable rate to a weighted average fixed rate of 6.65% (see Note 5 - Financial Instruments).
Variable Rate Debt Secured Credit Facilities Variable rate secured credit facilities consists of $138.7 million of the $195.7 million outstanding on the FNMA Credit Facility.
Tax-Exempt Secured Notes Payable Variable rate mortgage notes payable which secure tax-exempt housing bond issues mature at various dates from December 2002 to April 2029. At December 31, 1999, these notes carry interest rates ranging from 4.75% to 5.90%.
Mortgage Notes Payable Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from February 2001 through September 2027. At December 31, 1999, these notes carry interest rates ranging from 6.86% to 7.50%.
The extraordinary loss for the years ended December 31, 1998 and 1997 resulted from the write-off of deferred financing costs on mortgage debt satisfied.
The aggregate maturities of secured debt for the five years subsequent to December 31, 1999 are as follows (dollars in thousands):
4. UNSECURED DEBT
A summary of unsecured debt at December 31, 1999 and 1998 is as follows (dollars in thousands):
1999 1998 -------- -------- Commercial Banks Borrowings outstanding under credit facilities (a) (b) $277,600 $240,000
Insurance Companies--Senior Unsecured Notes 7.98% due March, 2000-2003 (c) 29,800 37,228
Other (d) 4,931 5,836
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
(a) Weighted average interest rate of 6.7% and 6.0% at December 31, 1999 and 1998, respectively. (b) As of December 31, 1999, United Dominion had seven interest rate swap agreements associated with commercial bank borrowings with an aggregate notional value of $110 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amounts. The interest rate swaps effectively change United Dominion's interest rate exposure on these borrowings from a variable rate to a weighted average fixed rate of approximately 6.77% (see Note 5 - Financial Instruments). (c) Payable annually in four equal principal installments of $7.4 million. (d) Includes $4.6 million and $5.4 million at December 31, 1999 and 1998, respectively, of deferred gains from the termination of interest rate risk management agreements. (e) United Dominion has one interest rate swap agreement associated with these unsecured notes with an aggregate notional value of $10 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreement effectively changes United Dominion's interest rate exposure on the $10 million from a variable rate to a fixed rate of 7.65% (see Note 5 - Financial Instruments). (f) Debentures include an investor put feature which grants a one-time option to redeem debentures in September 2004.
For the year ended December 31, 1999, United Dominion recognized a $927 thousand extraordinary gain related to the repurchase of $70.0 million of its unsecured notes payable at less than face value.
Information concerning short-term bank borrowings is summarized in the table that follows (dollars in thousands):
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
(a) Includes balances on a $75 million bridge facility funded in July 1998 that matured in November 1998.
At December 31, 1999, United Dominion had in place a syndicated three year $200 million unsecured revolving credit facility (the "Bank Credit Facility") of which $197.6 million was outstanding at December 31, 1999. The Bank Credit Facility will expire on August 4, 2000. Borrowings under the Bank Credit Facility generally bear interest at LIBOR plus .50%. United Dominion is also required to pay a fee of .20% of the committed amount. This fee and the interest rate are both subject to change should United Dominion's credit ratings change.
At December 31, 1999, United Dominion had a $110 million syndicated 364-day credit agreement (the "Line of Credit") of which $80 million was outstanding at December 31, 1999. The Line of Credit will mature on September 15, 2000. Borrowings under the Line of Credit generally bear interest at LIBOR plus 1.00%. United Dominion is also required to pay a fee of .20% of the committed amount. This fee and the interest rate are both subject to change should United Dominion's credit ratings change.
The Bank Credit Facility and the Line of Credit are subject to customary financial covenants and limitations. The underlying loan agreements contain certain covenants which, among other things, require United Dominion to maintain minimum consolidated tangible net worth, as defined, and maintain certain financial ratios.
5. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following disclosures of estimated fair value of financial instruments were determined by United Dominion using available market information and appropriate valuation methodologies. Considerable judgement is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts United Dominion would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts and estimated fair value of United Dominion's financial instruments at December 31, 1999 and 1998, both on and off-balance sheet, are summarized as follows (dollars in thousands):
The following methods and assumptions were used by United Dominion in estimating the fair values set forth above.
