UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K405 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered - - --------------------- ------------------------------------- Common Stock, $1 par value New York Stock Exchange 9 1/4% Series A Cumulative Redeemable New York Stock Exchange Preferred Stock Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained , to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K. (X) The aggregate market value of the shares of common stock held by non-affiliates (Based upon the closing sales price on the New York Stock Exchange) on March 14, 1997 was approximately $1.3 billion.* As of March 14, 1997, there were 86,288,728 shares of common stock, $1 par value, outstanding. Part III incorporates certain information be reference from the definitive proxy statement to be filed with respect to the Annual Meeting of Shareholders on May 6, 1997. *In determining this figure, the Company has assumed that all of its officers & directors, and persons known to the Company to be beneficial owners of more than 5% of the Company's shares, are affiliates. Such assumptions should not be deemed conclusive for any other purpose.
UNITED DOMINION REALTY TRUST, INC. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security-Holders 14 PART II. Item 5. Market for Registrant's Common Equity and Related 16 Stockholder Matters Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial 18 Condition and Results of Operation Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements with Accountants on 29 Accounting and Financial Disclosure PART III. Item 10. Directors and Executive Officers of the Registrant 30 Item 11. Executive Compensation 30 Item 12. Security Ownership of Certain Beneficial Owners and 30 Management Item 13. Certain Relationships and Related Transactions 30 PART IV. Item 14. Exhibits, Financial Statement Schedule, and Reports 31 on Form 8-K </TABLE> 2
Part I Item 1. Business The Company General United Dominion Realty Trust, Inc., a Virginia corporation, (collectively with its subsidiaries, the "Company"), is a self-administered equity real estate investment trust ("REIT"), formed in 1972 which acquires, repositions, develops, manages and selectively sells apartment homes for its own portfolio in the Sunbelt region of the United States. Effective at the close of business on December 31, 1996, the Company acquired South West Property Trust, Inc. ("South West") in a statutory merger ("Merger"). South West was a Texas-based real estate investment trust that owned 44 apartment communities containing 14,320 completed apartment homes and 675 under development, located primarily in Texas. The South West apartment portfolio consists primarily of B grade communities. The Merger provided several strategic and operational benefits which include (i) operating efficiencies through economies of scale, (ii) added development experience and capability, (iii) increased liquidity in common stock and the potential to lower the Company's cost of capital, (iv) geographic expansion which provided significant investment in several major markets including Dallas, Houston, San Antonio and Phoenix, (v) additional investment opportunities in the Sunbelt markets and (vi) broadening of the Company's management. The Merger was accounted for under the purchase method of accounting prescribed by Accounting Principles Board No. 16, and as such, had no impact on the Company's results of operations for 1996. Following the merger, at December 31, 1996, the Company owned 55,664 completed apartment homes in 210 apartment communities and had 1,475 apartment homes under development. The Company is headquartered in Richmond, Virginia with divisional offices in Richmond and Dallas plus regional offices in Richmond, Atlanta, Georgia, Dallas, Texas and Orlando, Florida, and area offices in the previously mentioned cities plus Columbia, Maryland, Raleigh, North Carolina, Charlotte, North Carolina, Tampa, Florida, Nashville, Tennessee, San Antonio, Texas and Phoenix, Arizona. The regional offices are responsible for the operation, acquisition, construction and asset management activities in their respective geographic regions. The Company had approximately 1,900 associates as of March 15, 1997. The Company manages its properties directly, rather than through outside property management firms. During 1996, the cost of internal property management of the Company's apartment properties totaled approximately 2.4% of rental revenue versus the 4-5% fee typically charged by independent fee management companies in the Company's major markets. In determining its cost of self management, the Company considers all direct and indirect costs associated with the internal property management function. The Company is operated so as to qualify as a real estate investment trust under the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"). 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. Apartments and Markets At the end of 1996, the apartment portion of the Company's portfolio included 210 apartment communities having a total of 55,664 completed apartment homes and constituting 98% of the Company's real estate owned, at cost. The Company operates in 21 major markets dispersed throughout a 15 state area from Delaware to Nevada. (See Item 2, "Properties.") During 1996, 1995 and 1994, the Company's apartment portfolio provided approximately 98%, 96% and 93%, respectively of the Company's rental income. The Company's apartment communities consist primarily of upper middle to moderate income garden and townhouse communities which make up the broadest segment of the apartment market. Most of the communities are considered to be B grade quality although the Company does own class A properties that compete at or near the top of their respective markets. Management believes that well located apartments offer the Company a good combination of current income and longer term equity growth. Although there is no known move toward rent control in any of the markets in which the Company now owns apartments, should rent control legislation be enacted, the Company's ability to raise rents to cover increases in operating expenses might be impaired. While the Company has been largely unaffected by military cutbacks and base closures, the effect of future defense cuts on the Company's regions is unknown. As the Company has expanded, it has attempted to avoid markets where the exposure to reduced defense spending is believed to be high. The size and geographical diversification of the Company can smooth the performance during natural real estate cycles. Apartment markets in the Company's regions in 1994 and 1995 generally benefitted from the combination of job growth which led to increases in the number of renter households and only modest apartment construction. Physical occupancy peaked in mid-1994 and remained above 95% through mid-1995 before trending downward during the second half of 1995. During the first half of 1996, most of the southeast apartment markets were in equilibrium with supply and demand balanced but occupancy fell during the second half. This was due to a combination of factors including slower job growth, an 3
increase in the home ownership rate and an increase in the supply of new apartments. Physical occupancy at the Company's apartment properties averaged 91.9% for December, 1996 compared with 93.9% for December, 1995. Despite this market softness, the Company expects rent growth and other income growth to remain strong over the next several years. It is anticipated that the Company will benefit more from higher rent growth in 1997 and 1998 than from occupancy gains. The Company expects to maintain rent growth in the 4% range and physical occupancy in the 92% range during 1997. On December 31, 1996, the Company acquired South West Property Trust Inc. and expanded its geographical markets. Approximately 80% of the South West apartment portfolio is located in Texas, with 50% in Dallas. Like the southeast markets, the southwest markets have experienced population and job growth above the national average, strong young household formation and growing demand for apartment homes. With the anticipated increase in young household formation and immigration trends, the Company believes there will be good long-term demand for B grade apartment communities in the Sunbelt. Business and Operating Strategies The Company seeks to maximize shareholder value through increasing its funds from operations ("FFO") and quarterly distributions to shareholders, while building equity primarily through real estate appreciation. FFO is defined as income before gains [losses] on 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 nonrecurring items, if any). The Company's current strategy is to be a major apartment owner in the larger Sunbelt markets. Generally, the list of top 20 U.S. growth markets is dominated by Sunbelt cities including cities in which the Company operates. The Company operates primarily in 21 major markets dispersed throughout a 15 state area from Delaware to Nevada. The Company believes that being a large or dominant owner in a market has the following advantages: o Being a local market leader. o Obtaining economies of scale in use of personnel, advertising and purchasing goods and services locally. o Efficiently adding services to produce other sources of income. o Benefitting from utility deregulation by purchasing utilities in bulk and remarketing them to residents. o Building stronger local and regional teams of associates. To fully execute this strategy, the Company will continue to grow principally through acquisitions. However, given its size, as well as its objective to be a dominant owner in its larger Sunbelt markets, the Company's development capability provides it with added flexibility to grow in its existing markets. Acquisitions The Company's acquisition strategy focuses on acquiring two types of apartment communities: (i) near Class A properties built since 1980 where the investment (purchase price plus planned improvements) represents a significant discount to replacement cost and (ii) well located older communities that can be upgraded and repositioned for the longer term. When evaluating potential acquisitions, the Company considers, among other things (i) the geographic location, (ii)construction quality, condition and design of the property, (iii) the current and projected cash flow of the property and the ability to increase cash flows, (iv) the potential for rent increases, (v) the potential for economic growth of the community in which the property is located, (vi) occupancy demands for similar properties in the area, (vii) competition from existing multifamily residential properties, and (viii) construction of new properties in the area. In addition to the Merger, during 1996, the Company purchased 30 apartment communities containing 7,712 apartment homes throughout the southeast for approximately $321 million. These acquisitions occurred in 13 of the Company's 21 major markets. This includes 18 apartment communities with 4,508 apartment homes located primarily in North Carolina and South Carolina acquired in a portfolio purchase for approximately $183 million, including closing costs. A geographic distribution of the Company's portfolio of apartment communities held for investment is included in Item 2, "Properties". The Company expects to acquire approximately 7,000 to 9,000 apartment homes for an aggregate purchase price ranging from $300 million to $400 million during 1997. 4
Merger The real estate industry is in the midst of a consolidation phase which began around 1990. Prior to 1990, the Company was the only major publicly held REIT focusing predominantly on apartment investments. Since then, a number of new multifamily REITs have been formed. According to the National Association of Real Estate Investment Trusts (NAREIT), there were more than 31 apartment REITs as of February 28, 1997. It is believed that some of these REITs may be forced to seek to be acquired by larger, better capitalized REITs with superior access to the capital markets, such as the Company. The Company has been a major participant in this real estate consolidation, having acquired apartment portfolios in each of the last three years and completing the Merger with South West on December 31, 1996. The Company expects to continue to participate in the consolidation process as an acquirer of other apartment portfolios and/or apartment REITs when such transactions are accretive to FFO earnings, can enhance dividend growth and shareholder value and can provide strategic and operational benefits. Development Consistent with the Company's acquisition strategy, apartment home development activity will be primarily focused in its major markets by investing in good site locations for new development and additions to existing apartment communities. The capability to develop provides the Company with added flexibility to grow in its existing major markets. During 1996, the Company completed the development of a second phase to an apartment community which added 60 apartment homes in Wilmington, North Carolina, and began developing a 360 apartment home community in Nashville, Tennessee. The Merger provides the Company with additional development capabilities as South West grew primarily through development during the last few years. During 1996, South West completed the development of three new apartment communities containing 1,194 apartment homes and the second phase to another apartment community containing 246 apartment homes. As a result of the development projects started by both companies during 1996, there were 1,580 apartment homes under construction, of which 105 were completed, at December 31, 1996. At December 31, 1996, the Company had $37.9 million of real estate under development with a total estimated costs to complete of approximately $102 million. The Company expects to fund in excess of $50 million on development activity during 1997 on these development projects. Existing Communities The Company seeks to achieve income growth from its portfolio of mature apartment communities by increasing rental revenues while maintaining occupancy and controlling operating expenses. During 1996, the Company's mature apartment communities (those communities acquired prior to January 1, 1995 and held throughout the annual reporting period) experienced strong rent and other income growth of 4.6% and 33%, respectively. Rental expenses at these mature communities increased 8.1% as the Company experienced pressure in many of its operating expense categories such as real estate taxes, insurance, salaries and wages, security, maintenance and weather related expenses. During 1996, the Company began the process of upgrading the interiors of its older apartment communities, primarily by modernizing the kitchens and bathrooms. The decision to upgrade the existing apartment portfolio is designed to enhance rent growth and add value to the apartment communities. This program which will take several years to complete, entails replacing or refurbishing appliances, light fixtures, floor coverings, cabinets, countertops and shelving. These improvements, which are considered revenue enhancing, contributed to the 4.6% rent growth at the mature apartment communities during 1996 and will continue to give these communities a competitive advantage in their respective markets. The Company also began several initiatives 5
