UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-10524
UNITED DOMINION REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0857512
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10 South Sixth Street, Richmond, Virginia 23219-3802
- --------------------------------------------------------------------------------
(Address of principal executive offices - zip code)
(804) 780-2691
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing requirements
for at least the past 90 days.
Yes X No
--------- ---------
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 10, 1998:
Common Stock: 103,580,953
<PAGE>
<TABLE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Real estate owned:
Real estate held for investment $ 2,918,192 $ 2,281,438
Less: accumulated depreciation 269,659 200,506
---------------- ----------------
2,648,533 2,080,932
Real estate under development 76,011 24,598
Real estate held for disposition 105,350 166,501
Cash and cash equivalents 28,485 473
Other assets 68,301 41,221
---------------- ----------------
Total assets $ 2,926,680 $ 2,313,725
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable-secured $ 646,718 $ 417,325
Notes payable-unsecured 902,180 738,901
Distributions payable to common and preferred shareholders 30,181 25,607
Accounts payable, accrued expenses and other liabilities 82,888 58,842
---------------- ----------------
Total liabilities 1,661,967 1,240,675
Minority interest of unitholders in operating partnership 45,164 14,693
Shareholders' equity:
Preferred stock, no par value; $25 liquidation preference,
25,000,000 shares authorized;
4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 105,000
6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 150,000
Common stock, $1 par value; 150,000,000 shares authorized
103,206,581 shares issued and outstanding (89,168,442 in 1997) 103,207 89,168
Additional paid-in capital 1,084,331 906,307
Notes receivable from officer-shareholders (8,124) (8,806)
Distributions in excess of net income (214,865) (183,312)
---------------- ----------------
Total shareholders' equity 1,219,549 1,058,357
================ ================
Total liabilities and shareholders' equity $ 2,926,680 $ 2,313,725
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Revenues
Rental income $123,475 $98,816 $346,171 $284,182
Interest and other non-property income 576 479 2,735 867
--------------- --------------- --------------- ----------------
124,051 99,295 348,906 285,049
Expenses
Rental expenses:
Utilities 7,259 6,166 19,204 18,290
Repairs and maintenance 17,072 14,528 45,107 40,707
Real estate taxes 10,461 8,107 29,802 23,014
Property management 4,048 3,080 11,855 9,154
Other operating expenses 13,787 10,762 37,241 30,051
Real estate depreciation 26,901 19,740 73,376 55,029
Interest 27,224 19,346 75,784 58,265
General and administrative 2,534 1,619 7,306 5,271
Other depreciation and amortization 893 494 2,434 1,339
Impairment loss on real estate owned -- 1,400 -- 1,400
--------------- --------------- --------------- ----------------
110,179 85,242 302,109 242,520
--------------- --------------- --------------- ----------------
Income before gains on sales of investments, minority interest
unitholders in operating partnership and extraordinary item 13,872 14,053 46,797 42,529
Gains on sales of investments 13 9,309 20,474 12,682
--------------- --------------- --------------- ----------------
Income before minority interest of unitholders in operating
partnership and extraordinary item 13,885 23,362 67,271 55,211
Minority interest of unitholders in operating partnership (78) (53) (1,200) (112)
--------------- --------------- --------------- ----------------
Income before extraordinary item 13,807 23,309 66,071 55,099
Extraordinary item-early extinguishment of debt -- -- (116) --
--------------- --------------- --------------- ----------------
Net income 13,807 23,309 65,955 55,099
Dividends to preferred shareholders (5,650) (5,653) (16,953) (11,692)
--------------- --------------- --------------- ----------------
Net income available to common shareholders $8,157 $17,656 $49,002 $43,407
=============== =============== =============== ================
Earnings per common share:
Basic earnings per common share $0.08 $0.20 $0.50 $0.50
=============== =============== =============== ================
Diluted earnings per common share $0.08 $0.20 $0.50 $0.50
=============== =============== =============== ================
Distributions declared per common share $0.2625 $0.2525 $0.7875 $0.7575
=============== =============== =============== ================
Weighted average number of common shares outstanding-basic 103,104 87,853 98,786 86,602
Weighted average number of common shares outstanding -diluted 106,222 88,007 101,352 86,770
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine months ended September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 65,955 $ 55,099
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 75,810 56,368
Minority interest of unitholders in operating partnership 1,200 112
Impairment loss on real estate owned -- 1,400
Gains on sales of investments (20,474) (12,682)
Amortization of deferred financing costs 1,500 1,306
Changes in operating assets and liabilities:
Increase in operating liabilities 9,469 9,837
Increase in operating assets (6,520) (349)
----------- ---------
Net cash provided by operating activities 126,940 111,091
Investing Activities
Acquisition of real estate, net of liabilities assumed (172,123) (206,205)
Capital expenditures for real estate owned (55,290) (68,822)
Capital expenditures for non real estate assets (2,895) (1,900)
Development of real estate assets (63,006) (37,369)
Net proceeds from sales of investments 122,480 27,044
Investment in preferred stock (2,100) --
Proceeds from interest rate hedge transaction -- 1,538
Issuance of and payments on notes receivable 248 2,143
Net cash acquired in acquisition of ASR Investments Corporation 321 --
----------- ---------
Net cash used in investing activities (172,365) (283,571)
Financing Activities
Net proceeds from the issuance of common stock 38,965 59,884
Net proceeds from the sale of preferred stock -- 145,275
Net proceeds from the issuance of common stock through the
dividend reinvestment and stock purchase plan 32,789 26,685
Gross proceeds from the issuance of unsecured notes payable -- 125,000
Net borrowings/(repayments) of short-term bank debt 171,400 (43,250)
Distributions paid to preferred shareholders (16,959) (10,617)
Distributions paid to common shareholders (75,975) (63,511)
Distributions paid to minority interest unitholders (2,078) (102)
Scheduled principal payments on secured notes payable (7,382) (4,573)
Non-scheduled payments on secured notes payable (54,949) (4,350)
Redemption of operating partnership units (3,070) --
Payments on unsecured notes payable (7,504) (63,414)
Payment of financing costs (1,800) (2,616)
----------- ---------
Net cash provided by financing activities 73,437 164,411
Net increase (decrease) in cash and cash equivalents 28,012 (8,069)
Cash and cash equivalents, beginning of period 473 13,452
----------- ---------
Cash and cash equivalents, end of period $ 28,485 $ 5,383
=========== =========
Supplemental Information:
Interest paid during the period $ 75,968 $ 55,279
Non-cash transactions associated with the acquisition of properties:
Secured debt assumed through the acquisition of properties 128,905 48,380
Issuance of operating partnership units 20,295 --
Issuance of common stock 5,240 --
Non-cash transactions associated with the acquisition of ASR
Investments Corporation:
Real estate assets acquired 313,700 --
Other operating assets acquired 8,848 --
Issuance of common stock 108,456 --
Issuance of operating partnership units 21,420 8,442
Secured debt assumed 179,440 --
Operating liabilities assumed 13,553 --
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except per share data)
(Unaudited)
<S> <C>
Preferred Stock
Balance, December 31, 1997 $ 255,000
-------------------
Balance, September 30, 1998 $ 255,000
===================
Common Stock, $1 Par Value
Balance, December 31, 1997 $ 89,168
Issuance of common shares through Unit Investment Trust 2,804
Issuance of common shares in the acquisition of ASR Investment Corporation 7,743
Issuance of common shares through dividend reinvestment
and stock purchase plan 2,456
Issuance of common shares in connection with the acquisition of properties 482
Issuance of common shares through exercise of stock options 43
Conversion of operating partnership units 521
Shares repurchased from officer-shareholders (10)
===================
Balance, September 30, 1998 $ 103,207
===================
Additional Paid-in Capital
Balance, December 31, 1997 $ 906,307
Issuance of common shares through Unit Investment Trust 35,171
Issuance of common shares in the acquisition of ASR Investment Corporation 100,713
Issuance of common shares through dividend reinvestment
and stock purchase plan 30,333
Issuance of common shares in connection with the acquisition of properties 4,758
Issuance of common shares through exercise of stock options 406
Conversion of operating partnership units 6,774
Shares repurchased from officer-shareholders (131)
===================
Balance, September 30, 1998 $ 1,084,331
===================
Notes Receivable from Officer-Shareholders
Balance, December 31, 1997 $ (8,806)
Principal repayments 682
===================
Balance, September 30, 1998 $ (8,124)
===================
Distributions in Excess of Net Income
Balance, December 31, 1997 $ (183,312)
Net income 65,955
Common stock distributions declared ($0.7875 per share) (80,555)
Preferred stock distributions declared-Series A ($1.74 per share) (7,281)
Preferred stock distributions declared-Series B ($1.61 per share) (9,672)
===================
Balance, September 30, 1998 $ (214,865)
===================
Total Shareholders' Equity $ 1,219,549
===================
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
The accompanying consolidated financial statements include the accounts of
United Dominion Realty Trust, Inc. and its subsidiaries, including United
Dominion Realty, L.P., its Operating Partnership, (collectively, the "Company").