Cash and cash equivalents The carrying amount of cash and cash equivalents - ------------------------- approximates fair value.
Secured and unsecured debt Estimated fair value is based on mortgage rates, - -------------------------- tax-exempt bond rates and corporate unsecured debt rates believed to be available to United Dominion for the issuance of debt with similar terms and remaining lives. The carrying amount of United Dominion's variable rate secured debt approximate fair value at December 31, 1999 and 1998. The carrying amounts of United Dominion's borrowings under variable rate unsecured debt arrangements, short-term revolving credit agreements and lines of credit approximate their fair values at December 31, 1999 and 1998.
Interest rate swap agreements Fair value is based on external market - ----------------------------- quotations from investment banks.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Derivative Instruments - ---------------------- The following table summarizes certain information pursuant to interest rate limitation and swap contracts at December 31, 1999 (dollars in thousands):
For all periods presented, United Dominion had no deferred gains or losses relating to terminated swap contracts.
Interest rate risk management agreements
In order to reduce the interest rate risk associated with the anticipated issuance of unsecured debt during 1998, United Dominion entered into a $100 million (notional amount) fixed pay forward starting swap agreement (interest rate risk management agreement) with an investment banking firm in July 1997. United Dominion settled the interest rate risk management agreement on November 9, 1998, by paying $15.6 million to the counterparty. United Dominion was unable to issue the unsecured debt contemplated by the interest rate risk management agreement, and accordingly, the cost associated with this settlement is reflected in the 1998 Statement of Operations. United Dominion has no interest rate risk management agreements outstanding at December 31, 1999.
Risk of counterparty non-performance
United Dominion has not obtained collateral or other security to support financial instruments. In the event of non-performance by the counterparty, United Dominion's credit loss on its derivative instruments is limited to the value of the derivative instruments that are favorable to United Dominion at December 31, 1999. However, such non-performance is not anticipated as the counterparties are highly rated, credit quality U.S. financial institutions and management believes that the likelihood of realizing material losses from counterparty non-performance is remote.
6. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The United Dominion Realty Trust, Inc. Profit Sharing Plan (the "Plan") is a defined contribution plan covering all eligible full-time employees. Under the Plan, United Dominion makes discretionary profit sharing and matching contributions to the Plan as determined by the Compensation Committee of the Board of Directors. Aggregate contributions, both matching and discretionary, which are included in United Dominion's consolidated statements of operations for the three years ended December 31, 1999, 1998 and 1997 were $2.2 million, $550,000 and $646,000, respectively.
Stock Option Plan
United Dominion's 1985 Share Option Plan, (the "Option Plan"), authorizes the grant of options, at the discretion of the Board of Directors, to certain officers, directors and key employees of United Dominion, for up to ten million shares of
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
United Dominion's common stock which is limited to 8% of the number of shares of common stock issued and outstanding. The Option Plan generally provides, among other things, that options be granted at exercise prices not lower than the market value of the shares on the date of grant. Shares under options which subsequently expire or are canceled are available for subsequent grant. For options granted prior to December 12, 1995, the optionee has up to five years from the date on which the options first become exercisable during which to exercise the options. For options granted on or after December 12, 1995, the options have a ten-year term. Options granted prior to December 9, 1997 vest on December 31 of the year subsequent to grant while options granted on and after this date vest ratably over a three year period beginning on December 31 of the year subsequent to grant. On December 8, 1998, United Dominion cancelled 1,047,165 options which were granted on December 9, 1997 at $14.25. United Dominion subsequently issued options on December 8, 1998, which vest over a three-year period, at United Dominion's then market price of $10.875.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS No. 123"), and has been determined as if United Dominion had accounted for its employee stock options under the fair value method of accounting as defined in SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997:
1999 1998 1997 ----- ----- ----- Risk free interest rate 6.7% 4.9% 4.8% Dividend yields 6.9% 6.6% 6.6% Volatility factor .144 .150 .150 Weighted average expected life (years) 9 9 9
The weighted average fair value of options granted during 1999, 1998 and 1997 was $.76, $.66 and $1.35, respectively.