in 1995 and 1996 that were designed to improve the property, grow occupancy, reduce turnover, increase rents and reduce expenses which include: (i) submetering of water and sewer to residents where local and state regulations allow the cost to be passed on to the resident, (ii) gating and fencing of apartment communities where feasible in order to control access into the communities and promote a sense of privacy, (iii) installing monitoring devices such as intrusion alarms or controlled access devices on the front doors of enclosed hallways, (iv) enlarging fitness centers and (v) adding business centers where computers, fax machines, copiers and meeting places are available to residents. The Company expects to fund approximately $400 per unit on revenue enhancing expenditures and $400 per unit on recurring capital expenditures during 1997 to improve the interiors and exteriors of the Company's apartment communities. Sales The Company continually assesses its real estate portfolio in order to make hold, upgrade or sell decisions on each of its apartment communities. The Company's strategy is to selectively sell certain apartment communities that no longer meet long term investment objectives that have been established for its apartment portfolio due to size, location, age or projected earnings potential. During 1996, the Company sold four apartment communities, four shopping centers, one industrial park and two parcels of undeveloped land for net cash proceeds of approximately $33.8 million. The sale of the five commercial properties furthers the Company's objective of disposing of its non-apartment portfolio. At December 31, 1996, the Company had six apartment communities, three shopping centers, three other commercial properties and one parcel of undeveloped land classified as "Real estate held for disposition" in its consolidated balance sheet aggregating $39.6 million, net of accumulated depreciation and valuation allowance. The Company hopes to dispose of these properties during the next twelve months. At December 31, 1996, commercial properties, primarily shopping centers, constituted the remaining 2% of the Company's real estate owned at cost. During 1996, 1995, and 1994, commercial properties provided 2%, 4%, and 7%, respectively, of the Company's rental income. The commercial portfolio has become a non-material portion of the Company's total portfolio and will be divested over time. Financing Strategies The Company is committed to maintaining a conservative capital structure. Prior to 1996, the Company generally managed its debt levels at or below 40% of total market capitalization (debt and equity). During 1996, the Company modestly increased the proportion of debt in its capital structure as interest rates were at historical lows. At December 31, 1996, total senior debt equaled 43% of the Company's total market capitalization (debt and equity) of $2.4 billion. The Company's senior debt is currently rated BBB+ by Standard & Poor's and Baal by Moody's. As a result of its investment grade debt ratings, the Company has used and expects to continue to use unsecured debt as its primary debt funding source. Depending on the volume and timing of acquisition and development activity during 1997, the Company anticipates raising additional debt and equity capital during the next twelve months. As a qualified REIT, the Company distributes a substantial portion of its cash flow to its shareholders in the form of distributions. Over the past several years, the Company has sought to retain a greater portion of its cash flow. During 1996, the Company's cash flow from operating activities exceeded cash distributions paid to common shareholders by approximately $26.4 million. The Company funds new acquisitions, development activity, property renovations, major capital improvements and balloon debt payments primarily through the private and public sale of capital stock and the issuance of medium and long-term unsecured notes payable. The Company has frequently utilized its bank lines of credit to temporarily finance these expenditures and has subsequently replaced the short-term bank debt with longer term debt or equity. In addition, the Company may also fund its capital requirements through (i) sales of properties, (ii) assumption of mortgage indebtedness, (iii) cash invested through the Company's dividend reinvestment and stock purchase plan, (iv) the issuance of operating partnership units and (v) retained cash flow. At December 31, 1996, the Company had the following credit facilities outstanding: (i) $70 million of revolving credit facilities with four commercial banks, (ii) $33.5 million of additional available lines of credit with three of its commercial banks, (iii) a $50 million interim credit facility with one of its commercial banks and (iv) a $75 million unsecured revolving credit facility assumed on December 31, 1996 in connection with the Merger which was repaid in January, 1997. At December 31, 1996, the Company had $125.3 million of borrowings outstanding under these credit facilities. The Company plans to increase its current bank credit facilities from $103.5 million to $250 million during 6
1997. Competition In most of the Company's markets, the competition for residents among properties is very intense. Some competing properties are larger and/or newer than the Company's properties and offer features for prospective residents not offered by properties owned by the Company. The competitive situation of each property varies and intensifies as additional properties are constructed. The Company expects to continue to aggressively acquire additional apartment properties within the Sunbelt during 1997. When it is in the market for new acquisitions, the Company competes with numerous other investors, including other REITs, individuals, partnerships, corporations, pension funds, insurance companies, foreign investors, and other real estate entities. Management believes that the Company, in general, is well positioned in terms of economic and other resources to compete effectively. Even though the Company has certain advantages over some of its competitors because of its substantial presence in the region and its access to capital, some competing investors are larger than the Company in terms of assets and other investment resources and may have a competitive advantage. Environmental Regulations To date, compliance with Federal, State, and local environmental protection regulations has not had a material effect upon the capital expenditures, earnings, or competitive position of the Company. However, over the past few years, there have been increasing concerns raised regarding the presence of asbestos and other hazardous materials in existing real estate properties. In response to this, on March 1, 1991, the Company adopted 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 by the Company and not previously inspected. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants and the report issued is reviewed by the Company prior to the purchase or development of any property. Nevertheless, it is possible that the Company's environmental assessments will not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. In some cases, the Company has abandoned otherwise economically attractive acquisitions because the costs of removal or control have been prohibitive and/or the Company has been unwilling to accept the potential risks involved. The Company does not believe it will be required to remediate any asbestos materials 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, the Company can minimize its exposure to potential liability associated with environmental hazards. The Company is not aware 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. The Company 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. The Company 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, or impose more stringent requirements on the Company, the costs of compliance with which could have a material adverse effect on the Company or its financial condition. To the best of its knowledge, the Company is in compliance with all applicable environmental rules and regulations. Operating Partnership - United Dominion Realty Trust, L.P. On October 23, 1995, the Company organized United Dominion Realty, L.P. (the "Partnership") under the Virginia Revised Uniform Limited Partnership Act, as amended (the "Partnership Act"). The Company is the sole General Partner of the Partnership and currently holds a 97% interest therein and 1% is currently held by UDRT of North Carolina, L.L.C., a wholly owned subsidiary of the Company. The remaining 2% is held by outside parties. In 1995, the Company acquired two apartment communities and land to develop an additional apartment community using the Partnership and transferred seven of its Tennessee properties into the Partnership. During 1996, the Company 7
issued approximatley 136,000 operating partnership units valued at approximately $2 million in connection with the acquisition of an apartment community. The Partnership is intended to assist the Company in competing for the acquisition of properties that meet the Company'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 is organized under a First Amended and Restated Agreement of Limited Partnership dated as of December 31, 1995 (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, which is filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Admission of Limited Partners; Investment Agreements The Company 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 the Company an Investment Agreement (the "Investment Agreement") and delivering to the Partnership the consideration prescribed therein. In the Investment Agreement, the prospective Limited Partner makes representations as to his status as an accredited investor and other representations and agreements regarding the Units, defined below, to be issued to him, intended to assure compliance with the Securities Act. Any rights to Securities Act registration of the Common Stock of the Company, if any, issued to such Limited Partner upon redemption of his Units (see "Redemption Rights" below), will also be set forth in the Investment 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 cash distributions from, and in the profits and losses of, the Partnership. Distributions by the Partnership are made equally for each Unit outstanding. As the Partnership's sole General Partner, the Company intends to make distributions per Unit in the same amount as the cash dividends paid by the Company on each share of Common Stock. However, because the Partnership properties, which are the primary source of cash available for distribution to Unit holders, are significantly fewer than the properties held directly by the Company 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 the Company to enable it to maintain its REIT status (see "Management and Operations" below) may deplete cash otherwise distributable to Unit holders. The Partnership may borrow from the Company for the purpose of equalizing per Unit and per Common share distributions, but neither the Partnership nor the Company 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 cannot be transferred by a holder unless they are so registered or an exemption from such registration is available. Neither the Partnership nor the Company 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 The Company, as the sole General Partner of the Partnership, has full, exclusive and complete responsibility and discretion in the management and control of the Partnership, and 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 the Company to satisfy the requirements for being classified as a REIT and to 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) sufficient to enable the Company to 8
pay distributions to its shareholders required to maintain its REIT status and avoid income tax or excise tax liability. Ability to Engage in Other Businesses; Conflicts of Interest The Company and other persons (including officers, directors, employees, agents and other affiliates of the Company) 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, and the Company 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 Company, 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 the Company 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, subject to certain possible exceptions, to 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 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 if the General Partner acted in good faith. 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 9
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 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. 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 may transfer his interest in the Partnership without the consent of the General Partner, unless in the opinion of counsel for the Partnership such transfer would require the registration of such interest under the Securities Act or would otherwise violate any applicable federal or state securities or blue sky law (including investment suitability standards) and unless such transfer would have undesirable federal income tax consequences for the Partnership. 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 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 the Company 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. 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 calender 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 and to the extent provided 10
in such Redeeming Partner's Investment 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 to 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, (iii) alter the Partnership's profit and loss allocations or (iv) impose any obligation upon the Limited Partners to make additional capital contributions to the Partnership shall require the consent of Limited Partners 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 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 the Company, 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 11
A separate capital account will be established and maintained for each Partner. 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 interest 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, 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. 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 require 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 effective 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 the Company received in connection with redemption of Units except as provided in their respective Investment Agreements. 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. Profit and loss of the Partnership generally will be allocated among the Partners in accordance with their respective interests in the Partnership based on the number of Units held by the Partners. Distributions The Partnership Agreement provides that the General Partner shall distribute cash quarterly, in amounts determined by the General Partner in its sole discretion, to the partners in accordance with their respective percentage interests in the Partnership, except that 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. 12
Item 2. Properties Real Estate Held for Investment The table below sets forth a summary by major geographic market of the Company's portfolio of apartment rental properties held for investment at December 31, 1996. See also Notes 1 and 2 to the Consolidated Financial Statements and Schedule III - - - Summary of Real Estate Owned. <TABLE> <CAPTION> Number of Number of Percentage of Apartment Apartment Apartment Real Estate Major Geographic Markets Communities Homes Homes at Cost - - ------------------------ ----------- --------- ------------ ------------ <S> <C> Dallas, Texas 20 7,223 13% $262,153,110 Richmond, Virginia 12 3,541 7% 103,180,360 Columbia, South Carolina 12 3,534 6% 112,548,555 Raleigh, North Carolina 10 2,936 5% 116,867,387 Orlando, Florida 10 2,981 5% 111,047,090 Tampa, Florida 9 2,639 5% 90,214,349 Charlotte, North Carolina 13 2,501 5% 87,154,000 Atlanta, Georgia 8 2,226 4% 82,713,902 Eastern, North Carolina 9 2,150 4% 72,348,771 Greensboro, North Carolina 9 2,122 4% 82,712,500 San Antonio, Texas 5 1,983 4% 87,150,000 Baltimore, Maryland 8 1,746 3% 76,507,947 Greenville/Spartanburg, South Carolina 8 1,718 3% 58,273,183 Nashville, Tennessee 6 1,520 3% 52,775,890 Washington, DC 6 1,483 3% 64,316,263 Hampton Roads, Virginia 6 1,428 3% 45,436,578 Jacksonville, Florida 3 1,157 2% 47,711,857 Ft. Lauderdale, Florida 4 960 2% 59,616,216 Memphis, Tennessee 4 935 2% 32,566,185 Phoenix, Arizona 3 712 1% 36,550,000 Houston, Texas 2 514 1% 12,250,000 Other Maryland 4 784 1% 32,912,724 Other Texas 5 1,341 3% 38,675,000 Other Florida 5 1,172 2% 40,381,088 Other North Carolina 4 1,052 2% 45,900,338 Other Virginia 6 988 2% 32,836,159 Delaware 2 368 0% 16,604,565 Other Georgia 2 468 1% 20,593,877 Other South Carolina 2 408 1% 12,511,511 Arkansas 2 512 1% 20,500,000 Nevada 1 384 1% 20,000,000 Oklahoma 1 316 0% 9,775,000 Alabama 2 382 1% 13,527,559 New Mexico 1 210 0% 9,300,000 --------- ------ ------ -------------- Total 204 54,394 100% $2,007,611,964 ========= ====== ====== ============== </TABLE> <TABLE> <CAPTION> Economic Average Monthly Rental Average Cost Occupancy Rates for the Year Ended Unit Size Major Geographic Markets Encumbrances per Unit Full Year 1996 December 31, 1996 * (Square Feet) - - ------------------------ ------------ --------- -------------- ------------------------- ------------- <S> <C> Dallas, Texas (d) $36,294 93.3% (a) $509 (a) 782 Richmond, Virginia $6,183,077 29,139 93.7% 520 944 Columbia, South Carolina 29,358,461 31,847 91.7% 484 860 Raleigh, North Carolina 11,800,000 39,805 98.2% 578 827 Orlando, Florida 27,700,000 37,252 91.8% 546 919 Tampa, Florida 8,103,979 34,185 92.8% 546 970 Charlotte, North Carolina 14,129,881 34,848 94.3% 560 828 Atlanta, Georgia 11,535,184 37,158 93.6% 554 949 Eastern, North Carolina 10,782,933 33,651 95.8% 508 790 Greensboro, North Carolina 14,323,909 38,979 90.2% 458 933 San Antonio, Texas (d) 43,949 89.1% (a) 512 (a) 847 Baltimore, Maryland 30,395,000 43,819 91.3% 636 865 Greenville/Spartanburg, South Carolina 20,416,000 33,919 90.9% 490 870 Nashville, Tennessee 5,183,402 34,721 93.9% 564 954 Washington, DC 11,357,182 43,369 89.0% 641 830 Hampton Roads, Virginia -- 31,818 91.0% 546 983 Jacksonville, Florida 22,454,958 41,238 92.3% 567 872 Ft. Lauderdale, Florida -- 62,100 91.3% 775 1,092 Memphis, Tennessee 5,805,000 34,830 93.1% 491 784 Phoenix, Arizona (d) 51,334 90.2% (a) 508 (a) 888 Houston, Texas (d) 23,833 87.3% (a) 462 (a) 686 Other Maryland -- 41,981 97.8% 602 935 Other Texas (d) 28,840 86.5% (a) 511 (a) 774 Other Florida 4,909,149 34,455 90.8% 536 810 Other North Carolina 23,493,161 43,632 88.6% (e) 889 Other Virginia 2,920,000 33,235 96.8% 529 848 Delaware -- 45,121 95.2% 591 893 Other Georgia 6,337,580 44,004 91.7% 625 1,140 Other South Carolina 2,200,000 30,665 84.6% 398 909 Arkansas 5,053,526 40,039 90.2% (a) 508 (a) 821 Nevada -- 52,083 (c) (c) 837 Oklahoma (d) 30,934 92.9% (a) 435 (a) 756 Alabama -- 35,412 87.4% 492 1,067 New Mexico (d) 44,286 89.8% (a) 575 (a) 729 ------------ ------- ---------- --------- ------ Total $369,310,458 $36,909 92.9% (b) $548 (b) 870 ============ ======= ========== ========= ====== </TABLE> At December 31, 1996, the Company had six apartment properties, three shopping centers, three other commercial properties and one parcel of undeveloped land classified in the consolidated balance sheet as real estate held for disposition in the amount of $39,556,055, net of accumulated depreciation in the amount of $14,617,873 and impairment loss valuation allowance in the amount of $290,000. These properties are not included in the above schedule. * Average Monthly Rental Rates for the Year Ended December 31, 1996, represents potential rent collections (gross potential rents less market adjustments), which approximates net effective rents. These amounts exclude the 1996 acquisitions. (a) These apartment communities were acquired on December 31, 1996 in connection with the statutory merger (the "Merger") with South West Property Trust Inc. ("South West") and as such, this information is presented for informational purposes only, as South West is not included in the Company's results of operations for the year ended December 31, 1996. (b) Excludes the South West apartment communities. (c) This community was under major rehabilitation by South West during 1996 and as such this information is excluded. (d) In connection with the Merger, the Company assumed $94,868,076 of REMIC Financings which encumber 27 of the apartment communities acquired. (e) These properties were acquired during 1996, and as such, this information is not available. 13