As of September 30, 1998, United Dominion Realty Trust, Inc. and its
wholly-owned subsidiaries (collectively "United Dominion") had an 84.2% interest
in the Operating Partnership. The financial statements of the Company include
the minority interest of unitholders in the Operating Partnership. As of
September 30, 1998, there were 13,415,220 units in the Operating Partnership
outstanding, of which 11,296,871, or 84.2% were owned by United Dominion and
2,118,349 or 15.8% were owned by non-affiliated limited partners. All
significant inter-company accounts and transactions have been eliminated in
consolidation. In addition, in connection with the ASR Investment Corporation
merger, the Company acquired Heritage Communities L.P., a Delaware limited
partnership (Heritage OP). As of September 30,1998, there were 3,855,329 units
in the Heritage OP outstanding, of which, 2,974,252, or 77.1% were owned by
United Dominion and 22.9% were owned by non-affiliated limited partnerships. The
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary for fair presentation of financial position at
September 30, 1998 and results of operations for the interim periods ended
September 30, 1998 and 1997. Such adjustments are normal and recurring in
nature. The interim results presented are not necessarily indicative of results
that can be expected for a full year. The accompanying consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes appearing in the Company's December 31, 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
2. Real estate held for investment
The following table summarizes real estate held for investment:
September 30, December 31,
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------
Land and land improvements $ 494,623 $ 393,505
Buildings and improvements 2,274,496 1,783,565
Furniture, fixtures and equipment 130,468 100,380
Construction in progress 18,605 3,988
------------ -----------
Real estate held for investment 2,918,192 2,281,438
Accumulated depreciation (269,659) (200,506)
------------ -----------
Real estate held for investment, net $ 2,648,533 $ 2,080,932
============ ===========
3. Notes payable - secured
Notes payable-secured, which encumber $1.1 billion or 35.8% of the Company's
real estate owned, at cost, ($2.0 billion or 64.2% of the Company's real estate
owned, at cost, is unencumbered) consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
Principal Weighted Average Weighted Average No. Communities
Dollars in thousands Balance Interest Rate Years to Maturity Encumbered
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Rate Debt
Mortgage notes payable $ 356,533 7.96 % 4.6 67
Tax-exempt secured notes payable 131,148 7.01 % 21.5 18
REMIC financings 78,769 7.31 % 2.2 23
Secured notes payable (a) 45,000 7.29 % .8 5
------------------------------------------------------------------------------------
Total Fixed Rate Notes 611,450 7.73 % 8.7 113
Variable Rate Debt
Secured notes payable 25,368 6.50 % 5.1 6
Tax-exempt secured notes payable 9,900 6.13 % 8.8 2
------------------------------------------------------------------------------------
Total Variable Rate Notes 35,268 6.44 % 5.9 8
------------------------------------------------------------------------------------
Total Notes Payable - Secured $ 646,718 7.63 % 7.6 121
====================================================================================
</TABLE>
(a) Variable-rate secured notes payable which have been effectively swapped to
a fixed rate consist of a $ 31.7 million variable rate secured senior
credit facility which encumbers five apartment communities and two variable
rate construction notes payable aggregating $13.3 million. The Company has
five interest rate swap agreements with an aggregate notional value of $45
million under which the Company pays a fixed-rate of interest and receives
a variable rate on the notional amounts. The interest rate swap agreements
effectively change the Company's interest rate exposure on $45 million from
a variable-rate to a weighted average fixed rate of approximately 7.29%.
6
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
4. Notes payable - unsecured
A summary of notes payable - unsecured is as follows:
<CAPTION>
September 30, December 31,
Dollars in thousands 1998 1997
------------- ------------
<S> <C> <C>
Commercial Banks
Borrowings outstanding under
revolving credit facilities .............. $307,000 $135,600
Insurance Companies--Senior Unsecured Notes
7.98% due March, 1999-2003 (a) ................ 37,142 44,571
8.72% due November 1998 ....................... 2,000 2,000
-------- --------
39,142 46,571
Other (b) ............................................. 6,038 6,730
Senior Unsecured Notes - Other
7.25% Notes due April 1999 .................... 75,000 75,000
8.50% Debentures due September 2024 (c) ....... 150,000 150,000
7.95% Medium-Term Notes due July 2006 ......... 125,000 125,000
7.25% Notes due January 2007 .................. 125,000 125,000
7.07% Medium-Term Notes due November 2006 ..... 25,000 25,000
7.02% Medium-Term Notes due November 2005 ..... 50,000 50,000
-------- --------
550,000 550,000
-------- --------
Total Notes Payable - Unsecured ......... $902,180 $738,901
======== ========
</TABLE>
(a) Payable in five equal annual principal installments of $7.4 million.
(b) Includes $ 5.6 million and $6.2 million at September 30, 1998 and
December 31, 1997, respectively, of deferred gains from the
termination of interest rate hedge transactions.
(c) Debentures include an investor put feature, which grants a one time
option to redeem debentures in September 2004.
The Company has a $200 million three-year unsecured revolving credit facility
which matures August 4, 2000 and a $50 million one-year revolving line of credit
facility which matures August 4, 1999. In addition to these facilities, a $15
million uncommitted unsecured line of credit is available to the Company until
June 30, 1999. The Company also has outstanding $75 million aggregate principal
amount of promissory notes (Promissory Notes) payable to certain banks. The
Promissory Notes are dated September 30, 1998 and mature November 30, 1998. As
of September 30, 1998, the Company had $307 million outstanding under the three
credit facilities and the Promissory Notes.
7
<PAGE>
<TABLE>
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Earnings Per Share
Basic earnings per common share is computed using net income available to common
shareholders and the weighted average shares outstanding. Diluted earnings per
common share is also computed using net income available to common shareholders,
however, the weighted average shares outstanding are adjusted for potentially
dilutive securities for the periods presented. The effect of the operating
partnership units was antidilutive for the three and nine months ended September
30, 1997, and is therefore not included in the following calculations. The
following table sets forth the computation of basic and diluted earnings per
share:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------------- -------------------------
In thousands, except per share data
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share-net
income available to common shareholders $ 8,157 $ 17,656 $ 49,002 $ 43,407
Effect of minority interest 78 -- 1,200 --
--------- -------- -------- --------
Numerator for diluted earnings per share- net
income available to common shareholders $ 8,235 $ 17,656 $ 50,202 $ 43,407
========= ======== ======== ========
Denominator:
Denominator for basic earnings per share-
weighted average common shares outstanding 103,104 87,853 98,786 86,602
Effect of dilutive securities:
Operating partnership units - weighted average 3,077 -- 2,482 --
Employee stock options 41 154 84 168
--------- -------- -------- --------
Dilutive potential common shares
denominator for dilutive earnings per
share-adjusted weighted average shares
and assumed conversions 106,222 88,007 101,352 86,770
========= ======== ======== ========
Basic earnings per common share $ .08 $ .20 $ .50 $ .50
Diluted earnings per common share $ .08 $ .20 $ .50 $ .50
</TABLE>
6. Pro Forma Financial Information
On March 27, 1998, the Company completed the acquisition of ASR Investments
Corporation (ASR) in a statutory merger. ASR was a publicly-traded multifamily
REIT that owned and operated 39 communities with 7,550 apartment homes located
in Arizona, Texas, New Mexico and the state of Washington. Each share of ASR's
common stock was exchanged for 1.575 shares of the Company'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, the
Company acquired primarily real estate assets totaling $313.7 million.
Consideration given by the Company included 7,742,839 shares of the Company'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, the Company assumed, at fair value,
mortgage debt totaling $179.4 million and other liabilities of $13.6 million.
Information concerning unaudited pro forma results of operations for the nine
months ended September 30, 1998 and 1997 are set forth below. For the nine
months ended September 30, 1998, such pro forma information assumes (i) the
acquisition of ASR and (ii) the acquisition of 13 communities with 4,318
apartment homes for an aggregate purchase price of $144 million as if these
transactions had occurred on January 1, 1997. For the nine months ended
September 30, 1997, such pro forma information assumes the following
transactions occurred on January 1, 1997: (i) the acquisition by the Company 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 a
total cost of $176 million.