For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. United Dominion's pro forma information is as follows (dollars in thousands, except per share amounts):
1999 1998 1997 ------- -------- -------- Net income available to common shareholders As reported $55,908 $48,739 $52,804 Pro forma 54,847 47,841 52,221 Earnings per common share-diluted As reported $ .54 $ .49 $ .60 Pro forma .53 .48 .60
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
A summary of United Dominion's stock option activity during the three years ended December 31, 1999 is provided in the following table (dollars in thousands, except per share amounts):
(a) The number of shares of common stock issuable upon the exercise of options outstanding is limited to 8% of the number of shares of common stock issued and outstanding.
Exercisable at December 31,
1997 916,981 $12.67 $7.44-$15.38 1998 1,691,863 13.79 7.44-15.38 1999 2,042,505 13.28 9.19-15.38
The weighted average remaining contractual life on all options outstanding is 7.5 years. Approximately 1,407,315 of share options had exercise prices between $14.13 and $15.38, approximately 1,967,691 of share options had exercise prices between $10.81 and $13.94 and approximately 840,586 of share options had exercise prices between $9.19 and $10.25.
7. SHAREHOLDERS' EQUITY
Preferred Stock Both Series A and Series B Preferred Stock have no stated par value and a liquidation preference of $25 per share. With no voting rights and no stated maturity, the preferred stock in both series is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of United Dominion. The Series A and Series B Preferred Stock are not redeemable prior to April 24, 2000 and May 29, 2007, respectively. On or after these dates, the Series A and Series B Preferred Stock may be redeemed for cash at the option of United Dominion, in whole or in part, at a redemption price of $25 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the sales proceeds of other capital stock of United Dominion. All dividends due and payable on the Series A and Series B Preferred Stock have been accrued or paid as of the end of each fiscal year. United Dominion declared total distributions of $2.31 and $2.15 per share on the Series A and Series B Preferred Stock, respectively, during 1999.
On December 7, 1998, in connection with the AAC merger, United Dominion issued eight million shares of newly created Series D Convertible Redeemable Preferred Stock (Series D), with a liquidation preference of $25 per share. The Series D has no voting rights, no stated maturity and is not subject to any sinking fund or mandatory redemption. Series D is convertible into 1.5385 shares of common stock at the option of the holder of Series D at any time at $16.25 per share. The Series D is not redeemable prior to December 7, 2003. On or after this date, United Dominion may, at its option, redeem at any time all or part of the Series D at a price per share of $25, payable in cash, plus all accrued and unpaid dividends,
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
provided that the current market price of the common stock at least equals the conversion price, initially set at $16.25 per share. The redemption is payable solely out of the sale proceeds of other capital stock. In addition, United Dominion may not redeem in any consecutive 12 month period a number of shares of Series D having an aggregate liquidation preference of more than $100 million. United Dominion declared total distributions of $1.89 per share on the Series D Preferred Stock during 1999.
Officers' Stock Purchase and Loan Plan Under the Officer Stock Purchase and Loan Plan (the "Loan Plan"), certain officers have purchased common stock at the then current market price with financing provided by United Dominion at an interest rate of 7%. The underlying notes mature between November 2001 and October 2006. A total of 848,500 shares have been issued and 551,500 shares are available for future issuance under the Loan Plan.
Dividend Reinvestment and Stock Purchase Plan United Dominion's Dividend Reinvestment and Stock Purchase Plan (the "Stock Purchase Plan") allows common and preferred shareholders the opportunity to purchase, through reinvestment of cash dividends, additional shares of United Dominion's common stock. As of December 31, 1999, 8,337,961 shares of common stock had been issued under the Stock Purchase Plan. Shares in the amount of 5,662,039 were reserved for further issuance under the Stock Purchase Plan at December 31, 1999. During 1999, 1,597,841 shares were issued under the Stock Purchase Plan for a total consideration of approximately $16.7 million.