Item 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 10, 1996, the Company held a special meeting of shareholders. A total of 34,976,019 shares of common stock, representing 59% of the 58,754,315 shares outstanding and entitled to vote as of the record date (November 1, 1996) were represented in person or by proxy and constituted a quorum. At the meeting, the shareholders approved an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") among the Company, United Sub, Inc. ("Sub"), a wholly-owned subidiary of the Company and South West dated as of October 1, 1996 pursuant to which: (i) South West would merge with and into Sub; (ii) each outstanding shares of South West Common Stock $.01 par value, would be converted into the right to receive 1.0833 shares of the Company's Common Stock , $1.00 par value, with cash in lieu of the issuance of any fractional share interest, (iii) the Articles of Incorporation of the Company would be amended to increase the number of authorized shares of the Company from 100,000,000 shares to 150,000,000 shares; and (iv) the Board of Directors of the Company would increase from nine members to 13 members and four persons designated by South West would become members of the Board of Directors of the Company filling the vacancies created by the increase in the size of the Board. The Merger Agreement received 34,123,357 shares, representing 58.1% of the total number of shares entitled to vote at the meeting and 97.6% of the shares voted. Executive Officers of the Registrant The executive officers of the Company, listed below, serve in their respective capacities for approximate one year terms and are subject to re-election annually by the Board of Directors, normally in May of each year. <TABLE> <CAPTION> Name Age Office Since - - ---- --- ------ ----- <S> <C> John P. McCann 52 Chairman of the Board, 1974 President and Chief Executive Officer James Dolphin 47 Executive Vice President 1979 and Chief Financial Officer John S. Schneider 58 Vice-Chairman of the Board 1996 and Executive Vice President Barry M. Kornblau 47 Senior Vice President and 1991 Director of Apartment Operations/ Eastern Division Richard A. Giannotti 41 Senior Vice President and Director 1985 of Acquisitions and Development/ Eastern Division </TABLE> 14
<TABLE> <S> <C> Robert F. Sherman 54 Senior Vice President and 1996 Director of Apartment Operations/ Western Division David L. Johnston 52 Senior Vice President and Director 1996 of Acquisitions and Development/ Western Division Katheryn E. Surface 38 Vice President, Corporate Secretary 1992 and General Counsel Jerry A. Davis 34 Vice President and Corporate Controller 1989 </TABLE> Mr. McCann has been the Company's managing Chief Excecutive 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. Mr. Schneider was employed with the investment banking firm of Donaldson, Lufkin and Jenrette until from 1967 until 1973, when he cofounded a predecessor firm to South West. Mr. Schneider was elected Vice Chairman of the Board and Executive Vice President in 1996 in connction with the Merger. Mr. Dolphin was first employed by the Company in 1979 as Controller. He was elected Vice President of Finance in 1985 and has served as the Company's Chief Financial Officer since that time, Senior Vice President in 1987 and Executive Vice President in 1996. Mr. Kornblau joined the Company in 1991 as Senior Vice President and Director of Apartment Operations. Mr. Giannotti joined the Company 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. Mr. Sherman is the former President and Chief Operating Officer of South West. Mr. Sherman was in charge of South West's management division from 1973 until 1996. Mr. Sherman was elected Senior Vice President in 1996 in connection with the Merger. Mr. Johnston is the former Executive Vice President-Real Estate Investments of South West, a position he held since joining South West in 1992. From 1989 until 1992, Mr. Johnston was Senior Vice President of Property Company of America. Ms. Surface joined the Company in 1992 as Assistant Vice President and Legal Counsel and in 1994 was elected General Counsel, Corporate Secretary and Vice President. From 1986 to 1992, she was an attorney with the law firm of Hunton & Williams, the Company's outside counsel. Mr. Davis joined the Company in March, 1989 as Controller and was subsequently elected Assistant Secretary. In 1991 he was elected Vice President. He is a certified public accountant. 15
PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "UDR". The following table sets forth the quarterly high and low closing sale prices per share reported on the NYSE for each quarter of the last two years. Distribution information reflects distributions declared per share for each calender quarter and paid at the end of the following month. Distributions 1995 High Low Declared 1st Quarter $ 14 5/8 $ 13 $ .225 2nd Quarter 15 3/8 13 1/2 .225 3rd Quarter 15 13 1/2 .225 4th Quarter 15 13 1/4 .225 1996 1st Quarter $ 15 5/8 $ 14 1/8 $ .24 2nd Quarter 15 1/4 14 1/8 .24 3rd Quarter 14 1/2 13 1/8 .24 4th Quarter 15 3/4 13 5/8 .24 The Company determined that, for Federal income tax purposes, approximately 63.8% of the distributions for each of the four quarters of 1996 represented ordinary income to its shareholders, 30.7% represented return of capital to its shareholders and there were no capital gains to its shareholders. On March 14, 1997, the closing sale price of the Common Stock was $15.25 per share on the NYSE. On March 14, 1997, there were 6,898 holders of record of the 86,288,728 shares of Common Stock. The Company pays regular quarterly distributions to holders of shares of Common Stock. Future distributions by the Company will be at the discretion of its Board of Directors and will depend on the actual funds from operations of the Company, the Company's financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as the Board of Directors deems relevant. The annual distribution payment for calender year 1996 necessary for the Company to maintain its status as a REIT was approximately $.61 per share. The Company paid total distributions of $.945 per share for 1996. The Company 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 the Company's Common Stock. Item 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other information for the Company as of and for each of the years in the five year period ended December 31, 1996. 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. 16
SELECTED FINANCIAL DATA <TABLE> <CAPTION> Years ended December 31, 1996 1995 1994 1993 1992 - - ----------------------------------------------------------------------------------------------------------------------------------- In thousands, except per share data (a) and apartment homes owned <S> <C> Operating Data Rental income $242,112 $195,240 $139,972 $89,084 $63,202 Income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary item 33,726 28,037 19,118 11,286 6,577 Gains (losses) on sales of investments 4,346 5,090 108 (89) -- Extraordinary item - early extinguishment of debt (23) -- (89) -- (242) Net income 37,991 33,127 19,137 11,197 6,335 Dividends to preferred shareholders 9,713 6,637 -- -- -- Net income available to common shareholders 28,278 26,490 19,137 11,197 6,335 Common distributions declared 55,493 48,610 37,539 27,988 23,271 Weighted average number of common shares outstanding 57,482 52,781 46,182 38,202 34,604 Per share: Net income per common share $.49 $.50 $.41 $.29 $.18 Common distributions declared .96 .90 .78 .70 .66 - - ----------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data (b) Real estate held for investment $2,007,612 $1,131,098 $1,007,599 $582,213 $454,115 Real estate under development 37,855 -- -- -- -- Real estate held for disposition 39,556 51,015 -- -- -- Total real estate owned 2,085,023 1,182,113 1,007,599 582,213 454,115 Accumulated depreciation 173,291 129,454 120,341 91,444 71,806 Total assets 1,966,904 1,080,616 911,913 505,840 390,365 Secured notes payable 376,560 180,481 158,449 72,862 76,516 Unsecured notes payable 668,275 349,858 368,215 156,558 104,605 Total debt 1,044,835 530,339 526,664 229,420 181,121 Shareholders' equity 850,379 516,389 356,968 259,963 197,677 Number of common shares outstanding 81,983 56,375 50,356 41,653 35,285 - - ----------------------------------------------------------------------------------------------------------------------------------- Other Data: Cash Flow Data Cash provided by operating activities $90,064 $66,428 $54,544 $33,939 $24,608 Cash used in investing activities (161,572) (183,930) (359,631) (130,064) (81,373) Cash provided by financing activities 82,056 113,145 306,575 100,793 56,777 Funds from Operations (c) Income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary item $33,726 $28,037 $19,118 $11,286 $6,577 Adjustments: Real estate depreciation 47,410 38,939 28,729 19,516 15,557 Non-recurring items: Impairment loss on real estate held for disposition 290 1,700 -- -- -- Prior years' employment and other taxes (d) -- 395 -- -- -- Adoption of SFAS No. 112 "Employers' Accounting for Postemployment Benefits" -- -- 450 -- -- Provision for possible investment losses -- -- -- -- 1,564 Dividends to preferred shareholders (9,713) (6,637) -- -- -- ----------------------------------------------------- Funds from operations $71,713 $62,434 $48,297 $30,802 $23,698 ===================================================== Apartment Homes Owned Total apartment homes owned at December 31 55,664 34,224 29,282 17,914 13,832 Weighted average number of apartment homes owned during the year 37,481 31,242 23,160 15,445 11,387 </TABLE> (a) All share and per share information has been adjusted to give effect to a 2-for-1 stock split in May, 1993. (b) Effective at the close of business on December 31, 1996, South West Property Trust Inc. merged with and into a wholly-owned subsidiary of the Company (the "Merger"). The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. (c) Funds from operations ("FFO") is defined as income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary item (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 the recommendations set forth in a White Paper adopted by the National Association of Real Estate Investment Trusts ("NAREIT") in early 1995. FFO for years prior to 1995 have been adjusted to conform to the NAREIT definition. 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. (d) Prior years' payroll tax liability resulting from an Internal Revenue Service examination for the years 1993 and 1994. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company operates in 21 major markets dispersed throughout a 15 state area extending from Delaware to Nevada. At December 31, 1996, the Company did not own more than 13% of its apartment homes in any one market. The following table summarizes the Company's major apartment market information for real estate held for investment and excludes real estate held for disposition: <TABLE> <CAPTION> As of December 31,1996 Year Ended December 31,1996 ---------------------------------------------------------- --------------------------- Number of Number of Percentage of Average Monthly Apartment Apartment Apartment Cost Economic Rental Market Communities Homes Homes (In thousands) Occupancy** Rates* - - ------------------------------------------------------------------------------- ------------------------------ <S> <C> Dallas, TX 20 7,223 13% $262,153 93.3% (A) $509 (A) Richmond, VA 12 3,541 7% 103,180 93.7% 520 Columbia, SC 12 3,534 6% 112,549 91.7% 484 Raleigh, NC 10 2,936 5% 116,867 98.2% 578 Orlando, FL 10 2,981 5% 111,047 91.8% 546 Tampa, FL 9 2,639 5% 90,214 92.8% 546 Charlotte, NC 13 2,501 5% 87,154 94.3% 560 Atlanta, GA 8 2,226 4% 82,714 93.6% 554 Eastern NC 9 2,150 4% 72,349 95.8% 508 Greensboro, NC 9 2,122 4% 82,713 90.2% 458 San Antonio, TX 5 1,983 4% 87,150 89.1% (A) 512 (A) Baltimore, MD 8 1,746 3% 76,508 91.3% 636 Greenville, SC 8 1,718 3% 58,273 90.9% 490 Nashville, TN 6 1,520 3% 52,776 93.9% 564 Washington, DC 6 1,483 3% 64,316 89.0% 641 Hampton Roads, VA 6 1,428 3% 45,437 91.0% 546 Jacksonville, FL 3 1,157 2% 47,712 92.3% 567 Ft. Lauderdale, FL 4 960 2% 59,616 91.3% 775 Memphis, TN 4 935 2% 32,566 93.1% 491 Phoenix, AZ 3 712 1% 36,550 90.2% (A) 508 (A) Houston, TX 2 514 1% 12,250 87.3% (A) 462 (A) Other 37 8,385 15% 313,518 92.8% 543 ------------------------------------------------------- ----------------------- Total 204 54,394 100% $2,007,612 92.9% (B) $548 (B) ====================================================== ======================= </TABLE> (A) These apartment communities were acquired on December 31, 1996 in connection with the Merger and as such, this information is presented for informational purposes only, as South West is not included in the Company's results of operations for the year ended December 31, 1996. (B) Excludes the South West apartment communities. * Average Monthly Rental Rates for the Year Ended December 31, 1996, represents potential rent collections (gross potential rents less market adjustments), which approximates net effective rents. These figures exclude 1996 acquisitions. 18
** Economic Occupancy is defined as rental income (gross potential rent less vacancy loss, management units and credit loss) divided by potential collections (gross potential rent less management units) for the period, expressed as a percentage. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. 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 expected benefits of the Merger, 1997 property acquisitions, 1997 development activity and capital expenditures, 1997 capital raising activities, 1997 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 the Company to be materially different from the results of operations or plans expressed or implied by such forward-loo king statements. Such factors include, among other things, unanticipated adverse business developments affecting the Company, and/or its properties, adverse changes in the real estate markets and general and local economies and business conditions. Although the Company 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 acc1urate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. At December 31, 1996, the Company owned 210 apartment communities containing 55,664 completed apartment homes, including six apartment communities containing 1,270 apartment homes included in real estate held for disposition. During 1996, the Company acquired in separate transactions 7,712 apartment homes in 30 communities at an aggregate cost of approximately $321 million which includes a portfolio of 18 apartment communities (the "Carolina Portfolio") and 44 communities containing 14,320 completed apartment homes and 675 apartment homes under development included in the Merger with South West Property Trust Inc. ("South West") for an aggregate purchase price of approximately $572 million. Effective at the close of business on December 31, 1996, the Company purchased South West Property Trust Inc., in a statutory merger (the "Merger") for total consideration of approximately $572 million. The Merger has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Assets and liabilities acquired were recorded at their estimated fair values at December 31, 1996 and results of operations are included from the date of acquisition. Accordingly, the results of operations for South West are excluded from the Company's consolidated statements of operations for the year ended December 31, 1996. Prior to the Merger, the Company's investments had been concentrated in the Mid-Atlantic and Southeast, however, the Merger added four new major markets and expanded the Company's investment geography to include the entire Sunbelt. The Company expects to achieve additional benefits from the Merger through operating economies of scale, enhanced development capabilities, broadening of the Company's management team and increased investment opportunities due to the geographic expansion. Liquidity and Capital Resources As a qualified REIT, the Company distributes a substantial portion of its cash flow to its shareholders in the form of quarterly distributions. The Company seeks to retain sufficient cash to cover normal operating needs, including routine replacements and to help fund additional acquisitions and development activity. For the year ended December 31, 1996, the Company's cash flow from operating activities exceeded cash distributions paid to preferred and common shareholders by approximately $26.4 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. The Company has, from time to time, used derivative instruments to synthetically alter on-balance sheet liabilities or to hedge anticipated financing transactions. Derivative contracts did not have a material impact on results of operations during the years ended December 31, 1996 or 1995. At December 31, 1996, the Company's outstanding indebtedness totaled $1.0 billion with a weighted average interest rate of 7.4%. This amount includes (i) secured notes payable aggregating $376.6 million with a weighted average interest rate of 7.4%, (ii) unsecured notes payable aggregating $543.0 million with a weighted average interest rate of 7.6 % and (iii) short-term bank borrowings and credit facilities aggregating $125.3 million with a weighted average interest rate of 6.3%. At December 31, 1996, total senior debt equaled 43% of the Company's total market capitalization (debt and equity) of $2.4 billion. At the beginning of 1996, the Company had approximately $2.9 million of cash and cash equivalents and $85.1 million of available and unused bank lines of credit. 