8
<PAGE>
<TABLE>
<CAPTION>
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pro Forma
Nine Months Ended
September 30
1998 1997
-----------------------------------
In thousands, except per share amounts
<S> <C> <C>
Rental income $ 363,914 $ 340,293
Net income available to common shareholders
before extraordinary item $ 49,446 $ 42,989
Net income per common share before
extraordinary item-basic $ .48 $ .46
Net income per common share before
extraordinary item-diluted $ .48 $ .46
</TABLE>
The unaudited information is not necessarily indicative of what the Company'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 the Company's results of
operations for future periods.
7. Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
Statement 130 had no impact on the Company's net income or stockholders' equity
for each of the periods presented.
On March 19, 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus decision on Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions" which provides
that internal costs of identifying and acquiring operating property should be
expensed as incurred. The Company had historically capitalized, on a successful
efforts basis, the direct internal costs of identifying and acquiring operating
property and, accordingly, has realized an increase in expense with the adoption
of this consensus on March 19, 1998. The Company does not expect the impact on
net income to be material in 1998.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133)
which is required to be adopted in years beginning after June 15, 1999.
Statement 133 permits early adoption as of the beginning of any fiscal quarter
after its issuance, however, the Company does not anticipate adopting Statement
133 until such time as it is required. Statement 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of the
hedged assets, liabilities, or firm commitments are recognized 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 net income. The Company has not yet
determined what the effect of Statement 133 will be on earnings and the
financial position of the Company, however, given the Company's current use of
derivatives, management does not anticipate that the adoption of Statement 133
will have a significant effect on net income or the financial position of the
Company.
8. Subsequent Events
In order to reduce the interest rate risk associated with the anticipated
issuance of unsecured notes during 1998, the Company entered into a $100 million
(notional amount) fixed pay forward starting swap agreement (interest rate risk
management agreement) with a major Wall Street investment banking firm in July
1997. The transaction allowed the Company to lock-in a ten year Treasury rate of
6.511% on or before November 9, 1998. This interest rate risk management
agreement had an unfavorable position to the Company of $16.8 million at
September 30, 1998. The Company settled the interest rate risk management
agreement on November 9, 1998, by paying $15.6 million to the counterparty. The
Company was unable to issue the unsecured notes contemplated by the interest
rate risk management agreement, and accordingly, the cost associated with the
settlement of this agreement will be expensed during the fourth quarter of 1998.
On November 10, 1998, the Company sold an aggregate $212.5 million of senior
unsecured notes payable in two simultaneous but separate public offerings which
consist of the following: (i) $150 million of 8.125% Notes due November 15, 2000
and (ii) $62.5 million (including the over-allotment option) of 8.5% Monthly
Income Notes due November 15, 2008. Net proceeds from the two offerings (net of
underwriting discounts, commissions and offering expenses) of approximately
$209.9 are expected to be received by the Company on November 17, 1998 and will
be used to repay bank debt outstanding under the Company's various credit
facilities.
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company considers portions of the information contained in Item 2. to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.
The Company is engaged in the ownership, acquisition, development and operation
of apartment communities throughout the country. Management's strategy is to
transform the Company into a national, low cost provider of quality apartment
homes. The Company has been implementing this strategy through the acquisition
of portfolios of higher quality communities, the sale of lower quality
communities, a greater commitment to development and the upgrade of older
communities. The Company's investment strategy has focused on acquiring
apartment communities in targeted strategic U.S. markets and geographically
expanding into other strategic markets in the Mid West, Pacific Northwest and
California. The Company intends to continue its expansion into other areas of
the United States and enter into new markets as appropriate opportunities arise.
The Company seeks to be a market leader by operating a sufficiently sized
portfolio of apartments within each market in order to drive down operating
costs through economies of scale and management efficiencies. The Company
believes this market diversification increases investment opportunity and
decreases the risk associated with cyclical local real estate markets and
economies.
10
<PAGE>
<TABLE>
The following table summarizes the Company's apartment market information by
strategic geographic market:
<CAPTION>
Nine Months Ended Three Months Ended
As of September 30, 1998 September 30, 1998 September 30, 1998
------------------------------------------------ ------------------- --------------------
Average Average
No. of No. of % of Carrying Physical Monthly Physical Monthly
Apartment Apartment Apartment Value Occupancy Rental Occupancy Rental
Market Communities Homes Homes (in thousands) ** Rates* ** Rates*
- ------ ----------- ----- ----- ------------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dallas, TX*** ...... 29 8,954 12% $ 378,726 94.3% $ 602 95.4% $ 610
Houston, TX*** ..... 23 5,783 8% 198,300 92.9% 548 94.2% 553
San Antonio, TX .... 13 3,836 5% 169,297 92.3% 622 93.2% 624
Orlando, FL ........ 13 3,848 5% 173,528 94.1% 628 94.7% 641
Raleigh, NC ........ 11 3,484 5% 153,314 94.0% 656 95.4% 663
Columbia, SC ....... 11 3,326 5% 112,510 94.0% 512 94.2% 515
Phoenix, AZ*** ..... 9 3,136 4% 171,512 89.3% 659 87.3% 666
Richmond, VA ....... 10 3,091 4% 114,933 93.0% 606 93.3% 615
Tampa, FL .......... 9 2,669 4% 101,568 94.8% 602 93.4% 608
Eastern NC ......... 10 2,530 3% 108,176 88.1% 571 89.9% 577
Charlotte, NC ...... 11 2,566 4% 119,552 90.4% 656 93.1% 661
Nashville, TN ...... 9 2,416 3% 118,837 92.5% 579 91.8% 595
Memphis, TN ........ 6 2,196 3% 101,193 90.5% 540 91.9% 543
Greensboro, NC ..... 8 2,123 3% 100,761 83.8% 613 87.8% 615
Baltimore, MD ...... 8 1,746 2% 79,352 93.7% 674 95.6% 680
Washington, DC ..... 6 1,483 2% 66,875 92.2% 697 93.8% 703
Hampton Roads, VA .. 8 1,830 3% 63,210 91.8% 555 92.7% 559
Atlanta, GA ........ 7 1,642 2% 77,307 92.7% 623 94.7% 631
Greenville, SC ..... 6 1,436 2% 53,446 87.9% 529 89.5% 533
Jacksonville, FL ... 3 1,157 2% 55,509 91.6% 612 92.2% 620
Tucson, AZ*** ...... 8 1,112 2% 29,121 88.2% 426 -- --
Miami/
Ft. Lauderdale, FL . 4 960 1% 62,717 91.3% 814 89.6% 822
Fayetteville, NC ... 3 884 1% 40,656 91.6% 566 94.3% 568
Eastern Shore, MD .. 4 784 1% 34,312 97.6% 652 97.4% 661
Columbus, Ohio**** . 3 684 1% 57,074 -- -- -- --
Austin, TX ......... 2 542 1% 22,830 91.8% 594 95.4% 595
Other Florida ...... 7 1,646 2% 75,011 94.1% 586 93.1% 595
Other Virginia ..... 6 1,156 2% 47,539 85.2% 605 90.7% 610
Washington state*** 4 974 1% 48,846 -- -- 73.5% 757
Other Texas ........ 3 776 1% 23,019 88.7% 526 90.5% 527
New Mexico*** ...... 4 758 1% 28,869 77.1% 552 73.8% 557
Arkansas ........... 2 512 1% 21,552 92.6% 579 93.8% 584
Other Georgia ...... 2 468 1% 22,178 88.7% 648 87.8% 651
Other South Carolina 2 408 1% 13,338 90.3% 425 91.0% 428
Nevada ............. 1 384 1% 20,436 80.4% 646 77.8% 643
Delaware ........... 2 368 1% 17,576 94.0% 615 94.4% 617
Oklahoma ........... 1 316 -- 9,667 90.7% 456 92.6% 455
Alabama ............ 1 242 -- 11,121 91.9% 517 93.4% 515
Other North Carolina 1 168 -- 7,567 94.2% 588 96.4% 592
-----------------------------------------------------------------------------------------
Total .............. 270 72,394 100% $3,111,335 91.6% $ 602 92.2% $ 609
=========================================================================================
</TABLE>
* Average monthly rental rates represent potential rent collections
(gross potential rents less market adjustments), which approximate net
effective rents. These figures exclude 1998 acquisitions.
** Physical occupancy is defined as rental income (potential rental
collections less vacancy loss, management units, units held out of
service and move-in concessions) divided by potential collections
(gross potential rent less management units, units held out of service
and move-in concessions) for the period, expressed as a percentage.