Restricted Stock Awards United Dominion's 1999 Restricted Stock Awards Plan authorizes the granting of restricted stock awards to employees, officers and directors of United Dominion. The shares of common stock vest ratably over a three year period. Deferred compensation expense is recorded over the vesting period and is based upon the value of the common stock on the date of issuance. A total of 46,000 shares of restricted stock have been issued under the Restricted Stock Awards Plan as of December 31, 1999.
Purchase Rights On January 27, 1998, the Board of Directors authorized a Shareholders Rights Plan (the "Rights Plan") which will become exercisable only if a person or group (the "Acquiring Person") acquires or announces a tender offer for more than 15% of the outstanding common stock of United Dominion. Upon exercise, United Dominion may issue one share of common stock in exchange for each right. Each right will entitle the holder to purchase for $45 one thousandth of a share of Series C Preferred stock or, at the option of United Dominion, common stock of United Dominion having a value of $90.
8. COMMITMENTS AND CONTINGENCIES
Land and Other Leases - ---------------------
United Dominion is party to several ground leases relating to operating communities. In addition, United Dominion is party to various other operating leases related to the operation of its corporate and regional offices. Future minimum lease payments for noncancelable land and other leases at December 31, 1999 are as follows (dollars in thousands):
2000 $ 2,177 2001 1,800 2002 1,746 2003 1,566 2004 1,444 Thereafter 26,631 ------- Total $35,364 =======
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
United Dominion incurred $2.8 million, $1.6 million and $1.2 million, respectively, of rent expense for the years ended December 31, 1999, 1998 and 1997.
Contingencies - -------------
United Dominion is party to various legal actions which are incidental to its business. Management believes that these actions will not have a material adverse affect on the consolidated balance sheets and statements of operation.
Commitments - -----------
United Dominion is committed to completing its real estate currently under development which has an estimated cost to complete of $59.0 million at December 31, 1999.
9. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
On March 27, 1998, United Dominion completed the acquisition of ASR Investments Corporation in a statutory merger (the "ASR Merger"). In connection with the ASR Merger, United Dominion acquired 39 communities with 7,550 apartment homes. Each share of ASR's common stock was exchanged for 1.575 shares of United Dominion's common stock. The acquisition was structured as a tax-free transaction and was treated as a purchase for accounting purposes. In connection with the acquisition, United Dominion acquired primarily real estate assets totaling $313.7 million. Consideration given by United Dominion included 7,742,839 shares of United Dominion's common stock valued at $14 per share for an aggregate equity value of $108.4 million plus the issuance of 1,529,990 Units in the ASR Operating Partnership valued at $21.4 million. In addition, United Dominion assumed, at fair value, mortgage debt totaling $179.4 million and other liabilities of $13.6 million.
On December 7, 1998, United Dominion completed the acquisition of American Apartment Communities II ("AAC") in a statutory merger (the "AAC Merger"). In connection with the acquisition of AAC, United Dominion acquired 53 communities with 14,001 apartment homes. The AAC Merger was structured as a tax-free merger and exchange of partnership units and was treated as a purchase for accounting purposes. In connection with the AAC Merger, United Dominion acquired primarily real estate assets totaling $766.9 million. The aggregate purchase price consisted of the following: (i) 8,000,000 shares of United Dominion's 7.5% Series D Convertible Preferred Stock ($25 liquidation preference value) which is convertible into United Dominion's Common Stock at $16.25 per share with a fair market value of $175 million, (ii) the issuance of 5,614,035 units of limited partnership interest in the Partnership with an aggregate fair market value of $67.4 million, (iii) the assumption of $457.7 million of secured notes payable at fair market value, (iv) the assumption of liabilities and minority interest aggregating $27.8 million and (v) $59.8 million of cash.