19
For the year ended December 31, 1996, the Company's cash flow from operating activities increased approximately $23.6 million over the same period last year. This increase was the direct result of the significant expansion of the Company's portfolio of apartment communities as discussed below and under "Results of Operations". During the year ended December 31, 1996, net cash used for investing activities was approximately $161.6 million. During 1996, the Company acquired in separate transactions 30 apartment communities containing 7,712 apartment homes for a total cost, net of debt and liabilities assumed and common stock issued of $137.2 million. In addition to these acquisitions, the Company funded $53.1 million of capital improvements to its properties and funded $9.2 million of development costs. The Company also received net cash proceeds of approximately $33.8 million from the sales of real estate held for disposition during 1996. Excluding communities that were acquired during 1994 and which were still undergoing rehabilitation in 1996, the remaining mature apartment homes (those communities acquired prior to January 1, 1995 and held throughout the annual reporting period) averaged $832 per unit in capital expenditures. This includes the following: carpet and tile replacements ($233 /unit), appliances ($95/unit), HVAC equipment ($58/unit), various interior improvements ($202/unit), various exterior improvements including new roofs ($134/unit), various land improvements including parking lots and site lighting ($89/unit) and various other improvements ($21/ unit). Some of these capital expenditures related to an upgrade program that began in 1996 to modernize the kitchens and bathrooms at certain of the Company's older apartment communities. These upgrades are believed to have enhanced rent growth in 1996. Net cash provided by financing activities during 1996 was approximately $82.1 million reflecting (i) the issuance of shares of common stock for an aggregate equity value of $15.0 million, primarily through the Company's dividend reinvestment and stock purchase plan, (ii) net proceeds from the issuance of unsecured notes payable in the amount of $200.1 million, (iii) net short-term bank borrowings of $37.8 million and (iv) net proceeds from the issuance of tax-exempt bonds totaling $5.9 million. These cash inflows were partially offset by (i) $63.7 million of cash distributions paid to common and preferred shareholders, (ii) scheduled mortgage principal payments of $2.7 million and (iii) and principal note repayments aggregating $112.7 million. In connection with the Merger, the Company acquired primarily real estate assets totaling $559.6 million. Consideration given by the Company included 22.8 million shares of the Company's common stock valued at $14.125 per share for all of the outstanding common stock of South West for an aggregate equity value of approximately $322.1 million. In addition, the Company assumed debt and other liabilities totaling $248.8 million, including the following: (i) a renegotiated unsecured line of credit with an investment bank in the amount of $69.1 million with a weighted average interest rate of 6.3%, (ii) an unsecured note payable in the amount of $55.9 million bearing interest of 7.0%, (iii) two REMIC financings aggregating $94.9 million with a weighted average interest rate of 7.76%, (iv) one mortgage note payable in the amount of $5.1 million bearing interest of 8.5% and (v) other liabilities aggregating $23.8 million. The renegotiated unsecured line of credit and the unsecured note were repaid in January, 1997. During 1996, the Company completed several significant financing activities. On July 9, 1996, the Company issued $125 million of ten year medium-term notes (MTN's) under its $200 million MTN program at an interest rate of 7.95%. Net proceeds of approximately $124.2 million were used to (i) curtail existing bank debt in the amount of $93.1 million, and (ii) repay a portion of a 9.57%, $35 million senior note that matured on July 15, 1996. In July, 1995, the Company executed a forward starting interest rate swap with a notional amount of $50 million which had the effect of fixing the interest rate on a 10-year Treasury starting July 15, 1996 at 6.544%. In anticipation of implementing the MTN program, the Company entered into a second interest rate hedge agreement for $75 million (notional amount) on June 28, 1996 which allowed the Company to lock-in a 10 year Treasury rate of 6.75%. The two interest rate hedge agreements were terminated simultaneously with the issuance of the MTN's and the Company received $3.0 million in cash which had the economic effect of reducing the interest rate on the MTN's issued to approximately 7.61% over the ten year term. On November 12, 1996, the Company issued the remaining $75 million of notes under its MTN program which consisted of $25 million of ten year notes at a 20
7.07% interest rate and $50 million of nine year notes at a 7.02% interest rate. Net proceeds of approximately $74.5 million were used to curtail existing bank debt of approximately $43.3 million, and to repay a $31.2 million variable-rate credit facility which had been assumed in connection with the Carolina Portfolio. On August 15, 1996, the Company acquired the Carolina Portfolio consisting of 18 apartment communities, located primarily in North Carolina and South Carolina, at an aggregate cost of $182.6 million, including closing costs. The Carolina Portfolio was financed with (i) borrowings under bank lines of credit of $25.1 million, (ii) the assumption of secured debt aggregating approximately $109.8 million, (iii) Seller financing of $25 million which subsequently was repaid on December 31, 1996, and (iv) the issuance of approximately 1.7 million shares of the Company's common stock valued at $22.7 million. The Company's strategy is to selectively sell certain apartment communities that no longer meet its long-term investment objectives due to size, location, age or unsatisfactory projected earnings growth, with the intent of reinvesting the proceeds in apartment acquisitions. During 1996, the Company sold four apartment communities, four shopping centers, one industrial park and two parcels of undeveloped land for an aggregate sales price of approximately $41 million. In connection with the sales, the Company recognized an aggregate $4.3 million financial reporting gain and received net cash proceeds of approximately $33.8 million. Included in the December 31, 1996 consolidated balance sheet as "Real estate held for disposition" are 12 properties in the aggregate amount of $39.6 million. The Company considers its cash provided by operating activities adequate to meet its operating requirements and payments of distributions to both common and preferred shareholders. During 1997, the Company expects to complete the following: (i) the acquisition of approximately 7,000 to 9,000 apartment homes for an aggregate purchase price ranging from $300 to $400 million, (ii) the development of additional phases to existing apartment communities and the completion of one apartment community which, in total, is estimated to cost in excess of $50 million and (iii) capital expenditures of approximately $400 per unit on revenue enhancing expenditures and $400 per unit on recurring capital expenditures. At December 31, 1996, the Company had 1,475 apartment homes under development as outlined below (dollars in thousands): <TABLE> <CAPTION> Construction Estimated Expected Completed Costs Construction Completion Property Location # Units Units to Date Total Cost Date - - ------------------------------------------------------------------------------------------------------------------------- <S> <C> Apartment Communities Providence Court Charlotte, NC 420 105 $ 22,047 $29,698 4Q `97 Dominion Franklin Nashville, TN 360 -- 2,567 22,090 4Q `98 ----------------------------------------------------- 780 105 24,614 51,788 Additional Phases England Run II Fredericksburg, VA 168 -- 1,901 10,830 2Q `97 Brantley Pines II Ft. Myers, FL 96 -- 3,384 6,668 2Q `97 Oak Park II Dallas, TX 80 -- 3,214 4,581 2Q `97 Oak Forest II Dallas, TX 260 -- 2,325 13,367 1Q `98 Steeplechase II Greensboro, NC 176 -- 1,223 11,705 2Q `97 Greenway Park II Phoenix, AZ 20 -- 441 2,612 4Q `97 Other -- 753 -- ------------------------------------------------------ 800 -- 13,241 49,763 ------------------------------------------------------ 1,580 105 $ 37,855 $ 101,551 ========================================================== </TABLE> The Company's liquidity and capital resources are believed to be more than adequate to meet its cash requirements for the next several years. The Company expects to meet its short- and long-term liquidity requirements, such as 21
balloon debt maturities, property acquisitions, development activity and significant capital improvements primarily through the public and private sale of capital stock and the issuance of medium and long-term unsecured notes payable. The Company may also fund its capital requirements through (i) the assumption of mortgage indebtedness, (ii) sales of properties, (iii) cash invested through the Company's Dividend Reinvestment and Stock Purchase Plan, (iv) retained operating cash flow and (v) the issuance of operating partnership units. The Company's senior debt is currently rated BBB+ by Standard & Poor's and Baa1 by Moody's. As a result of its investment grade debt ratings, the Company expects to use unsecured debt as its primary debt funding source. Depending upon the volume and timing of acquisition activity, the Company anticipates raising additional debt and equity capital during the next twelve months. In anticipation of the issuance of unsecured debt in early 1997, the Company entered into a $100 million (notional amount) Treasury rate lock agreement in November 1996. On January 27, 1997, the Company issued $125 million of 7.25% Notes due January 15, 2007 under its $462.5 million shelf registration statement. The Notes were priced to yield 7.31% which was 79 basis points over the 10 year Treasury at the time of issuance. The interest rate protection agreement was terminated simultaneously with the $125 million Note issuance and the Company received $1.5 million in cash. This had the economic effect of lowering the interest rate on the Notes to approximately 7.14%. Net proceeds of approximately $124 million were used to curtail bank line debt. On January 28, 1997, the Company issued 4,000,000 shares of its common stock at $15.75 per share for an aggregate value of approximately $63 million. Net proceeds of approximately $59.7 million were used to repay an unsecured credit facility assumed in connection with the Merger. The Company plans to increase its current bank lines of credit from $103.5 million to $250 million during the first half of 1997. 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 year ended December 31, 1996, FFO increased 14.9% to $71.7 million, compared with $62.4 million or for the same period last year. The increase in FFO was principally due to the increased net rental income from the Company's 12,914 non-mature apartment homes in 52 apartment communities (those acquired and developed subsequent to December 31, 1994 and four apartment communities sold during this same period, excluding those acquired in the Merger). During 1996, the Company employed more leverage than 1995 which resulted in a smaller increase in FFO over the same period last year. For the year ended December 31, 1995, FFO increased $14.1 million or 29.3% over the prior year principally due to the increased net rental income from the Company's then 16,308 non-mature apartment homes. 22
<TABLE> <CAPTION> Year Ended December 31, Year Ended December 31, (In thousands) (In thousands) (Unaudited) (Unaudited) ------------------------------------- -------------------------------------- 1996 1995 % Change 1995 1994 % Change -------------------------------------- --------------------------------------- <S> <C> Calculation of Funds from Operations: Income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary item $ 33,726 $ 28,037 20.3% $ 28,037 $ 19,118 46.7% Adjustments: Real estate depreciation 47,410 38,939 21.8% 38,939 28,729 35.5% Dividends to preferred shareholders (9,713) (6,637) 46.3% (6,637) Prior years' payroll tax liability -- 395 -- 395 -- -- Adoption of SFAS No. 112 "Employers' Accounting for Postemployment Benefits" -- -- -- -- 450 -- Impairment loss on real estate held for disposition 290 1,700 -- 1,700 -- -- -------------------------------------- ------------------------------------------ Funds from Operations $71,713 $ 62,434 14.9% $ 62,434 $ 48,297 29.3% ====================================== ========================================== </TABLE> Results of Operations The Company's net income 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 (i) mature--those communities acquired prior to January 1, 1995 and held throughout the annual reporting period and (ii) non-mature--those communities acquired and developed subsequent to December 31, 1994 plus four apartment communities sold during this same period. For the year ended December 31, 1996, the Company reported increases over the same period last year in rental income and income before gains (losses) on sales of investments and minority interest of unitholders in operating partnership and net income. Net income available to common shareholders increased $1.8 million, with a decrease of $.01 per share compared to 1995. Since the beginning of 1995, the Company acquired and developed a total of 12,914 apartment homes in 52 communities (excluding those acquired in the Merger) representing a 44.1% expansion in the number of apartment homes owned during that period. These non-mature apartment homes provided a substantial portion of the aggregate reported increases. All Communities The operating performance for the Company's 166 apartment communities containing 41,344 apartment homes (excluding those acquired in the Merger) and the 141 apartment communities containing 34,224 apartment homes for the years ended December 31, 1996 and 1995, respectively, is summarized as follows: <TABLE> <CAPTION> Year Ended December 31, Year Ended December 31, (In thousands) (In thousands) --------------------------------------- ---------------------------------------- 1996 1995 % Change 1995 1994 % Change ---------------------------------------- ---------------------------------------- <S> <C> Rental income $ 237,543 $ 188,021 26.3% $188,021 $ 130,692 43.9% Rental expenses (103,352) (80,274) 28.7% (80,274) (57,180) 40.4% Real estate depreciation (47,316) (36,929) 28.1% (36,929) (26,371) 40.0% --------------------------------------- ---------------------------------------- Net rental income (1) $ 86,875 $ 70,818 22.7% $ 70,818 $47,141 50.2% ======================================= ========================================= Weighted average number of apartment homes 37,481 31,242 20.0% 31,242 23,160 34.9% Economic occupancy (2) 92.9% 94.1% (1.2%) 94.1% 93.7% 0.4% </TABLE> 23