*** The Physical Occupancy and Average Monthly Rental Rates for the nine
months ended September 30, 1998, does not include communities which
were acquired on March 27, 1998 in connection with the acquisition of
ASR Investments Corporation.
**** Average Monthly Rental Rates are not available for the communities
included in this market which were acquired on July 2, 1998 and include
development properties in lease-up and stabilization.
11
<PAGE>
Liquidity and Capital Resources
As a qualified real estate investment trust ("REIT"), the Company distributes a
substantial portion of its cash flow to its shareholders in the form of
quarterly distributions. The Company believes that cash provided by operations
will be adequate to meet normal operating requirements and payment of
distributions by the Company in accordance with REIT requirements in both the
short and long term. For the nine months ended September 30, 1998, the Company's
cash flow from operating activities exceeded cash distributions paid to
preferred and common shareholders and operating partnership unitholders by $31.9
million. The Company utilizes a variety of primarily external financing sources
to fund portfolio growth, major capital improvement programs and balloon debt
payments. The Company's bank lines of credit generally have been used to
temporarily finance these expenditures, and subsequently this short-term bank
debt has been replaced with longer term debt or equity. At September 30, 1998,
the Company had cash and cash equivalents of $28.5 million and amounts available
under its various credit facilities aggregating $33 million.
The Company has a $200 million three-year unsecured revolving credit facility
which matures August 4, 2000 and a $50 million one-year revolving line of credit
facility which matures August 4, 1999. In addition to these facilities, a $15
million uncommitted unsecured line of credit is available to the Company until
June 30, 1999. The Company also has outstanding $75 million aggregate principal
amount of promissory notes (Promissory Notes) payable to certain banks. The
Promissory Notes are dated September 30, 1998 and mature November 30, 1998. As
of September 30, 1998, the Company had $307 million outstanding under the three
credit facilities and the Promissory Notes.
On November 9, 1998, the Company received verbal assurance from one of its
major lending banks of revised terms of certain credit facilities, including
the extension, at the Company's discretion, of the maturity of the $75 million
Promissory Notes from November 30, 1998 to November 30, 1999 and that an
additional $50 million one-year revolving line of credit facility would be
made available to the Company.
The following discussion explains the changes in net cash provided by operating
activities, net cash used for investing activities and net cash provided by
financing activities which are presented in the Company's Consolidated
Statements of Cash Flows.
Operating Activities
For the nine months ended September 30, 1998, the Company's cash flow from
operating activities increased $15.8 million over the same period last year.
This increase is primarily due to the increased operating income from the
Company's acquired communities, as well as increases in property operating
income within the Company's mature apartment portfolio achieved through higher
rental rates and decreased property operating expenses as discussed below and
under "Results of Operations".
Investing Activities
During the nine months ended September 30, 1998, net cash used for investing
activities was $172.4 million compared to $283.6 million for the same period
last year. Changes in the level of investing activities from period to period
primarily reflect the changing levels of the Company's acquisition, capital
expenditure, development and sales programs.
Acquisitions
The Company seeks to acquire apartment communities in individual or portfolio
transactions that can provide returns on investment in excess of the Company's
cost of capital by the third year of ownership. These acquisitions typically
have the prospect for future cash flow growth and appreciation. The Company is
taking a very cautious view towards new investment commitments. During the
remainder of 1998 and 1999, the Company does not plan to acquire apartment
communities except to reinvest proceeds from property sales.
During the first nine months of 1998, the Company acquired 24 communities with
7,055 apartment homes (excluding ASR) at a total cost (including closing
costs) of $318.6 million or $45,200 per home. The communities acquired by market
were as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Purchase
Purchase No. Apt. Year Price Cost
Location Date Name Homes Built (thousands) per Home
- -------- ---- ---- ----- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
San Antonio, Texas 04/16/98 Audubon 216 1984 $7,082 $32,787
04/16/98 Carmel 228 1984 8,084 35,456
04/16/98 Cimarron 140 1984 5,087 36,336
04/16/98 Grand Cypress 164 1995 9,975 60,823
04/16/98 Kenton Place 244 1982 11,883 48,701
04/16/98 Peppermill 232 1984 8,151 35,134
04/16/98 Villages of Thousand Oaks 466 1983 13,986 30,013
08/15/98 Inn at Los Patios 167 1990 14,550 87,126
Memphis, Tennessee 01/09/98 The Trails at Kirby Parkway (a) 376 1987 16,757 44,566
01/09/98 Cinnamon Trails 208 1989 9,531 45,822
01/09/98 The Trails at Mount Moriah (a) 630 1990/91 28,026 44,486
02/06/98 Dogwood Creek 278 1997 18,446 66,353
Phoenix, Arizona 01/09/98 The Village at North Park 320 1983 15,056 47,050
05/28/98 Rancho Mirage 856 1984/85 38,538 45,021
06/09/98 Woodland Park 300 1980 9,723 32,410
Columbus, Ohio 07/02/98 Sycamore Ridge Apartments 270 1997 19,501 72,227
07/02/98 Washington Park Apartments 150 1997/98 9,577 63,845
07/02/98 Heritage Green 360 1997/98 14,382 39,950
Dallas, Texas 01/30/98 Summit Ridge 264 1983 8,034 30,430
04/16/98 The Crest 280 1983 7,026 25,093
Atlanta, Georgia 04/15/98 Waterford Place 180 1990 11,900 66,111
Nashville, Tennessee 05/20/98 Williamsburg Apartments 300 1986 12,307 41,023
Orlando. Florida 07/20/98 Heron Lake Apartments 264 1989 10,734 40,661
Seattle, Washington 07/31/98 Aspen Creek Apartments 162 1996 10,261 63,340
------------------------------------------------------------------------------------------------------
Total/Weighted Average 7,055 1986 $318,597 $45,159
</TABLE>
(a) These two properties are operating as one apartment community named
The Trails.
Mergers
ASR MERGER On March 27, 1998, the Company completed the acquisition of ASR
Investments Corporation in a statutory merger (the "Merger"). ASR was a
publicly-traded multifamily REIT with apartment communities located in Arizona,
Texas, New Mexico and the state of Washington. Each share of ASR's common stock
was exchanged for 1.575 shares of the Company'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, the Company acquired
primarily real estate assets totaling $313.7 million. Consideration given by the
Company included 7,742,839 shares of the Company'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, the Company assumed, at fair value, mortgage debt totaling $179.4
million and other liabilities of $13.6 million.
The Merger both strengthened the Company's position in several long-term growth
markets in the Southwest and established an initial presence in the Pacific
Northwest. These communities are projected to produce a first year return on
investment in the 9% range. The 7,550 apartment homes had a weighted average
year built of 1984 and are geographically distributed as follows:
Number of Number of
City/State Apartment Communities Apartment Homes
- ------------------------ --------------------- ---------------
Houston, Texas 14 2,261
Dallas, Texas 8 1,889
Tucson, Arizona 8 1,112
Phoenix, Arizona 3 928
Albuquerque, New Mexico 3 548
Washington state 3 812
--- ------
Total 39 7,550
=== =====
AAC MERGER On September 11, 1998, the Company, entered into an Agreement and
Plan of Merger (Merger Agreement) between the Company and American Apartment
Communities II, Inc. (AAC). Pursuant to the Merger Agreement, each share of AAC
common and preferred stock is entitled to receive 7.812742 shares of the
Company's Series D Convertible Preferred Stock (Preferred Stock) and $46.1824 in
cash. In exchange for the Preferred Stock and cash, the Company will acquire
AAC's 79.1% interest in AAC II, LP. In addition, the Company entered into a
Partnership Interest Purchase and Exchange Agreement (Partnership Exchange
Agreement) between United Dominion Realty Trust, Inc., United Dominion Realty,
L.P. (United Dominion's Operating Partnership) and American Apartment
Communities Operating Partnership, L.P., AAC Management LLC and Schnitzer
Investment Corporation (the Limited Partners). The Limited Partners own a
combined 20.9% interest in AAC II, LP. In exchange for the Limited Partners
20.9% interest in AAC II, LP, the Company will issue 5,614,035 Operating
Partnership Units (OP Units) and cash. The transaction has been structured as a
tax-free merger and exchange of OP Units and will be treated as a purchase for
accounting purposes.
13
<PAGE>
In accordance with the Merger Agreement, the purchase price consists of the
following: (i) 8,000,000 shares of 7.5% Series D Convertible Preferred Stock
($25 liquidation preference) which is convertible into the Company's common
stock at $16.25 per share with a fair market value of $175 million, (ii) the
issuance of 5,614,035 OP Units with an aggregate fair value of $67.4 million,
(iii) the assumption of $466.2 million of secured notes payable at fair value,
(iv) the assumption of other liabilities aggregating $24.7 million and (v) $56.5
million of cash. The aggregate purchase price of the Merger is estimated at
approximately $806.0 million, including transaction costs. The transaction is
expected to close in the fourth quarter of 1998, however, there can be no
assurances that this transaction will be consummated as planned.