Information concerning unaudited pro forma results of operations of United Dominion for the years ended December 31, 1998 and 1997 are set forth below. For 1998, such pro forma information assumes the following transactions occurred on January 1, 1998: (i) the acquisition of ASR, (ii) the acquisition of AAC and (iii) the acquisition of 13 communities with 4,318 apartment homes for an aggregate purchase price of $144 million. For 1997, in addition to the acquisitions previously described, such pro forma information assumes the following transactions occurred on January 1, 1997: (i) the acquisition by United Dominion of 17 communities with 5,659 apartment homes at a total cost of $219 million and (ii) the acquisition by ASR of 22 communities with 4,208 apartment homes at total cost of $176 million.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
In addition to the ASR Merger and the AAC Merger, all of the acquisitions described have been accounted for as purchases of real estate and operating results for those communities are reflected in the accompanying consolidated financial statements from their respective dates of acquisition.
Pro Forma Year Ended December 31, ------------------- In thousands, except per share amounts 1998 1997 - -------------------------------------- -------- -------- (Unaudited)
Rental income $597,460 $566,681 Net income available to common shareholders before extraordinary item 43,218 37,468 Net income available to common shareholders 43,080 37,418 Net income per common share before extraordinary item - basic and diluted $ .41 $ .39 Net income per common share - basic and diluted .41 .39
The unaudited information is not necessarily indicative of what United Dominion's consolidated results of operations would have been if the acquisitions had occurred at the beginning of each period presented. Additionally, the pro forma information does not purport to be indicative of United Dominion's results of operations for future periods.
10. INDUSTRY SEGMENTS
United Dominion adopted Financial Accounting Standards Board ("FASB") Statement No. 131, Disclosure about Segments of an Enterprise and Related Information" ("Statement 131") in the fourth quarter of 1998. Statement 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way public business enterprises report information regarding reportable operating segments. The adoption of Statement 131 did not affect the results of operations or financial position of United Dominion.
United Dominion owns and operates multifamily apartment communities throughout the United States which generated rental and other property related income through the leasing of apartment units to a diverse base of tenants. United Dominion separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities have similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosure are included in or can be derived from United Dominion's consolidated financial statements.
All revenues are from external customers and no revenues are generated from transactions with other segments. There are no tenants which contributed 10% or more of United Dominion's total revenues during 1999, 1998 or 1997.
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
11. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY FINANCIAL DATA
Summarized consolidated quarterly financial data for the year ended December 31, 1999 is as follows (dollars in thousands, except per share amounts):
(a) The second quarter of 1999 includes $32.2 million of gains on the sales of investments and a $7.1 million impairment loss on real estate and investments. (b) The fourth quarter of 1999 includes $ 5.5 million of gains on the sales of investments and a $12.2 million impairment loss on real estate and investments. ________________________________________________________________________________ Summarized consolidated quarterly financial data for the year ended December 31, 1998 is as follows (dollars in thousands, except per share information):
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
(a) United Dominion completed the acquisition of ASR Investments Corporation on March 27, 1998 and the acquisition of American Apartment Communities II on December 7, 1998. (b) The fourth quarter of 1998 includes a $15.6 million charge associated with the termination of an interest rate risk management agreement.
SCHEDULE III. Summary of Real Estate Owned
SCHEDULE III. Summary of Real Estate Owned
SCHEDULE III. Summary of Real Estate Owned
SCHEDULE III Summary of Real Estate Owned
(a) The aggregate cost for federal income tax purposes was approximately $3.3 billion at December 31, 1999 and 1998, respectively. (b) Represents a $30,581,553 REMIC financing encumbering 12 apartment communities. (c) Represents a $28,585,050 REMIC financing encumbering 9 apartment communities. (d) Represents a $195,675,000 secured credit facility which encumbers 19 apartment communities. (e) Represents $107,492,963 of fixed rate debt which encumbers 15 apartment communities. (f) Represents $43,010,206 of fixed rate debt which encumbers 9 apartment communities. (g) Represents $11,031,634 of fixed rate debt which encumbers 5 apartment communities. (h) The depreciable life for all buildings is 35 years. (i) Total initial acquisition cost includes a purchase price reallocation of $8.5 million. (j) Encumbrances include a fair market value adjustment of $14.8 million.