(1) Net rental income for an apartment community is defined as total rental income, less rental expenses, less depreciation expense. (2) Economic occupancy is defined as rental income (gross potential rent less vacancy loss, management units and credit loss) divided by potential collections (gross potential rent less management units) for the period, expressed as a percentage. 1996-vs-1995 Due to the acquisition and development of 12,914 apartment homes since January 1, 1995, the weighted average number of apartment homes increased 20% to 37,481 for the year ended December 31, 1996. As a result of the increase in the number of apartment homes acquired since January 1, 1995, the Company has experienced significant increases in rental income, rental expenses and real estate depreciation for the year ended December 31, 1996. The non-mature apartment homes (see discussion under "Non-Mature Communities") provided the majority of the increases in rental income, rental expenses and depreciation expense for the year ended December 31, 1996, however, higher average rents at the Company's mature communities also contributed to the increases in rental income. For the 41,344 apartment homes in the 166 apartment communities owned at December 31, 1996, economic occupancy averaged 92.9% and the operating expense ratio (ratio of rental expenses to rental income) averaged 43.5% during 1996. The major markets in which the Company operates experienced rent growth of 4.6% for the Company's mature apartment communities despite some declines in occupancy, primarily attributable to increased home buying. The Company's mature apartments experienced increases in most of the operating expense catagories compared to the same period last year (see discussion under "Mature Communities"). 1995-vs-1994 Due to the acquisition of 16,308 apartment homes (net of sales) since January 1, 1994, the weighted average number of apartment homes increased approximately 35% to 31,242 for the year ended December 31, 1995. As a result of the increase in the number of apartment homes acquired since January 1, 1994, the Company has experienced significant increases in rental income, rental expenses and real estate depreciation for the year ended December 31, 1995. The non-mature apartment homes provided the majority of the increases in rental income, rental expenses and depreciation expense for the year ended December 31, 1995, however, higher average rents at the Company's mature communities also contributed to the increases in rental income. For the 34,224 apartment homes in the 141 apartment communities owned at December 31, 1995, economic occupancy averaged 94.1% and the operating expense ratio (ratio of rental expenses to rental income) averaged 42.7% for the year ended December 31, 1995. For 1994, the 29,282 apartment homes then owned had economic occupancy of 93.7% and an expense ratio of 43.8% for that year. Mature Communities The operating performance for the Company's 114 mature apartment communities containing 28,430 apartment homes for the year ended December 31, 1996 and the 74 mature apartment communities containing 17,916 apartment homes for the year ended December 31, 1995 is summarized as follows: <TABLE> <CAPTION> Year Ended December 31, Year Ended December 31, (In thousands) (In thousands) -------------------------------------- ------------------------------------ 1996 1995 % Change 1995 1994 % Change --------------------------------------- ----------------------------------- <S> <C> Rental income $ 176,939 $ 169,969 4.1% $ 104,013 $ 99,094 4.9% Rental expenses (78,836) (72,915) 8.1% (45,110) (44,009) 2.5% Real estate depreciation (35,997) (33,796) 6.5% (21,354) (20,742) 3.0% --------------------------------------- ---------------------------------- Net rental income $ 62,106 $ 63,258 (1.8%) $ 37,549 $ 34,343 9.3% ======================================= =================================== Economic occupancy 92.8% 94.1% (1.3%) 94.8% 94.1% 0.7% Average monthly rental rates $ 540 $ 516 4.6% $ 499 $ 481 3.7% </TABLE> 24
1996-vs-1995 For the year ended December 31, 1996, the Company's mature communities provided approximately 74% of the Company's apartment rental income and 71% of its net rental income. Compared to the same period last year, total rental income from these apartment homes grew 4.1%, or $7 million, reflecting an increase in average monthly rents of 4.6% to $540 per month, or an increase of $8.1 million. In addition, other income, primarily fee income, increased $1.6 million or 33%. The rental rate increases were offset by a $2.7 million decrease attributable to a 1.3% decline in economic occupancy to 92.8%, which resulted from a decrease in physical occupancy of 1.0% and an increase in credit loss of .3%. The economic occupancy declined due to the weakening of certain major markets during the last half of the year including Richmond, Columbia, Greenville, Washington, DC and Hampton Roads. The Company attributes the market softness primarily to increased home buying. The Company expects to maintain rent growth in the 4% range and economic occupancy in the 92% range during 1997. For the year ended December 31, 1996 rental expenses at these communities increased 8.1%, or $ 5.9 million, resulting in an increase in the operating expense ratio (the ratio of rental expenses to rental income) of 1.7% to 44.6%. The increase in rental expenses is partly attributable to the severe winter of 1996 compared to the relatively mild winter of 1995. Of the $5.9 million increase, approximately $400,000 was weather related which included increases in gas, snow removal and repair labor expenses. During 1996, the Company's mature apartments experienced increases in most of its operating expense categories compared to the same period last year. Payroll and payroll-related expenses increased approximately $1.1 million or 7% due to several factors: (i) increased salaries and wages in 1996 as several positions were re-priced, (ii) tightening in the labor markets and (iii) overtime attributable to the upgrade process discussed below. Exterior painting and other exterior improvements, such as striping and sealcoating parking lots, accounted for almost $1.1 million of the increase. In addition, real estate taxes, security and water and sewer expenses have increased $232,000, $427,000 and $416,000, respectively, over the same period last year. For 1996, casualty insurance expense increased approximately $406,000 over the same period last year. Over the past several years, the Company experienced several large casualty insurance claims relating to hurricane and storm damage which resulted in a significant increase in insurance rates beginning with its July 1, 1996 policy year. The Company expects the rate of growth in rental expenses to moderate during 1997 partly due to the high base of 1996 expenses. However, the Company expects continuing pressure on certain expenses such as real estate taxes, insurance and water/sewer rates. In 1996, the Company began the process of upgrading certain of its older apartment communities in order to enhance rent growth over the long term. The upgrades relate primarily to the modernization of the kitchens and bathrooms with new appliances, cabinets, light fixtures, ceiling fans, shelving, countertops, doors and floor coverings. Although certain of these costs have been capitalized, a portion has been expensed. The process of upgrading has also contributed to higher turnover costs and an increase in repair labor costs. Turnover (measured by move-outs) for 1996, was 61.7% at the mature communities which is 4.8% higher than turnover last year. For the year ended December 31, 1996, depreciation expense increased $2.2 million or 6.5%, primarily as a result of capital expenditures. During 1996, the Company had significant capital expenditures on several apartment communities acquired during 1994. 1995 -vs- 1994 For 1995, the Company's mature communities provided approximately 55% of the Company's rental income. Total rental income from these apartment homes grew 4.9%, or $4.9 million in 1995, reflecting an increase in economic occupancy to 94.8% from 94.1% for 1994, and growth in average rents and other income of 4.4%. The improvement in occupancy reflected stronger apartment markets throughout the Company's region. Occupancy peaked in mid-1994 and remained above 95% through mid-1995 before trending downward slightly in the second half of the year. Rental expenses at these communities increased only 2.5%, or $1.1 million, resulting in an overall decrease in the operating expense ratio (the ratio of rental expenses to rental income) of 1.0% to 43.4%. The increase in rental 25
expenses reflected increased repairs, real estate taxes and exterior painting expenses. These increases were offset somewhat by lower gas, property management, and promotional expenses caused primarily by the combination of stronger occupancy and efficiencies of size. As a result of an Internal Revenue Service examination, property management expenses for the 1995 period include a $395,000 payment for employment and other taxes associated with employee occupied apartment homes for the 1993 and 1994 tax years. In 1995, the Company was able to internally manage its mature apartment communities at a cost of approximately 2.6% of rental income versus 3.4% in 1994. This reduction was achieved through economies of scale, as the Company acquired a significant number of apartment communities over the past two years without a corresponding increase in property management costs. Turnover (measured by move-outs) was 60% at the mature communities for 1995 versus 59% in 1994. For the year ended December 31, 1995, depreciation expense increased $612,000 or 3.0%, primarily as a result of capital expenditures during this period. Non-Mature Communities The operating performance for the year ended December 31, 1996 for the Company's 52 non-mature apartment communities which includes (i) the 12,914 apartment homes acquired and developed since January 1, 1995 and (ii) the seven apartment communities containing 919 apartment homes sold since December 31, 1994, and the Company's 67 non-mature communities containing 16,308 apartment homes in 1995 is summarized as follows: <TABLE> <CAPTION Year Ended December 31, Year Ended December 31, (In thousands) (In thousands) -------------------------------------- ---------------------------------------- 1996 1995 $ Change 1995 1994 $ Change -------------------------------------- ---------------------------------------- <S> <C> Rental income $ 60,604 $ 18,052 $ 42,552 $ 84,008 $ 31,598 $ 52,410 Rental expenses (24,516) (7,359) (17,157) (35,164) (13,171) (21,993) Real estate depreciation (11,319) (3,133) (8,186) (15,575) (5,629) (9,946) ---------------------------------------- ---------------------------------------- Net rental income $ 24,769 $ 7,560 $ 17,209 $ 33,269 $ 12,798 $ 20,471 ======================================== ======================================== </TABLE> 1996 -vs- 1995 For the year ended December 31, 1996, the Company's non-mature apartment communities provided approximately 26% of the Company's rental income and 29% of its net rental income. Rental income, rental expenses and real estate depreciation increased from 1995 to 1996 directly as a result of the increase in the number of apartment homes acquired during 1995 and 1996. For the 12,914 apartments in the 52 non-mature communities acquired and developed since January 1, 1995, average economic occupancy was 93.1% and the operating expense ratio was 40.5% during 1996. During 1996, these communities provided increases of $42.6 million, $17.2 million and $17.2 million, respectively, in rental income, rental expenses , and net rental income. For the year ended December 31, 1996 the 30 apartment communities containing 7,712 apartment homes which were acquired during 1996, provided rental income, rental expenses and net rental income of $27.1 million, $10.7 million and $11.6 million, respectively, and the 1995 acquisitions which consist of 42 apartment communities containing 5,142 apartment homes provided rental income, rental expenses and net rental income of $30.4 million, $12.3 million and $11.6 million, respectively. 1995-vs-1994 For the year ended December 31, 1995, the Company's non-mature apartment communities provided approximately 45% of the Company's apartment rental income and 47% of its net rental income. For the 16,308 apartments in the 67 non-mature communities acquired since January 1, 1994 (net of sales), average occupancy was 93.1% and the operating expense ratio was 41.9% during 1995. Rental income, rental expenses and real estate depreciation increased from 1994 to 1995 directly as a result of the increase in the number of apartment homes acquired during 1994 and 1995. These communities provided increases of $52.4 million, $22.0 million and $20.5 million, respectively, in rental income, rental expenses and net rental income. 26
Commercial Properties Rental income, rental expenses and real estate depreciation from commercial properties decreased $3.7 million, $762,000 and $2.9 million, respectively during the year ended 1996 compared to the same period last year. The decrease is directly attributable to the sale of eleven shopping centers and one industrial park since the beginning of 1995. For 1995, rental income, rental expenses and real estate depreciation from commercial properties decreased $1.8 million, $370,000 and $741,000, respectively since 1994, primarily due to the sales of eight shopping centers during 1995 and 1994. Interest Expense For 1996, interest expense increased $10.2 million or $.10 per common share over the same period last year. The weighted average amount of debt employed during 1996 was higher than it was in 1995 ($647 million in 1996 versus $512 million in 1995). The weighted average interest rate on this debt was slightly lower in 1996 decreasing from 7.9% in 1995 to 7.6%. The lower interest rate during 1996 reflected the fact that the weighted average interest rate on short-term bank borrowings decreased compared to last year and the Company's reliance on these lower rate short-term bank borrowings increased in 1996 compared to 1995 ($49.9 million weighted average outstanding in 1996 versus $8.2 million in 1995). The Company funded its 1996 acquisitions and development activity primarily with debt compared to 1995 when a combination of debt and equity was used. For 1995, interest expense increased approximately $12.1 million over 1994. The Company used both debt and equity to finance its growth over the past two years; however, the weighted average amount of debt employed was higher in 1995 than it was in 1994 ($512 million in 1995 versus $392 million in 1994). The $.15 per common share increase in interest expense reflected this higher average amount of outstanding debt in 1995 together with an increase in the weighted average interest rate on this debt from 7.3% in 1994 to 7.9% in 1995. The rate increase reflected the Company's increased reliance on lower rate short-term bank borrowings in 1994 than in 1995 ($33.8 million weighted average outstanding in 1994 versus $8.2 million in 1995). General and Administrative During 1996, general and administrative expenses increased by $553,000 over the same period last year. In 1996, the Company incurred increases in most of its general and administrative expense categories. The largest increases occurred in payroll expenses, investor relations expenses and office rent which are directly related to the higher administrative costs associated with increasing the size of the Company, however, general and administrative expense as a percentage of rental revenues has remained relatively flat compared to last year. General and administrative expenses were relatively flat in 1995, increasing by only $62,000 over 1994. General and administrative expense for 1994 included a $450,000 charge related to the adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits". In 1995, the Company incurred increases in most of its general and administrative expense categories with the largest percentage increase attributable to costs related to abandoned acquisitions, including $204,000 associated with an unsuccessful business combination with another apartment company. Gains on Sales of Investments During 1996, the Company recognized gains for financial reporting purposes aggregating $4.3 million on the sale of four apartment communities, four shopping centers, one industrial park and two parcels of undeveloped land. Seven of the sales were structured to qualify as tax deferred exchanges which enabled the Company to defer approximately $7.8 million of capital gains for income tax purposes. During 1995, the Company sold seven shopping centers and two apartment communities and recognized gains for financial reporting purposes totaling $5.1 million. Four of the shopping centers were sold to First Washington Realty Trust, Inc. on June 30, 1995. In connection with the sales, the Company received cash and 358,000 shares of First Washington's 9.75% Series A Cumulative Participating Convertible Preferred Stock having a fair value of $7.7 million on the date of sale. Five of the shopping center sales during the year were structured to qualify as tax deferred exchanges which enabled the Company to defer approximately $4.5 million of capital gains for income tax purposes. The 27
Company also sold two apartment communities, both of which were acquired as part of the Clover Portfolio in 1994. No significant book gain or loss was recognized on the sale of either property. The Company recorded a $1.7 million impairment loss in 1995 associated with management's decision to sell a shopping center at a discount as part of a portfolio transaction. Inflation The Company believes that the direct effects of inflation on the Company's operations have been inconsequential. 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedule on page F-1 of this Annual Report on Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29
Part III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 6, 1997. Information required by this item regarding the executive officers of the Company is included in Part I of this Annual Report on Form 10-K in the section entitled "Executive Officers of the Registrant". Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 6, 1997. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 6, 1997. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders to be held on May 6, 1997. 30
PART IV 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 F-1 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. <TABLE> <CAPTION> Exhibit Description Location - - ------- ----------- -------- <S> <C> 2(a) Agreement of Purchase and Sale dated Exhibit 2 to the Company's Current Report on Form July 1, 1996 8-K dated August 15, 1996. 2(b) Definitive Agreement and Plan of Exhibit 2(b) to the Company's Form S-4 Registration Merger dated as of October 1, 1996, Statement (Registration No. 333-13745) filed with the between the Company, United Sub, Commission on October 9, 1996. Inc. and South West Property Trust Inc. 3(a) Restated Articles of Incorporation Exhibit 4(i)(c) to the Company's Form S-3 Registration Statement (Registration No. 33-64275) 3(a)(i) Amended and Restated Articles of Exibit 6(a)(4) to the Company's Form 8-A Incorporation Registration Statements dated April 19, 1990 and April 24, 1995. 3(b) Restated By-Laws Filed herewith. 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(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 31