AAC owns 54 communities located in the West, Northwest, Midwest and Florida. The
54 communities contain 14,141 apartment homes with a weighted average year built
of 1979. AAC's apartment communities are geographically distributed as follows:
<TABLE>
<CAPTION>
Number of Number of
City/State Apartment Communities Apartment Homes
- ------------------------ --------------------- ---------------
<S> <C> <C>
San Francisco/San Jose, CA ................... 4 980
Monterey Peninsula, CA ....................... 13 2,076
Sacramento, CA ............................... 2 914
Los Angeles, CA .............................. 2 926
Other CA ..................................... 2 444
------ ------
Total California .................... 23 5,340
Portland, OR ................................. 4 996
Seattle, WA .................................. 3 492
Denver, CO ................................... 2 876
------ ------
Pacific Northwest ................... 9 2,364
Columbus, OH ................................. 4 1,344
Indianapolis, IN ............................. 3 875
Detroit, MI .................................. 4 744
Lansing, MI .................................. 4 1,227
Other Midwest ................................ 4 819
------ ------
Total Midwest ....................... 19 5,009
Tampa, FL .................................... 2 1,108
South Florida ................................ 1 320
------ ------
Total Florida ....................... 3 1,428
------ ------
Total ............................... 54 14,141
====== ======
</TABLE>
Real estate under development
Consistent with the Company's acquisition strategy, development activity has
focused primarily within its strategic markets. During the first nine months of
1998, the Company invested approximately $63.0 million in development projects.
14
<PAGE>
<TABLE>
At September 30, 1998, the Company had 1,969 apartment homes under development
as outlined below (dollars in thousands, except cost per home):
<CAPTION>
Development Estimated Estimated Expected
No. Apt. Completed Costs Development Cost Completion
Property Location Homes Apt. Homes to Date Cost Per Home Date
- -------- -------- ----- ---------- ------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
New Apartment Communities
Dominion Franklin Nashville, TN 360 160 $ 21,049 $ 24,700 $ 68,600 2Q99
Ashlar I Fort Myers, FL 260 -- 6,858 18,600 71,500 2Q99
Sierra Foothills Phoenix, AZ 322 -- 3,238 22,500 69,900 4Q99
Stone Canyon Houston, TX 216 -- 2,318 11,100 51,400 2Q99
Alexander Court Columbus, OH 356 38 11,830 23,000 64,600 4Q99
Legends at Park 10 Houston, TX 236 -- 4,073 13,900 58,900 4Q99
Ashton at Waterford Lakes Orlando, FL 292 -- 3,520 18,600 63,700 3Q99
----------------------------------------------------------------
2,042 198 52,886 132,400 64,800
Additional Phases
Mill Creek II Wilmington, NC 180 151 10,789 12,100 67,200 4Q98
Heritage Green Columbus, OH 96 -- 3,906 6,900 71,900 2Q99
----------------------------------------------------------------
276 151 14,695 19,000 68,800
Land Held for Development * -- -- 8,430 -- --
----------------------------------------------------------------
2,318 349 $ 76,011 $ 151,400 $ 65,300
================================================================
</TABLE>
* Includes six parcels of land held for future development.
The Company completed the following development project during 1998 (dollars in
thousands, except cost per home):
<TABLE>
<CAPTION>
Original
Budgeted
No. Apt. Development Development Cost Date of % Leased
Property Location Homes Costs Cost Per Home Completion at 9/30/98
- -------- -------- ----- ----- ---- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Additional Phases
Oak Forest II Dallas, TX 260 $11,858 $13,375 $51,400 1Q98 92%
=============================================================
</TABLE>
Due to the fact that the acquisitions market has become very competitive, the
Company increased its commitment to development. The Company expects to invest
approximately $150 million on the development of new communities and additional
phases to existing communities during 1999.
Capital Expenditures
During the first nine months of 1998, the Company invested $55.3 million on
capital improvements to its apartment portfolio. During this period, capitalized
expenditures averaged $1,033 per home (on an annualized basis) for all apartment
homes acquired prior to 1996. A significant portion of these expenditures are
designed to increase revenues or reduce expenses. These improvements include the
addition of intrusion alarms, sub-meters to pass the cost of water and sewer to
residents, various interior upgrades and enhanced amenities such as business and
fitness centers. These expenditures should allow the Company's communities to
operate more effectively in competitive markets over the long-term. Capital
expenditures for the full year 1998 are expected to be at or below 1997 levels.
The Company has reduced its capital expenditures this year versus last year on
its mature apartment homes, but will continue to add revenue-enhancing
improvements as needed.
15
<PAGE>
Disposition of investments
In an effort to upgrade its apartment portfolio, the Company continually
undertakes portfolio review analyses with the objective of identifying
properties that no longer meet the Company's investment objectives due to size,
location, age, quality and/or performance. These sales allow the Company to
reduce the age of its existing portfolio, which should result in lower operating
expense and capital expenditure growth associated with the older properties. The
sales are initially dilutive to earnings as the initial returns on investment on
higher quality apartments are lower than the returns on investment on the
communities being sold.
On January 20, 1998, the Company sold a portfolio of five apartment communities
containing 2,406 apartment homes, which had a weighted average age of 21 years
for an aggregate sales price of $65.6 million. The transaction was structured to
qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code,
so the related capital gain will be deferred for federal income tax purposes.
These five communities, all located in Texas, were acquired on December 31, 1996
in connection with the South West Property Trust Inc. Merger ("South West
Merger"), and accordingly, no significant gain or loss was recorded for
financial reporting purposes.
On April 24, 1998, the Company sold a portfolio of eleven Southeast apartment
communities containing 2,303 homes, which had a weighted average age of 24 years
for an aggregate sales price of $69.4 million. For income tax purposes, eight of
the eleven communities sold were structured to qualify as a tax deferred
exchange so that the related capital gains will be deferred. The Company
realized a $21.2 million gain on the sale for financial reporting purposes in
the second quarter of 1998.
Financing Activities
Net cash provided by financing activities during the nine months ended September
30, 1998 was $73.4 million compared to $164.4 million for the same period last
year.
Cash provided by financing activities
During the first quarter of 1998, the Company entered into two separate
transactions to sell its common stock to Unit Investment Trusts ("UIT"). In
February 1998, the Company issued 1.7 million shares of its common stock at a
gross sales price of $14.31 per share to a UIT. In March 1998, the Company
issued 1.1 million shares of its common stock at a gross sales price of $14.19
to a second UIT. The net proceeds from the two UIT's aggregating $38.0 million
were primarily used to curtail bank debt.
The Company issued 2,455,558 shares of its common stock and received $32.8
million under its Dividend Reinvestment and Stock Purchase Plan (the "Plan")
during the first nine months of 1998, which included $23.2 million in optional
cash investments and $9.6 million of reinvested distributions.
Derivative Instruments
The Company has, from time to time, used derivative instruments to synthetically
alter on-balance sheet liabilities to hedge anticipated transactions. Derivative
contracts did not have a material impact on the results of operations during the
three and nine months ended September 30, 1998 and 1997.
In order to reduce the interest rate risk associated with the anticipated
issuance of unsecured notes during 1998, the Company entered into a $100 million
(notional amount) fixed pay forward starting swap agreement (interest rate risk
management agreement) with a major Wall Street investment banking firm in July
1997. The transaction allowed the Company to lock-in a ten year Treasury rate of
6.511% on or before November 9, 1998. This interest rate risk management
agreement had an unfavorable position to the Company of $16.8 million at
September 30, 1998. The Company settled the interest rate risk management
agreement on November 9, 1998, by paying $15.6 million to the counterparty.
During the fourth quarter of 1998, the Company was unable to issue the unsecured
notes contemplated by the interest rate risk management agreement, and
accordingly, the cost associated with the settlement of this agreement will be
expensed during the fourth quarter of 1998.
On November 10, 1998, the Company sold an aggregate $212.5 million of senior
unsecured notes payable in two simultaneous but separate public offerings which
consist of the following: (i) $150 million of 8.125% Notes due November 15, 2000
and (ii) $62.5 million (including the over-allotment option) of 8.5% Monthly
Income Notes due November 15, 2008. Net proceeds from the two offerings (net of
underwriting discounts, commissions and offering expenses) of approximately
$209.9 million will be used to repay bank debt outstanding under the Company's
various credit facilities.