one or more separate accounts, Insurance Company of North America, Principal Mutual Life Insurance Company and Aid Association for Lutherans 4(ii)(f) Credit Agreement dated as of Exhibit 6 (c)(6) to the Company's December 15, 1994 between the Form 8-A Registration Statement Company and First Union National Bank dated April 19, 1990. of Virginia 4(ii)(g)(1) Indenture dated as of April 1, 1994, Exhibit 4(ii)(f)(1) to between the Company and First Union the Company's Quarterly National Bank of Virginia, Report on Form 10-Q for as Trustee. the quarter ended March 31, 1994. 4(ii)(g)(2) Resolution of the Board of Directors Exhibit 4(ii)(f)(2) to the Company's of the Company establishing terms of Quarterly Report on Form 10-Q for 7 1/4% Notes due April 1, 1999 the quarter ended March 31, 1994. 4(ii)(g)(3) Form of 7 1/4% Notes due April 1, Exhibit 4(ii)(f)(3) to the Company's 1999 Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. 4(ii)(g)(4) Resolution of the Board of Directors Exhibit 4 (ii)(f)(4) to the Company's of the Company establishing terms of Quarterly Report on Form 10-Q for the 8 1/2% Debentures due quarter ended September 30, 1994. September 15, 2024 4(ii)(g)(5) Form of 8 1/2% Debentures Exhibit 4 (ii)(f)(5) to the Company's due September 15, 2024 Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 4(ii)(h)(1) Indenture dated November 1, Exhibit 4(ii)(h)(1) to the Company's 1995, between the Company Quarterly Report on Form 10-Q for And First Union National Bank the quarter ended June 30, 1996. of Virginia, as Trustee 4(ii)(h)(2) Resolution of the Board of Directors Exhibit 4(ii)(h)(2) to the Company's of the Company establishing the terms Quarterly Report on Form 10-Q for of the Medium-Term Notes Due Nine the quarter ended June 30, 1996. Months or More from Date of Issue 4(ii)(h)(3) Form of Medium-Term Exhibit 4(ii)(h)(3) to the Company's Notes Due Nine Months or More Quarterly Report on Form 10-Q for from the Date of Issue the quarter ended June 30, 1996. 4(ii)(h)(4) Resolution of the Board of Directors Filed herewith. of the Company establishing the terms of 7 1/4% Notes Due January 15, 2007 32
</TABLE> <TABLE> <S> <C> 4(ii)(h)(5) Form of 7 1/4% Notes due January 15, 2007 Filed herewith. </TABLE> The Company agrees to furnish to the Commission on request a copy of any instrument with respect to long-term debt of the Company or its subsidiaries the total amount of securities authorized under which does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. <TABLE> <S> <C> 10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report on the Company and John P. McCann Form 10-K for the year ended December 31, 1982. dated October 29, 1982 10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Comapny's Annual Report on the Company and James Dolphin Form 10-K for the year ended December 31, 1982. dated October 29, 1982. 10(iii) Employment Agreement between Exhibit 10(iii) to the Company's Annual The Company and Barry M. Kornblau, Report on Form 10-K for the year December dated February 1, 1991. 31, 1990. 10(iv) Employment Agreement between Filed herewith. the Company and John S. Schneider dated December 14, 1996 10(v) Employment Agreement between Filed herewith. the Company and Robert F. Sherman dated December 19, 1996 10(vi) Employment Agreement between Filed herewith. the Company and David L. Johnston dated December 19, 1996. 10(vii) 1985 Stock Option Plan, Exhibit A to the Company's definitive proxy as amended. statement dated March 28, 1996. 10(vii) 1991 Stock Purchase and Loan Exhibit 10(v) to the Company's Annual Report on Plan. Form 10-K for the year ended December 31, 1991. 10(ix) Amended and Restated Agreement Exhibit 10(vi) to the Company's Annual Report on of Limited Partnership of Form 10-K for the year ended December 31, 1995. United Dominion Realty, L.P. Dated as of December 31, 1995 10(x) Underwriting Agreement dated Filed herewith. January 22, 1997, between the Company And Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Scott and Stringfellow relating to 4,000,000 shares of Common Stock. 33
</TABLE> <TABLE> <S> <C> 10(xi) Underwriting Agreement dated January Filed herewith. 22, 1997, between the Company and Goldman Sachs & Co., J.P. Morgan Securities Inc. And NationsBanc Capital Markets, Inc. relating to $125 Million 7 1/4% Notes due January 15, 2007. 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges 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 97.9% of the aggregate partnership interest. The Commons of Columbia, a Virginia corporation UDRT of North Carolina, L.L.C., a North Carolina limited liability company UDRT of Alabama, Inc., an Alabama corporation UDR of Marble Hill, L.L.C., a Virginia limited liability company United Dominion Realty, L.P., a Virginia limited partnership United Dominion Residential, Inc., a Virginia corporation UDRT of Virginia, Inc., a Virginia corporation United Dominion, Sub, Inc., a Virginia corporation UDR Western Residential, Inc., a Virginia corporation UDR South Carolina Trust, a Maryland business trust Cleary Court Property Owner's Association, Inc., a Florida non-profit corporation SWP Properties, Inc., a Texas corporation SWP Properties I, L.P., a Delaware limited partnership SWP Woodscape Properties, Inc., a Texas corporation SWP Woodscape Properties I, L.P., a Delaware limited partnership SWP Creeks Properties, Inc., a Texas corporation SWP Creeks Properties, I, L.P., a Delaware limited partnership SWP REMIC Properties II, Inc., a Texas corporation SWP REMIC properties II-A, L.P., a Delaware limited partnership South West Properties, L.P., a Delaware limited partnership SWP Arkansas Properties, Inc., an Arknasas corporation South West Property Apartments, L.P., a Delaware limited partnership MF-SWP Joint Venture, a Texas joint venture High Ridge Investment Partners Joint Venture, a Texas joint venture SWP Depositor, Inc., a Texas corporation SWP Developers, Inc., a Texas corporation SRL Amarillo Investors, Inc., a Texas corporation SWPT II Arizona Properties, Inc., an Arizona corporation South West REIT Holding, Inc., a Texas corporation </TABLE> 23 Consent of Independent Filed herewith. Auditors Exhibits 10(i) through 10(viii) 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 (i) A Form 8-K dated October 1, 1996 was filed with the Securities and Exchange 34
Commission on October 4, 1996. The filing reported the Agreement and Plan of Merger dated as of October 1, 1996 between the Company, United Dominion Sub, Inc., a wholly-owned subsidiary of the Company, and South West Property Trust Inc. (ii) A Form 8-K dated October 31, 1996 was filed with the Securities and Exchange Commission on November 14, 1996. The filing reported the acquisition of two apartment communities which in the aggregate were deemed to be significant. The financial statements filed as part of this report are the statements of rental operations of Westland Park Apartments and Steeplechase Apartments. (iii) A Form 8-K dated December 31, 1996 was filed with the Securities and Exchange Commission on January 15, 1997. The filing reported the acquisition by the Company of South West Property Trust Inc. effective at the close of business on December 31, 1996. This Form 8-K was amended by a Form 8-K/A filed March 17, 1997. The financial statements filed as part of this report were the consolidated financial statements and notes thereto of South West Property Trust Inc. for the year ended December 31, 1996 (iv) A Form 8-K dated January 21, 1997 was filed with the Securities and Exchange Commission on January 21, 1997. The filing reported the pro forma results of the Company for the nine months ended September 30, 1996 and the year ended December 31, 1995. 35
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 Company, Inc. (registrant) By /s/ James Dolphin ----------------------- James Dolphin Executive Vice President and Chief Financial Officer March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 1997 by the following persons on behalf of the registrant and in the capacities indicated. /s/ John P. McCann - - ---------------------------- --------------------------- John P. McCann R. Toms Dalton, Jr. Chariman of the Board, President and Chief Director Executive Officer /s/ James Dolphin /s/ Jeff C. Bane - - ----------------------------- --------------------------- James Dolphin Jeff C. Bane Director, Executive Vice President, Director and Chief Financial Officer /s/ Jerry A. Davis - - ------------------------------ --------------------------- Jerry A. Davis John C. Lanford Vice President, Controller-Corporate Director Accounting and Chief Accounting Officer /s/ C. Harmon Williams, Jr. /s/ H. Franklin Minor - - ------------------------------ --------------------------- C. Harmon Williams, Jr. H. Franklin Minor Director Director /s/ Barry M. Kornblau - - ------------------------------ --------------------------- Barry M. Kornblau Ira T. Wender Director, Senior Vice President and Director Director of Apartments/Eastern Division /s/John S. Schneider - - ------------------------------- --------------------------- John S. Schneider Lynne Sagalyn Director, Vice Chairman of the Board and Director Executive Vice President - - ------------------------------- --------------------------- Mark J. Sandler Robert W. Scharar Director Director 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE UNITED DOMINION REALTY TRUST, INC. <TABLE> <CAPTION> Page ---- <S> <C> FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT Report of Ernst & Young LLP, Independent Auditors F-2 Consolidated Balance Sheets at December 31, 1996 F-3 and 1994 Consolidated Statements of Operations for each of F-4 the three years in the period ended December 31, 1996 Consolidated Statements of Cash Flows for each of F-5 the three years in the period ended December 31, 1996 Consolidated Statements of Shareholders' Equity for F-6 each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements F-7 SCHEDULE FILED AS PART OF THIS REPORT Schedule III - Summary of Real Estate Owned F-23 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. F-1
Report of Ernst & Young LLP, 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. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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 estimates 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. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related 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. As discussed in Note 1 to the consolidated financial statements, in 1995 the Company changed its method of accounting for impairment of long-lived assets and long-lived assets held for disposition. Ernst & Young LLP Richmond, Virginia March 5, 1997 F-2
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except for share data) December 31, December 31, 1996 1995 ----------- ------------ Assets Real estate owned: Real estate held for investment (Notes 2 and 3) $2,007,612 $1,131,098 Less: accumulated depreciation 173,291 129,454 --------- ---------- 1,834,321 1,001,664 Real estate under development 37,855 -- Real estate held for disposition (Notes 1 and 2) 39,556 51,015 Cash and cash equivalents 13,452 2,904 Other assets 41,720 25,053 -------- ---------- Total assets $1,966,904 $1,080,616 ========= ========== Liabilities and shareholders' equity Notes payable-secured (Note 4) $ 376,560 $ 180,481 Notes payable-unsecured (Note 5) 668,275 349,858 Distributions payable to common shareholders 19,699 12,695 Accounts payable, accrued expenses and other liabilities 49,962 21,193 --------- -------- Total liabilities 1,114,496 564,227 Minority interest of unitholders in operating partnership 2,029 -- Shareholders' equity (Notes 9 and 10): Preferred stock, no par value; 25,000,000 shares authorized: 9 1/4% Series A Cumulative Redeemable Preferred Stock (liquidation preference of $25 per share), 4,200,000 shares issued and outstanding 105,000 105,000 Common stock, $1 par value; 150,000,000 shares authorized 81,982,551 shares issued and outstanding (56,375,333 in 1995) 81,983 56,375 Additional paid-in-capital 814,795 480,971 Notes receivable from officer-shareholders (5,926) (6,091) Distributions in excess of net income (147,529) (120,314) Unrealized gain on securities available- for-sale 2,056 448 -------- ------- Total shareholders' equity 850,379 516,389 -------- ------- Total liabilities and shareholders' equity $ 1,966,904 $1,080,616 =========== ========== See accompanying notes. F-3
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) </TABLE> <TABLE> <CAPTION> Years ended December 31, 1996 1995 1994 - - ---------------------------------------------------------------------------------------------------- <S> <C> Revenues Rental income $242,112 $195,240 $139,972 Interest, dividend and other non-property income 1,707 1,692 756 -------- --------- -------- 243,819 196,932 140,728 Expenses Rental expenses: Utilities 17,735 14,464 11,206 Repairs and maintenance 40,665 30,374 21,216 Real estate taxes 17,348 14,058 9,658 Property management 5,575 5,300 4,645 Other operating expenses 23,510 17,446 12,141 Depreciation of real estate owned 47,410 38,939 28,729 Interest 50,843 40,646 28,521 General and administrative 5,418 4,865 4,803 Other depreciation and amortization 1,299 1,103 691 Impairment loss on real estate held for disposition 290 1,700 -- -------- -------- -------- 210,093 168,895 121,610 -------- -------- -------- Income before gains on sales of investments, minority interest of unitholders in operating partnership and extraordinary item 33,726 28,037 19,118 Gains on sales of investments 4,346 5,090 108 -------- -------- -------- Income before minority interest of unitholders in operating partnership and extraordinary item 38,072 33,127 19,226 Minority interest of unitholders in operating partnership (58) -- -- -------- -------- -------- Income before extraordinary item 38,014 33,127 19,226 Extraordinary item-early extinguishment of debt (23) -- (89) -------- -------- -------- Net income 37,991 33,127 19,137 Dividends to preferred shareholders (9,713) (6,637) -- -------- -------- -------- Net income available to common shareholders $28,278 $26,490 $19,137 ======== ======== ======== Net income per common share $.49 $.50 $.41 ======== ======== ======== Weighted average number of common shares outstanding 57,482 52,781 46,182 </TABLE> See accompanying notes. F-4
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Years ended December 31, 1996 1995 1994 - - ------------------------- -------- ------ ----- <S> <C> Operating Activities Net income $ 37,991 $ 33,127 $ 19,137 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 48,709 40,042 29,644 Minority interest of unitholders in operating partnership 58 Extraordinary item-early extinguishment of debt 23 -- 89 Impairment loss on real estate held for disposition 290 1,700 Gains on sales of investments (4,346) (5,090) (108) Adoption of SFAS No. 112 "Employers' Accounting for Postemployment Benefits" -- -- 450 Changes in operating assets and liabilities: Increase in operating liabilities 8,899 763 6,680 Increase in operating assets (1,560) (4,114) (1,348) ----------- --------- -------- Net cash provided by operating activities 90,064 66,428 54,544 Investing Activities Acquisition of real estate, net of debt and liabilities assumed (137,236) (173,937) (346,730) Capital expenditures (53,087) (35,613) (19,154) Development of real estate assets (9,229) -- -- Net proceeds from sales of investments 33,823 23,464 2,706 Proceeds from interest rate hedge transaction 3,025 -- 3,484 Net cash acquired in the acquisition of South West Property Trust Inc. 1,129 -- -- Net decrease in mortgage notes receivable 3 2,156 63 ----------- --------- -------- Net cash used in investing activities (161,572) (183,930) (359,631) Financing Activities Net proceeds from the issuance of common stock 15,012 79,615 115,407 Net proceeds from the issuance of preferred stock -- 101,478 -- Net proceeds from the issuance of unsecured notes payable 200,111 10,000 250,000 Net proceeds from the issuance of secured notes payable 5,925 21,927 15,504 Net borrowings (repayments) of short-term bank borrowings 37,800 4,250 (14,500) Cash distributions paid to preferred shareholders (9,713) (4,613) -- Cash distributions paid to common shareholders (53,979) (45,737) (35,005) Scheduled mortgage principal payments (2,729) (1,932) (1,455) Mortgage financing proceeds released from construction funds 3,627 2,457 24,866 Payments on unsecured notes (72,064) (32,259) (27,230) Non-scheduled payments on secured notes payable (40,628) (21,463) (17,514) Payment of financing costs (1,306) (578) (3,498) ----------- --------- -------- Net cash provided by financing activities 82,056 113,145 306,575 ----------- --------- -------- Net increase (decrease) in cash and cash equivalents 10,548 (4,357) 1,488 Cash and cash equivalents, beginning of year 2,904 7,261 5,773 ----------- --------- -------- Cash and cash equivalents, end of year $ 13,452 $ 2,904 $ 7,261 =========== ========= ======== Supplemental information: Interest paid during the year $ 48,500 $ 39,568 $ 22,944 Non-cash transcations associated with the Merger of South West Property Trust Inc.: Real estate assets acquired 559,591 -- -- Issuance of common stock 322,110 -- -- Secured debt assumed 99,921 -- -- Unsecured debt assumed 125,035 Operating liabilities assumed 23,805 -- -- Non-cash transactions associated with the acquisition of properties: Issuance of common stock 22,739 -- Secured debt assumed 137,988 24,137 60,336 Unsecured seller financing 25,000 -- -- Issuance of operating partnership units 2,006 -- -- </TABLE> See accompanying notes. F-5
UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands, except share and per share amounts) <TABLE> <CAPTION> Common Stock, $1 Par Value Preferred Stock Number Number Years ended December 31, 1996, 1995 and 1994 of Shares Amount of Shares Amount - - ------------------------------------------------- ------------------------------------------------------------ <S> <C> Balance at December 31, 1993 41,653,097 $41,653 - - Common shares issued in public offering 8,479,400 8,479 - - Exercise of share options 50,488 51 - - Common shares purchased by officers, net of repayments 137,500 138 - - Common shares issued through dividend reinvestment plan 35,155 35 - - Net income - - - - Common stock distributions declared ($.78 per share) - - - - ---------------------------------------------------------- Balance at December 31, 1994 50,355,640 50,356 - - Common shares issued in direct institutional sale 1,360,000 1,360 - - Preferred shares issued in public offering - - 4,200,000 $105,000 Common shares issued in public offering 4,550,000 4,550 - - Exercise of share options 98,536 98 - - Common shares purchased by officers, net of repayments 10,000 10 - - Common shares issued through employee stock purchase plan 1,157 1 - - Net income - - - - Preferred stock distributions declared ($1.58 per share) - - - - Common stock distributions declared ($.90 per share) - - - - Unrealized gain on securities available-for-sale - - - - ---------------------------------------------------------- Balance at December 31, 1995 56,375,333 56,375 4,200,000 105,000 Common shares issued in connection with South West Property Trust Inc. Merger 22,804,246 22,804 - - Common shares issued in private placement 1,679,840 1,680 - - Exercise of share options 148,220 148 - - Common shares purchased by officers, net of repayments - - - - Common shares issued through dividend reinvestment plan 970,718 972 - - Common shares issued through employee stock purchase plan 4,194 4 - - Net income - - - - Preferred stock distributions declared ($2.31 per share) - - - - Common stock distributions declared ($.96 per share) - - - - Unrealized gain on securities available-for-sale - - - - ---------------------------------------------------------- Balance at December 31, 1996 81,982,551 $81,983 4,200,000 $105,000 =========================================================== </TABLE> <TABLE> <CAPTION> Unrealized Gain on Additional Receivable Distributions Securities Paid-in from Officer in Excess of Available- Years ended December 31, 1996, 1995 and 1994 Capital Shareholders Net Income for-Sale - - ------------------------------------------------- ------------------------------------------------------------------- <S> <C> Balance at December 31, 1993 $302,486 $(4,384) $(79,792) - Common shares issued in public offering 105,731 - - - Exercise of share options 456 - - - Common shares purchased by officers, net of repayments 1,652 (1,607) - - Common shares issued through dividend reinvestment plan 472 - - - Net income - - 19,137 - Common stock distributions declared ($.78 per share) - - (37,539) - ------------------------------------------------------------------- Balance at December 31, 1994 410,797 (5,991) (98,194) - Common shares issued in direct institutional sale 16,452 - - - Preferred shares issued in public offering (3,522) - - - Common shares issued in public offering 56,376 - - - Exercise of share options 717 - - - Common shares purchased by officers, net of repayments 136 (100) - - Common shares issued through employee stock purchase plan 15 - - - Net income - - 33,127 - Preferred stock distributions declared ($1.58 per share) - - (6,637) - Common stock distributions declared ($.90 per share) - - (48,610) - Unrealized gain on securities available-for-sale - - - $ 448 ------------------------------------------------------------------- Balance at December 31, 1995 480,971 (6,091) (120,314) 448 Common shares issued in connection with South West Property Trust Inc. Merger 299,109 - - - Common shares issued in private placement 21,059 - - - Exercise of share options 1,382 - - - Common shares purchased by officers, net of repayments - 165 - - Common shares issued through dividend reinvestment plan 12,216 - - - Common shares issued through employee stock purchase plan 58 - - - Net income - - 37,991 - Preferred stock distributions declared ($2.31 per share) - - (9,713) - Common stock distributions declared ($.96 per share) - - (55,493) - Unrealized gain on securities available-for-sale - - - 1,608 ------------------------------------------------------------------- Balance at December 31, 1996 $814,795 ($5,926) ($147,529) $2,056 =================================================================== </TABLE> <TABLE> <CAPTION> Total Shareholders' Years ended December 31, 1996, 1995 and 1994 Equity - - ------------------------------------------------- -------------------- <S> <C> Balance at December 31, 1993 $259,963 Common shares issued in public offering 114,210 Exercise of share options 507 Common shares purchased by officers, net of repayments 183 Common shares issued through dividend reinvestment plan 507 Net income 19,137 Common stock distributions declared ($.78 per share) (37,539) -------------------- Balance at December 31, 1994 356,968 Common shares issued in direct institutional sale 17,812 Preferred shares issued in public offering 101,478 Common shares issued in public offering 60,926 Exercise of share options 815 Common shares purchased by officers, net of repayments 46 Common shares issued through employee stock purchase plan 16 Net income 33,127 Preferred stock distributions declared ($1.58 per share) (6,637) Common stock distributions declared ($.90 per share) (48,610) Unrealized gain on securities available-for-sale 448 -------------------- Balance at December 31, 1995 516,389 Common shares issued in connection with South West Property Trust Inc. Merger 321,913 Common shares issued in private placement 22,739 Exercise of share options 1,530 Common shares purchased by officers, net of repayments 165 Common shares issued through dividend reinvestment plan 13,188 Common shares issued through employee stock purchase plan 62 Net income 37,991 Preferred stock distributions declared ($2.31 per share) (9,713) Common stock distributions declared ($.96 per share) (55,493) Unrealized gain on securities available-for-sale 1,608 -------------------- Balance at December 31, 1996 $850,379 ==================== </TABLE> See accompanying notes. F-6
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Organization United Dominion Realty Trust, Inc. (together with its subsidiaries, the "Company"), a Virginia corporation, was formed in 1972. The Company is a fully integrated real estate company that owns and operates income producing real estate, primarily multifamily apartment communities. As of December 31, 1996, the Company owned 210 apartment communities containing 55,664 completed apartment homes located in the Sunbelt states from Delaware to Nevada. Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (including United Dominion Realty, L.P., its Operating Partnership). All significant inter-company accounts and transactions have been eliminated in consolidation. The financial statements of the Company include the minority interest of unitholders in the operating partnership. Effective December 31, 1996, the Company acquired South West Property Trust Inc. ("South West") in a statutory merger (the "Merger"). South West was a Texas-based public real estate investment trust. The Merger has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Assets and liabilities acquired were recorded at their estimated fair values at December 31, 1996 and results of operations are included from the date of acquisition. Accordingly, the results of operations for South West have been excluded from the Company's consolidated statements of operations for the year ended December 31, 1996. 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. Federal income taxes The Company is operated as and annually elects to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Generally, a real estate investment trust, which complies with the provisions of the Code and distributes at least 95% of its taxable income to its shareholders, does not pay federal income taxes on its distributed income. Accordingly, no provision has been made for federal income taxes. Cash and cash equivalents All highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents. Real estate assets and depreciation On October 1, 1995, the Company adopted the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The statement requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows are not sufficient to recover the asset's carrying value. If such indicators are present, an impairment loss is recognized based on the excess of the carrying amount of the impaired 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 measured at the time management commits to a plan to dispose 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. Real estate held for disposition is carried at the lower of cost or fair value less cost to dispose, determined on an asset by asset basis. Depreciation is not recorded during the period in which real estate is 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. Real estate held for disposition is reported separately on the consolidated balance sheet, net of accumulated depreciation and impairment loss valuation allowance. F-7
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ordinary repairs and maintenance costs are expensed as incurred; significant improvements, renovations, and replacements are capitalized and depreciated over their estimated useful lives. 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 fixtures, equipment and other assets. The cost of development properties includes interest, property taxes, insurance and allocated development overhead during the construction period. Revenue Recognition Residential rental properties are leased under operating leases with terms generally of one year or less. Rental income is recognized as it is earned, which is not materially different than on a straight-line basis. Interest Interest is capitalized on accumulated expenditures relating to the acquisition and development of certain qualifying properties. During 1996, 1995 and 1994, total interest capitalized was $541,000, $40,000 and $0, respectively. Deferred financing costs Deferred financing costs are generally amortized over a period not to exceed the term of the related debt. Amortization of deferred financing costs is classified as interest expense and was included in the consolidated statements of operations in the amounts of $1,319,000, $1,078,000 and $1,180,000, for 1996, 1995 and 1994, respectively. Interest rate swap agreements The Company enters into interest rate swap agreements to alter the interest rate characteristics of outstanding debt instruments. 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. The related amounts payable to and receivable from counterparties are included in other liabilities and other assets, respectively. Changes in the fair value of the interest rate swap agreements accounted for under the accrual method are not reflected in the financial statements. Interest rate protection agreements The Company enters into interest rate futures contracts to hedge interest rate risk associated with anticipated debt transactions. The Company 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 terms of the related debt as an adjustment to interest expense. The fair values of interest rate protection agreements are not recognized in the financial statements.At the time the anticipated transaction is no longer likely to occur, the Company would mark the derivative instrument to market and would recognize any adjustment in the consolidated statement of operations. Net income per common share Primary net income per common share is calculated using the weighted average number of common shares outstanding during each year. Stock options and other potentially dilutive securities outstanding are not included since their inclusion would not be materially dilutive. Investment in marketable equity securities In connection with certain property sales, the Company received marketable preferred stock with a fair value of $7.7 million on the date of receipt. These securities are classified as available-for-sale and are included in other assets. Securities available-for-sale are stated at fair value. F-8
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unrealized gains and losses are reported as a separate component of shareholders' equity and are not reported in earnings until realized or until a decline in fair value is deemed to be other-than-temporary. Minority Interest Capital contributions, distributions and profits and losses are allocated to minority interests in accordance with the terms of the individual partnership agreements. Net income allocated to minority interests for 1996 aggregated approximately $58,000. Stock Based Compensation In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (Statement 123) which provides an alternative to APB Opinion No.25 in accounting for stock-based compensation plans and is effective for fiscal years beginning after December 31, 1995. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Statement 123 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 the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized. Reclassifications Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. F-9
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Real Estate Owned The Company operates primarily in 21 separate markets dispersed throughout a 15 state area. At December 31, 1996, the Company's largest apartment market was Dallas, Texas, where it owned 13% of its apartment homes. Excluding Dallas, Texas, the Company did not own more than 7% of its apartment homes in any one market. The following table summarizes real estate held for investment at December 31, 1996 and 1995: Dollars in thousands 1996 1995 - - -------------------- ---- ----- Land and land improvements $ 353,092 $ 193,672 Buildings and improvements 1,537,387 864,331 Furniture, fixtures and equipment 115,308 72,576 Construction in progress 1,825 519 -------------- ------------ Real estate held for investment 2,007,612 1,131,098 Accumulated depreciation (173,291) (129,454) ------------- ---------- Real estate held for investment, net $ 1,834,321 $ 1,001,644 =========== ========== The following is a summary of real estate owned at December 31, 1996 (dollars in thousands): Real Estate Held for Investment (Excluding real estate under development) <TABLE> <CAPTION> Initial Number of Acquisition Carrying Accumulated Properties Cost Value Depreciation Encumbrances ---------- ----------- -------- ------------ ------------ <S> <C> Apartments North Carolina 45 $361,593 $405,000 $ 48,219 $74,530 Texas 32 400,228 400,228 -- (A) Florida 31 318,590 348,971 23,245 63,168 Virginia 30 203,981 245,769 51,462 20,460 South Carolina 22 154,078 183,330 21,098 51,974 Georgia 10 90,783 103,308 11,982 17,873 Maryland 12 99,981 109,421 8,776 30,395 Tennessee 10 75,546 85,342 6,380 10,989 Arizona 3 36,550 36,550 -- (A) Alabama 2 12,012 13,528 1,146 -- Delaware 2 14,732 16,590 983 -- Nevada 1 20,000 20,000 -- -- New Mexico 1 9,300 9,300 -- (A) Oklahoma 1 9,775 9,775 -- (A) Arkansas 2 20,500 20,500 -- 5,053 --- --------- ---------- ---------- --------- 204 $1,827,649 $2,007,612 $173,291 $369,310 === ========== ========== ======== ======== </TABLE> F-10
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> Real Estate Held for Disposition Initial Number of Acquisition Carrying Accumulated Properties Cost Value* Depreciation Encumbrances ------------ ----------- -------- ----------- ------------ <S> <C> Apartments North Carolina 2 $5,758 $9,769 $4,547 -- Virginia 2 6,186 9,067 3,263 $3,900 South Carolina 1 1,918 1,924 10 -- Texas 1 8,000 8,000 -- (A) Commercial Virginia 4 6,870 14,270 3,909 $3,350 North Carolina 1 5,169 8,705 2,155 -- Tennessee 1 1,176 2,439 734 -- -------- ----- -------- ------- ----- 12 $35,077 $ 54,174 $14,618 $7,250 ======== ======= ======== ======= ====== </TABLE> (A) In connection with the Merger on December 31, 1996, the Company assumed two REMIC financings aggregating $94,868 which encumber 27 of the apartment communities acquired. Real estate held for disposition contributed net rental income (rental income less rental expenses and depreciation expense) in the aggregate amount of approximately $3.9 million for the year ended December 31, 1996. The Company expects to dispose of these properties within the next twelve months. The following is a reconciliation of the carrying amount of real estate held for investment (dollars in thousands): 1996 1995 1994 --------------- ---------------- ---------- Balance at January 1 $ 1,131,098 $ 1,007,599 $ 582,213 Real estate purchased 843,277 198,136 409,280 Improvements 49,434 35,682 18,857 Real estate sold (230) (34,031) (2,751) Transferred to real estate held for disposition (15,967) (76,288) -- --------------- ---------------- ------------ Balance at December 31 $ 2,007,612 $ 1,131,098 $ 1,007,599 =============== ================ ============ The following is a reconciliation of accumulated depreciation (dollars in thousands): 1996 1995 1994 ------------ ----------- -------- Balance at January 1 $ 129,454 $ 120,341 $ 91,444 Depreciation expense for the year* 48,039 39,442 29,049 Transferred to real estate held for disposition (4,202) (23,572) -- Real estate sold -- (6,757) (152) --------------- ------------ ----------- Balance at December 31 $ 173,291 $ 129,454 $ 120,341 ========== ========= ========= * Depreciation expense of $629,000, $503,000 and $320,000 for 1996, 1995 and 1994, respectively, is included in "Other depreciation and amortization" in the consolidated statements of operations. F-11