16
<PAGE>
Funds from Operations
Funds from operations ("FFO") is defined as income before gains (losses) on
sales of investments, minority interest of unitholders in operating partnership
and extraordinary items (computed in accordance with generally accepted
accounting principles) plus real estate depreciation, less preferred dividends
and after adjustment for significant non-recurring items, if any. The Company
computes FFO in accordance with the recommendations set forth by the National
Association of Real Estate Investment Trusts ("NAREIT"). The Company considers
FFO in evaluating property acquisitions and its operating performance, and
believes that FFO should be considered along with, but not as an alternative to,
net income and cash flows as a measure of the Company's operating performance
and liquidity. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs.
For the three months ended September 30, 1998, FFO increased 20.7% to $35.1
million, compared with $29.1 million for the same period last year. For the nine
months ended September 30, 1998, FFO increased 18.9% to $102.7 million, compared
with $86.4 million for the same period last year. The increase in FFO was
principally due to the increased property operating income from the Company's
non-mature apartment homes acquired and developed subsequent to January 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) (in thousands)
1998 1997 % Change 1998 1997 % Change
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calculation of funds from operations:
Income before gains on sales of investments and minority
interest of unitholders in operating partnership $ 13,872 $ 14,053 (1.3%) $ 46,797 $ 42,529 10.0%
Adjustments:
Real estate depreciation 26,901 19,740 36.3% 73,376 55,029 33.3%
Dividends to preferred shareholders (5,650) (5,653) -- (16,953) (11,692) 45.0%
Impairment loss on real estate owned -- 1,400 -- -- 1,400 --
Change in acounting for internal acquisitions costs -- (436) -- (544) (915) (40.5%)
---------------------------------- -----------------------------------
Funds from operations $ 35,123 $ 29,104 20.7% $ 102,676 $ 86,351 18.9%
================================== ===================================
</TABLE>
Results of Operations
The Company's net income available to common shareholders is primarily generated
from the operations of its apartment communities. For purposes of evaluating the
Company's comparative operating performance, the Company categorizes its
apartment communities into two categories, same community and non-mature. For
the 1998 versus 1997 comparison, these communities are as follows: (i) same
community--those communities acquired, developed and stabilized prior to January
1, 1997 and held throughout the first nine months of 1998 and 1997 and (ii)
non-mature--those communities acquired, developed or sold subsequent January 1,
1997.
The Company's apartment operations are divided into three geographic regions,
each of which constitutes a core operating unit. Based on the total number of
apartment homes, the Northern Region constitutes 40.0% of the Company's
apartment portfolio and includes Delaware, Maryland, Virginia and northern North
Carolina. The Southern Region constitutes 37.4% of the Company's portfolio and
includes Charlotte, North Carolina, South Carolina, Georgia, Tennessee, Florida
and Alabama. The Western Region constitutes 22.6% of the Company's apartment
portfolio and includes Texas, Arkansas, Oklahoma, Nevada, New Mexico, Arizona
and Washington. For the three months ended September 30, 1998, net income
available to common shareholders decreased $9.5 million primarily due to the
$9.3 million ($.11 per share) aggregate gains on the sales of investments
included in the 1997 period. For the nine months ended September 30, 1998, net
income available to common shareholders increased $5.6 million primarily as a
result of the increase in the weighted average number of apartment homes
owned. Net income available to common shareholders for the nine months ended
September 30, 1998 and 1997 included aggregate gains of $20.5 million ($.20 per
share) and $12.7 million ($.15 per share), respectively, on the sales of
investments (see "Disposition of Investments"). The combination of initially
lower returns on newer, higher quality replacement acquisitions together with
the money market returns earned on escrowed funds required to complete 1031
exchanges had a cost of $.006 per share and $.026 per share for the three and
nine months ended September 30, 1998, respectively.
17
<PAGE>
All Apartment Communities
The operating performance of the Company's 270 communities with 72,394 apartment
homes for the three and nine months ended September 30, 1998, and 220
communities with 61,099 apartment homes for the three and nine months ended
September 30, 1997, respectively, is summarized in the chart below (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1998 1997 % Change 1998 1997 % Change
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property rental income $ 122,794 $ 98,269 25.0% $ 344,341 $ 282,077 22.1%
Property operating expenses (excluding
depreciation and amortization) (52,209) (42,453) 22.9% (142,088) (120,532) 17.9%
---------------------------------- -----------------------------------
Property operating income $ 70,585 $ 55,816 26.5% $ 202,253 $ 161,545 25.2%
================================== ===================================
Weighted average number
of apartment homes 72,365 60,204 20.2% 68,723 57,803 18.9%
Physical occupancy 92.2% 93.0% (0.8)% 91.6% 92.3% (0.7%)
</TABLE>
The increase in the weighted average number of apartment homes owned during both
periods presented resulted in a significant increase in property rental income
and property operating expense for the first nine months of 1998.
Same Communities
The operating performance for the Company's 178 same communities with 48,245
apartment homes for the three and nine months ended September 30, 1998 is
summarized in total and by geographic region below (dollars in thousands):
<TABLE>
Total Same Community Operating Performance
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1998 1997 % Change 1998 1997 % Change
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property rental income $ 83,333 $ 80,670 3.3% $ 246,153 $ 237,759 3.5%
Property operating expenses (excluding
depreciation and amortization) (34,123) (34,201) (0.2)% (98,661) (100,172) (1.5)%
---------------------------------- -----------------------------------
Property operating income $ 49,210 $ 46,469 5.9% $ 147,492 $ 137,587 7.2%
================================== ===================================
Physical occupancy 93.5% 93.6% (.1%) 92.8% 92.7% .1%
Average monthly rental rates $ 605 $ 584 3.6% $ 599 $ 579 3.5%
Mature Operating Performance (By Geographic Region)
Three Months Ended September 30,:
<CAPTION>
North South West Total
----------------------- ------------------------ ----------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
----------------------- ------------------------ ----------------------- --------------------
Property rental income $ 34,440 $ 33,432 $ 30,493 $ 29,373 $ 18,400 $ 17,865 $ 83,333 $ 80,670
Property operating
expenses (excluding
depreciation and
amortization) (12,420) (12,847) (13,549) (13,477) (8,154) (7,877) (34,123) (34,201)
----------------------- ------------------------ ----------------------- --------------------
Property operating
income $ 22,020 $ 20,585 $ 16,944 $ 15,896 $ 10,246 $ 9,988 $ 49,210 $ 46,469
======================= ======================== ======================= ====================
Physical occupancy 93.6% 93.9% 93.2% 93.0% 93.8% 94.2% 93.5% 93.6%
Average monthly
rental rates $ 621 $ 600 $ 592 $ 570 $ 596 $ 580 $ 605 $ 584
Nine Months Ended September 30,:
North South West Total
----------------------- ------------------------ ----------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
----------------------- ------------------------ ----------------------- --------------------
Property rental income $101,305 $ 98,184 $ 90,484 $ 86,888 $ 54,364 $ 52,687 $ 246,153 $237,759
Property operating
expenses (excluding
depreciation and
amortization) (36,470) (37,869) (39,147) (39,864) (23,044) (22,439) (98,661) (100,172)
----------------------- ------------------------ ----------------------- --------------------
Property operating
income $ 64,835 $ 60,315 $ 51,337 $ 47,024 $ 31,320 $ 30,248 $147,492 $137,587
======================= ======================== ======================= ====================
Physical occupancy 92.4% 92.8% 93.1% 92.2% 93.2% 93.3% 92.8% 92.7%
Average monthly
rental rates $ 616 $ 595 $ 586 $ 565 $ 592 $ 575 $ 599 $ 579
</TABLE>
18
<PAGE>
For the nine months ended September 30,1998, the Company's same communities
provided approximately 71.5% of the Company's property rental income and 72.9%
of its property operating income. During the first nine months of 1998, the
Company's same communities continued to generate rent growth. Compared to the
same period last year, total property rental income from these apartment homes
grew 3.5%, or $8.4 million, reflecting an increase in average monthly rents of
3.5% to $599 per month. A portion of the rent growth reflected the impact of the
Company's upgrade and revenue enhancing capital expenditure programs. During the
first nine months of 1998, the operating margin improved 2.1% to 59.9% as a
result of increased property rental income. For the quarter ended September 30,
1998 total property rental income grew 3.3% or $2.7 million, reflecting the 3.6%
increase in average monthly rental rates to $605 as physical occupancy remained
flat compared to the same period last year. The operating margin improved 1.5%
to 59.1% as a result of increased property rental income during this period. The
Company expects to maintain annualized rent growth in the 3 to 3 1/2% range and
physical occupancy in the 92% range during the remainder of 1998.
For the nine months ended September 30, 1998, property operating expenses at
these communities decreased 1.5%, or $1.5 million. This decline is primarily the
result of two factors: (i) lower utility expenses directly attributable to the
Company's water sub-metering initiative and (ii) overall decreases in repairs
and maintenance and other operating expenses. The decreases in repairs and
maintenance and other operating expenses occurred as the Company has begun to
benefit from its upgrade program. In addition, the Company has taken advantage
of economies of scale due to its increased size and centralized purchasing. For
the quarter ended September 30, 1998, property operating expenses decreased .2%
or $78,000 due to the same factors discussed above. The Company's objective is
to maintain annualized property operating expense growth in the 2% range during
the remainder of 1998.
Non-Mature Communities
The operating performance for the three and nine months ended September 30, 1998
for the Company's 91 non-mature communities with 24,464 apartment homes is
summarized in the chart below (dollars in thousands):
<TABLE>
Three Months Ended September 30:
<CAPTION>
Sales Development
1997 Acquisitions 1998 Acquisitions Properties Properties
-------------------- ------------------ -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property rental income $ 14,700 $ 8,537 $ 22,211 $ -- $ 10 $ 8,127 $ 2,540 $ 935
Property operating
expenses (excluding
depreciation and
amortization) (6,373) (3,624) (10,748) -- (23) (4,168) (942) (460)
-------------------- ------------------ -------------------- --------------------
Property operating
income $ 8,327 $ 4,913 $ 11,463 $ -- $ (13) $ 3,959 $ 1,598 $ 475
==================== ================== ==================== ====================
Total Non-Mature
--------------------
1998 1997
--------------------
Property rental income $ 39,461 $ 17,599
Property operating
expenses (excluding
depreciation and
amortization) (18,086) (8,252)
--------------------
Property operating
income $ 21,375 $ 9,347
====================
Nine Months Ended September 30:
<CAPTION>
Sales Development
1997 Acquisitions 1998 Acquisitions Properties Properties
-------------------- ------------------ -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------------------- ------------------ -------------------- --------------------
Property rental income $ 42,877 $ 14,970 $ 43,587 $ -- $ 5,471 $ 27,560 $ 6,253 $ 1,788
Property operating
expenses (excluding
depreciation and
amortization) (18,325) (5,810) (19,841) -- (2,797) (13,750) (2,464) (800)
-------------------- ------------------ -------------------- --------------------
Property operating
income $ 24,552 $ 9,160 $ 23,746 $ -- $ 2,674 $ 13,810 $ 3,789 $ 988
==================== ================== ==================== ====================
</TABLE>
Total Non-Mature
--------------------
1998 1997
--------------------
Property rental income $ 98,188 $ 44,318
Property operating
expenses (excluding
depreciation and
amortization) (43,427) (20,360)
--------------------
Property operating
income $ 54,761 $ 23,958
====================
For the nine months ended September 30, 1998, the Company's non-mature
communities provided approximately 28.5% of the Company's property rental income
and 27.1% of its property operating income. For the quarter ended September 30,
1998, these communities had physical occupancy of 89.8% (including Development
Properties undergoing lease-up) and an operating margin of 54.2%. For the nine
months ended September 30, 1998, these communities had physical occupancy of
88.8% (including Development Properties undergoing lease-up) and an operating
margin of 55.8%.
19
<PAGE>
1997 Acquisitions
The 27 communities containing 8,524 apartment homes (net of one resold) included
in this category had average monthly rental rates of $600, physical occupancy of
91.6% and an operating margin of 57.3% for the first nine months of 1998. For
the third quarter of 1998, these communities had average monthly rental rates of
$607, physical occupancy of 93.2% and an operating margin of 56.6%. The
annualized return on investment for these communities for the nine months ended
September 30, 1998, on an average investment of approximately $354.1 million,
was 9.2%.
1998 Acquisitions
Included in this category are the following: (i) the 24 communities with 7,055
apartment homes acquired by the Company during the first nine months of 1998
which are projected to have a first year return on investment in the 9% range
and (ii) the 39 communities with 7,550 apartment homes included in the ASR
portfolio acquired on March 27, 1998. A number of the 1998 acquisitions,
including the ASR communities are in Phoenix, Tuscon and Albuquerque, which are
both soft and somewhat seasonal markets. However, better results from these
communities are anticipated in the fourth quarter of 1998.
Sales
Included in this category are the 29 communities with 7,518 apartment homes sold
as part of the Company's disposition program (see Disposition of investments
under Liquidity and Capital Resources) since January 1, 1997. The net
proceeds from the sales of these communities were reinvested in the 1997 and
1998 acquisitions discussed above.
Development
This represents the 1,464 homes developed at various times since January 1, 1997
which includes three new apartment community and seven additional phases to
existing communities. These communities did not have a material impact on the
results of operations for the three and nine months ended September 30, 1998.
Real Estate Depreciation
Real estate depreciation increased $7.2 million or 36.3% and $18.3 million or
33.3% for the three and nine months ended September 30, 1998, respectively over
the same periods last year. These increases are directly attributable to the
addition of depreciable real estate assets as a result of the Company's
acquisition, development and capital expenditure programs.
Interest Expense
Interest expense increased $7.9 million and $17.5 million for the three and nine
months ended September 30, 1998, respectively over the same periods last year.
The weighted average amount of debt employed during the first nine months of
1998 was higher than it was for the same period during 1997 ($1.4 billion in
1998 versus $1.1 billion in 1997). For both the three and nine months ended
September 30, 1998, the weighted average interest rate on this debt was slightly
lower than it was during the same periods last year, decreasing from 7.5% in
1997 to 7.4% in 1998. For the quarter ended September 30, 1998, the weighted
average amount of debt outstanding was higher than the same period last year
($1.5 billion in 1998 versus $1.1 billion in 1997). For the three and nine
months ended September 30, 1998, total interest capitalized on the Company's
development communities was $910,000 and $2.2 million, respectively.
General and Administrative
During the three and nine months ended September 30, 1998, general and
administrative expenses increased by $915,000 and $2.0 million over the same
periods last year primarily due to (i) the added infrastructure costs incurred
due to the increased size of the Company and (ii) the change in accounting for
internal acquisition costs subsequent to March 19, 1998 (See Footnote
7-Accounting Pronouncements).
Inflation
The Company believes that the direct effects of inflation on the Company's
operations have been inconsequential.
20
<PAGE>
Year 2000
The Company continues to address issues regarding the transition to Year 2000 as
it is dependent on computer systems and applications to conduct its business.
The Company performed a preliminary assessment earlier in 1998, and it believes
that its personal computers, desktop software, servers and major applications
are Year 2000 compliant (both at property and corporate locations). To ensure
that the Company completed a formalized and thorough assessment of its Year 2000
issues, an outside consulting firm has been engaged to conduct a Year 2000
assessment and develop a remediation plan. The plans covers four stages: (i)
inventory, (ii) assessment, (iii) remediation and (iv) testing and
certification. The Company has substantially completed the inventory stage for
its Company owned systems and applications. The assessment processes are
approximately 80% complete and should be completed by January 15, 1999. The
Company believes that it has identified all of its information technology (IT)
and non-IT systems to assess its Year 2000 readiness. The Company plans to
complete its Year 2000 project, no later than the third quarter of 1999.
Inherent in all phases is assessing the Year 2000 compliance of the Company's
vendors and other external relationships to determine the extent to which the
Company may be vulnerable to such parties' failure to resolve their own Year
2000 issues. The Company has initiated formal communication with these parties.
However, the Company cannot assure timely compliance of third parties and
therefore could be adversely affected by failure of a significant third party to
become Year 2000 compliant. The effect, if any, on the Company's results of
operations from the failure of such parties to be Year 2000 ready is not
reasonably estimable.
At this time, the Company cannot estimate the aggregate cost of its Year 2000
issues of third parties. Amounts expended to ensure Year 2000 compliance are
expected to be funded by cash flows from operations and are not expected to have
a material impact on the Company's financial position, results of operations, or
cash flows. The Company estimates that the total Year 2000 project cost will be
in the $100,000 range, of which approximately 25% has been incurred as of
September 30, 1998. The Company believes that its Year 2000 initiatives are
adequate to address reasonably likely Year 2000 issues.
21
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Company nor any of its apartment communities is presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company or any of the communities, other than
routine actions arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on the business or financial
condition or results of operations of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULT UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are filed as part
of this quarterly report.
(b) A Form 8-K dated June 9, 1998 was filed with the Securities and
Exchange Commission on June 24, 1998. The filing reported the
acquisition by the Company of properties which in the aggregate were
significant. The Form 8-K was subsequently amended on Form 8-K/A No. 1
which was filed with the Securities and Exchange Commission on August
13, 1998. The Form 8-K/A No. 1 included the Statement of Rental
Operations of The Trails at Kirby Parkway Apartments, The Trails at Mt.
Moriah Apartments, Cinnamon Trails Apartments, Dogwood Creek
Apartments, Audobon Apartments, Carmel Apartments, Cimmaron Apartments,
Grand Cypress Apartments, Kenton Place Apartments, Peppermill
Apartments, The Crest Apartments and Village at Thousand Oaks
Apartments.
A Form 8-K dated May 29, 1998 was filed with the Securities and
Exchange Commission on October 19, 1998. The filing included the
Statement of Rental Operations of Rancho Mirage Apartments.
A Form 8-K dated September 11, 1998 was filed with the Securities and
Exchange Commission on October 23, 1998. The filing reported the
proposed merger of American Apartment Communities II, Inc. by the
Company. The filing included the audited financial statements of
American Apartment Communities II, Inc, and American Apartment
Communities II, LP for the year ended December 31, 1997.
22
<PAGE>
A Form 8-K dated October 28, 1998 was filed with the Securities and
Exchange Commission on October 28, 1998. The filing reported on the
Company's results of operations for the three and nine months ended
September 30, 1998.
A Form 8-K dated November 2, 1998 was filed with the Securities and
Exchange Commission on November 6, 1998. The filing included the
Exhibits for the Consents of Experts as used in the Company's
Prospectus Supplement for the issuance of debt securities.
23
<PAGE>
<TABLE>
EXHIBIT INDEX
Item 6 (a)
.
The exhibits listed below are filed as part of this quarterly report.
References under the caption "Location" to exhibits, forms, or other filings
indicate that the form or other filing has been filed, that the indexed exhibit
and the exhibit referred to are the same and that the exhibit referred to is
incorporated by reference.
<CAPTION>
Exhibit Description Location
- ------- ----------- --------
<S> <C> <C>
2(a) Agreement and Plan of Merger dated Exhibit 2(a) to the Company's Form S-4 Registration
as of December 19, 1997, between Statement (Registration No. 333-45305) filed with
the Company, ASR Investment the Commission on January 30, 1998.
Corporation and ASR Acquisition Sub, Inc.
2(b) Agreement of Plan of Merger dated as Exhibit 2(b) to the Company's Form S-4 Registration
of September 10, 1998, between the Statement (Registration No. 333-45305) filed with
Company and American Apartment the Commission on January 30, 1998.
Communities II, Inc. including as
exhibits thereto the proposed terms
of the Series D Preferred Stock and the
proposed form of Investment Agreement
between the Company, United Dominion
Realty, L.P., American Apartment
Communities II, Inc., American
Apartment Communities Operating
Partnership, L.P., Schnitzer Investment
Corp., AAC Management LLC and LF
Strategic Realty Investors, L.P.
2(c) Partnership Interest Purchase and Exchange Exhibit 2(b) to the Company's Form S-4 Registration
Agreement dated as of September 10, 1998, Statement (Registration No. 333-45305) filed with
between the Company, United Dominion the Commission on January 30, 1998.
Realty, L.P., American Apartment
Communities Operating Partnership, L.P.,
AAC Management LLC, Schnitzer
Investment Corp., Fox Point Ltd. and
James D. Klingbeil including as an exhibit
thereto the proposed form of the Third
Amended and Restated Limited Partnership
Agreement of United Dominion Realty, L.P.
3(a) Restated Articles of Incorporation Exhibit 4(b) to the Company's Form S-3
Registration Statement (Registration No. 333-44463)
filed with the Commission on January 16, 1998.
3(a)(i) Amendment of Articles of Exhibit 3 to the Company's Form 8-A
Incorporation Registration Statement dated February 4,
1998.
3(b) Restated By-Laws Exhibit 3(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.
24
<PAGE>
4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report
Certificate on Form 10-K for the year ended December
31, 1993.
4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995.
Redeemable Preferred Stock
4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 8.60% Series B Cumulative Registration Statement dated June 11, 1997.
Redeemable Preferred Stock
4(i)(d) Rights Agreement dated as of Exhibit 1 to the Company's Form 8-A
January 27, 1998, between the Registration Statement dated February 4, 1998.
Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent.
4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Company's Form 8-A
Registration Statement dated February 4, 1998.
4(ii)(a) Loan Agreement dated as of Exhibit 6(c)(i) to the Company's Form 8-A
November 7, 1991, between the Registration Statement dated April 19, 1990.
Company and Aid Association for
Lutherans
4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A
as of February 15, 1993, between Registration Statement dated April 19, 1990.
the Company and CIGNA Property
and Casualty Insurance Company,
Connecticut General Life Insurance
Company, Connecticut General Life
Insurance Company, on behalf of
one or more separate accounts,
Insurance Company of North
America, Principal Mutual Life
Insurance Company and Aid
Association for Lutherans
10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report on
the Company and John Form 10-K for the year ended December 31,
P. McCann dated October 29, 1982 1982.
10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Company's Annual Report on
the Company and James Form 10-K for the year ended December 31,
Dolphin dated October 29, 1982. 1982.
10(iii) Employment Agreement between Exhibit 10(iv) to the Company's Annual
the Company and John S. Schneider Report on Form 10-K for the year ended
dated December 14, 1996. December 31, 1996.
10(iv) 1985 Stock Option Plan, Exhibit 10(iv) to the Company's Quarterly
as amended. Report on Form 10-Q for the quarter ended
June 30, 1998.
25
<PAGE>
10(v) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Company's Quarterly Report
Plan. on Form 10-Q for the quarter ended March 31, 1997.
10(vi) Second Amended and Restated Exhibit 10(ix) to the Company's Quarterly Report on
Agreement of Limited Partnership of Form 10-Q for the quarter ended September 30,1997.
United Dominion Realty, L.P.
Dated as of August 30, 1997.
10(vi)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Company's Form 10-Q for the
April 16, 1998, between the quarter ended March 31, 1998.
Company and United Dominion
Realty, L.P.
12 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges.
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Quarterly Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
United Dominion Realty Trust, Inc.
(registrant)
Date: November 16, 1998 /s/ James Dolphin
------------------------------------
James Dolphin
Executive Vice President and
Chief Financial Officer
Date: November 16, 1998 /s/ Robin R. Flanagan
------------------------------------
Robin R. Flanagan
Assistant Vice President and
Chief Accounting Officer
27
<TABLE>
EXHIBIT 12
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(Dollars in thousands)
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
-------------------------------------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net income before extraordinary item $13,807 $23,309 $66,071 $55,099
Add:
Portion of rents representative
of the interest factor 155 111 401 301
Interest on indebtedness 27,224 19,346 75,784 58,265
============== ============== ============== =============
Earnings $41,186 $42,766 $142,256 $113,665
============== ============== ============== =============
Fixed charges and preferred stock dividend:
Interest on indebtedness $27,224 $19,346 $75,784 $58,265
Capitalized interest 910 852 2,223 2,082
Portion of rents representative
of the interest factor 155 111 401 301
-------------- -------------- -------------- -------------
Fixed charges 28,289 20,309 78,408 60,648
-------------- -------------- -------------- -------------
Add:
Preferred stock dividend 5,650 5,653 16,953 11,692
-------------- -------------- -------------- -------------
Combined fixed charges and preferred stock dividend $33,939 $25,962 $95,361 $72,340
============== ============== ============== =============
Ratio of earnings to fixed charges 1.46 x 2.11 x 1.81 x 1.87 x
Ratio of earnings to combined fixed charges
and preferred stock dividend 1.21 1.65 1.49 1.57
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,485
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,301
<PP&E> 3,099,553
<DEPRECIATION> 269,659
<TOTAL-ASSETS> 2,926,680
<CURRENT-LIABILITIES> 113,069
<BONDS> 1,548,898
0
255,000
<COMMON> 103,207
<OTHER-SE> 861,342
<TOTAL-LIABILITY-AND-EQUITY> 2,926,680
<SALES> 346,171
<TOTAL-REVENUES> 348,906
<CGS> 0
<TOTAL-COSTS> 143,209
<OTHER-EXPENSES> 83,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,784
<INCOME-PRETAX> 66,071
<INCOME-TAX> 0
<INCOME-CONTINUING> 66,071
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> 65,955
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