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisitions In connection with the Merger, the Company issued 22.8 million shares of its common stock at $14.125 per share for total market equity of approximately $322 million, assumed debt and other liabilities of approximately $246 million and incurred transaction costs of approximately $4 million for total consideration of approximately $572 million. No goodwill was recorded in connection with this transaction. In addition to the Merger, during 1996, the Company acquired 30 apartment communities containing 7,172 apartment homes in separate transactions at a total cost of approximately $321 million, including closing costs. During 1995, the Company acquired 23 apartment communities containing 5,142 apartment homes for a total cost of approximately $195 million, including closing costs. Information concerning unaudited pro forma results of operations for the years ended December 31, 1996 and 1995 are set forth below. For 1996, such pro forma information assumes (i) the consummation of the Merger and (ii) the acquisition of 20 apartment communities containing 5,157 apartment homes at a total cost of approximately $213 million , as if the transactions had occurred on January 1, 1996. For 1995, such pro forma information assumes (i) the consummation of the South West Merger, (ii) the acquisition of 20 apartment communities containing 5,157 apartment homes at a total cost of approximately $213 million and , (iii) the acquisition of 13 apartment communities containing 2,417 units at a total cost of approximately $99 million, as if the transactions had occurred on January 1, 1995. Pro Forma Pro Forma Year Ended Year Ended In thousands, except per share amounts Dec. 31, 1996 Dec. 31, 1995 - - --------------------------------------- ------------- ------------- (Unaudited) Rental income $ 341,765 $ 301,106 Income before extraordinary item 53,650 49,402 Net income per common share before extraordinary item $ .54 $ .54 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. F-12
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Secured Notes Payable Secured notes payable consist of the following: (dollars in thousands) <TABLE> <CAPTION> December 31, 1996 1995 ------------ ----------- <S> <C> Fixed-Rate Mortgage Notes Payable $ 101,221 $ 56,368 Fixed-Rate Tax-Exempt Secured Notes Payable 116,797 112,843 Fixed-Rate REMIC Financings 94,868 -- Fixed-Rate Secured Notes Payable 45,000 -- -------- --------- Total Fixed-Rate Secured Notes Payable 357,886 169,211 Variable-Rate Secured Notes Payable 13,124 -- Variable-Rate Tax-Exempt Secured Notes Payable 5,550 11,270 --------- ----------- Total Variable-Rate Secured Notes Payable 18,674 11,270 --------- ----------- Total Secured Notes Payable $ 376,560 $ 180,481 ========= =========== </TABLE> Fixed-Rate Mortgage Notes Payable Fixed-rate mortgage notes payable included 23 loans encumbering 18 properties at December 31, 1996, and 19 loans encumbering 13 properties at December 31, 1995. Fixed-rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates through 2008. At December 31, 1996 and 1995, this debt carried interest rates ranging from 7.125% to 9.625% (8.3% weighted average) and 7.00% to 9.625% (8.2% weighted average), respectively. During 1996, the Company assumed six fixed-rate mortgage notes payable aggregating $53.6 million with a weighted average interest rate of 8.4% in connection with the acquisition of apartment communities, including $5.1 million assumed in connection with the Merger. Fixed-Rate Tax-Exempt Notes Payable At December 31, 1996, 17 properties were encumbered by fixed-rate mortgage notes which secure related tax-exempt housing bond issues. Interest on these notes is generally payable in semi-annual installments and the notes mature at various dates through 2025. At December 31, 1996 and 1995, tax-exempt fixed-rate mortgage notes had interest rates ranging from 6.00% to 8.50% (weighted average interest rate of 6.88%), and 5.98% to 8.50% (weighted average interest rate of 6.90%), respectively. During 1996, the Company refunded one bond issue relating to a 1995 property acquisition in the amount of $5.9 million bearing interest of 6.35%. Fixed-Rate REMIC Secured Notes Payable In connection with the Merger, the Company assumed two fixed-rate REMIC Financings in the aggregate amount of $94.9 million. The REMIC Financings encumber 27 apartment communities and have interest rates of 7.01% and 8.5% (weighted average of 7.76%). Monthly principal and interest payments in the amount of $821,893 are required. The first phase of the REMIC financing matures on December 10, 2000 and the second phase of the REMIC financing matures on February 10, 2001, the principal balances on the maturity dates are expected to be $39.9 million and $41.7 million, respectively. Fixed-Rate Secured Notes Payable In connection with the acquisition of an 18 apartment community portfolio on August 15, 1996, the Company assumed two variable-rate construction notes payable and two variable-rate secured senior credit facilities aggregating $89.5 million plus five related interest rate swap agreements with an aggregate notional value of $45 million, all of which mature in August, 1999. The Company repaid one of the secured senior credit facilities in the amount of $31.2 million on November 12, 1996. Variable-rate secured notes payable which have been effectively swapped to a fixed-rate at December 31, 1996 consist of a $40 million variable-rate secured senior credit facility which encumbers six apartment communities and a variable-rate construction note payable. F-13
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The variable-rate secured notes payable bear interest at LIBOR + 1% or 6.61% at December 31, 1996. The five interest rate swap agreements aggregate $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 7.29%. Variable-Rate Secured Notes Payable Variable-rate secured notes payable at December 31, 1996 consist of two variable-rate construction notes payable which were assumed in connection with the acquisition of an 18 apartment community portfolio on August 15, 1996, both of which mature in August, 1999. The variable-rate secured notes payable bear interest at LIBOR + 1% or 6.61% at December 31, 1996. Variable-Rate Tax-Exempt Notes Payable At December 31, 1996 two of the Company's properties were encumbered by variable-rate mortgage notes which secure tax-exempt housing bond issues. Interest on these notes is generally payable in semi-annual installments and the notes mature at various dates through 2010. At December 31, 1996 and 1995, tax-exempt variable-rate notes had interest rates ranging from 4.56% to 7.27% (weighted average interest rate of 6.20%) and 5.00% to 7.29% (weighted average interest rate of 5.80%), respectively. The loan documents relating to the REMIC financing contain certain covenants, which require among other things, that debt service coverage ratios on the mortgaged properties be maintained at certain levels. The aggregate maturities of secured notes payable for the five years subsequent to December 31, 1996 were as follows (dollars in thousands): Year Amount ---- ------ 1997 $ 7,393 1998 22,382 1999 86,559 2000 57,917 2001 51,119 Thereafter 151,190 ------- $ 376,560 ======= F-14
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Unsecured Notes Payable A summary of unsecured notes payable at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> Dollars in thousands 1996 1995 ---- ---- <S> <C> Commercial Banks Borrowings outstanding under revolving credit facilities (a) $ 125,250 $ 18,400 Insurance Companies--Senior Unsecured Notes 7.98% due March, 1997-2003(b) 52,000 52,000 9.57% due July, 1996 -- 35,000 7.89% due March, 1996 -- 10,000 8.72% due November, 1996-1998 (c) 4,000 6,000 --------- ------- 56,000 103,000 Other (d) 6,040 3,458 Senior Unsecured Notes - Other 7.00% Unsecured Note due January 15, 1997 (e) 55,985 -- 7.25% Notes due April 1, 1999 75,000 75,000 8.50% Debentures due September 15, 2024 (f) 150,000 150,000 7.95% Medium-Term Notes due July 12, 2006 125,000 -- 7.07% Medium-Term Notes due November 15, 2006 25,000 -- 7.02% Medium-Term Notes due November 15, 2005 50,000 -- -------- -------- 480,985 225,000 ------- ------- $ 668,275 $ 349,858 ======= ======= </TABLE> (a) Includes $69,050 outstanding under a renegotiated $75,000 unsecured revolving credit facility assumed on December 31, 1996 in connection with the Merger. The note was paid in full on January 29, 1997. (b) Payable in seven equal principal installments of $7.4 million. (c) Payable in two equal annual principal installments of $2 million. (d) Includes $5.6 million and $3.0 million at December 31, 1996 and 1995, respectively, of deferred gain from the termination of interest rate hedge transactions. (e) Represents an unsecured note assumed in connection with the Merger on December 31, 1996. The note was paid in full on January 3, 1997. (f) Debentures include an investor put feature which grants the debentureholder a one time option to redeem debentures at the end of 10 years. On January 27, 1997, the Company issued $125 million of 7.25% Notes due January 15, 2007 under its $462.5 million shelf registration statement. In November 1996, the Company entered into an interest rate protection agreement for a notional amount of $100 million in anticipation of issuance of debt early in 1997. The interest rate protection agreement was terminated simultaneously with the $125 million Note issuance and the Company received $1.5 million in cash on the settlement. This had the economic effect of lowering the interest rate on the Notes to approximately 7.14% over the ten year term of the Notes. Net proceeds of approximately $124 million were used to curtail approximately $83.1 million of bank line debt and the remaining proceeds were temporarily invested in short-term money market instruments and subsequently used to repay debt assumed in connection with the Merger. F-15
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information concerning short-term bank borrowings is summarized in the table that follows: <TABLE> <CAPTION> In thousands 1996 1995 1994 - - ----------------------------------------------------------------------------------------------------- <S> <C> Total revolving credit facilities and lines of credit at December 31* $ 228,500 $103,500 $103,500 Borrowings outstanding at December 31 125,250 18,400 14,150 Weighted average daily borrowings during the year 49,941 8,198 33,787 Maximum daily borrowings during the year ** 73,900 35,300 79,300 Weighted average daily interest rate during the year 6.0% 6.8% 5.1% Weighted average daily interest rate at December 31 6.3% 6.5% 6.5% </TABLE> * Includes a renegotiated $75 million unsecured revolving credit facility assumed on December 31, 1996 in connection with the Merger. ** Maximum daily borrowings outstanding excludes the $69.1 million revolving credit facility assumed on December 31, 1996. The underlying loan agreements contain certain covenants which, among other things, require the Company to maintain minimum consolidated tangible net worth, as defined, and maintain certain financial ratios. At December 31, 1996, the Company had $70 million of unsecured revolving credit facilities with four commercial banks. At December 31, 1996, there was $45 million outstanding under the revolving credit facilities. These credit agreements currently expire at dates between June 1997 and June 1998, but are renewable annually by mutual agreement between the Company and each bank. Interest on borrowings outstanding under these agreements are at varying rates depending on the level of the Company's debt and the term of the borrowing. Generally, loans for 30 days or more are priced at LIBOR plus 5/8% to 1%. Loans of shorter duration are priced at spreads of 5/8% to 1.125% over the bank's applicable base rate. The Company is obligated to pay a fee equal to 1/4% of 1% per annum on the average daily amount of the unused portion of the commitment during the revolving loan period. None of these agreements have compensating balance requirements. At December 31, 1996, the Company had unsecured lines of credit with three commercial banks totaling $33.5 million. At December 1996, there was $11.2 million outstanding under the lines of credit. These credit facilities currently expire on June 30, 1997, but are renewable annually by mutual agreement between the Company and each bank. Each line is subject to periodic bank review and requires the Company to maintain a depository relationship with the respective bank, however, there are no formal compensating balance arrangements. Borrowings bear interest generally at negotiated rates in line with borrowings under the Company's revolving credit facilities. At December 31, 1996, the Company had a $50 million interim credit agreement expiring on May 31, 1997, with one of its commercial banks. Borrowings bear interest generally at negotiated rates in line with borrowings under the Company's revolving credit facilities negotiated by the Company. There were no borrowings outstanding under this credit facility at December 31, 1996. F-16
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Financial Instruments Fair Value of Financial Instruments The following disclosures of estimated fair value of financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts and estimated fair value of the Company's financial instruments at December 31, 1996 and 1995, both on and off-balance sheet, are summarized as follows: <TABLE> <CAPTION> December 31, 1996 December 31, 1995 ------------------------------ --------------------- In thousands Carrying Fair Carrying Fair Amount Value Amount Value <S> <C> Investment in equity securities $ 9,771 $ 9,771 $ 8,144 $ 8,144 Secured notes payable 376,560 381,007 180,481 189,666 Unsecured notes payable 688,275 684,332 349,858 376,347 Interest rate swap agreements -- (589) -- -- Interest rate risk management agreements -- 934 -- (3,996) </TABLE> The following methods and assumptions were used by the Company in estimating the fair values set forth above. The carrying amount of cash and cash equivalents approximates fair value because of the short-term nature of these instruments. Investment in equity securities Securities available-for-sale are carried at fair value based upon market quotations. Notes payable Estimated fair value is based on mortgage rates and tax-exempt bond rates believed to be available to the Company for issuance of debt with similar terms and remaining maturities as of December 31, 1996 and 1995. The carrying amount of the Company's variable-rate secured notes payable approximate fair value at December 31, 1996 and 1995. The carrying amounts of the Company's borrowings under short-term revolving credit agreements and lines of credit approximate their fair values at December 31, 1996 and 1995 due to the short term maturity of these instruments and the fact that they are variable-rate instruments. Interest rate swap agreements Fair value is based on external market quotations from investment banks. Interest rate risk management agreements Fair value is based on external market quotations from investment banks. Interest rate swap agreements At December 31, 1996, the Company had six interest rate swap agreements outstanding with an aggregate notional amount of $122.2 million which effectively change the cost on certain debt instruments from a variable-rate to a fixed-rate. Of this amount, $77.2 million was assumed in connection with the Merger which fixes the interest rate on a portion of the Company's variable-rate debt at 7.9% through April, 1997. The Company also assumed a $45 million interest rate swap on August 15, 1996 in connection with a portfolio acquisition which effectively fixes $45 million of the variable-rate secured notes payable assumed to a weighted average fixed rate of 7.29%. The Company's credit exposure on swaps is limited to the value of interest rate swaps that are favorable to the Company at December 31, 1996. At December 31, 1996, the market value of interest rate swaps in a favorable value position was $21,000, while the net fair value of all positions was unfavorable to the Company at $589,000. F-17
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1995, there were no interest rate swap agreements outstanding, nor were there any interest rate swap agreements during 1995. For all periods presented, the Company had no deferred gains or losses relating to terminated swap contracts. Interest rate risk management agreements In June 1995, the Company entered into a $50 million (notional amount) fixed pay forward starting swap agreement with a major Wall Street investment banking firm in order to reduce the interest rate risk associated with the anticipated refinancing of fixed-rate debt maturing in 1996. The transaction allowed the Company to lock-in a ten year Treasury rate of 6.544% on or before July, 15, 1996. In November, 1995, in anticipation of the issuance of medium-term notes during 1996, the Company entered into a $50 million (notional amount) interest rate protection agreement with one of its commercial banks which allowed the Company to lock-in a 10 year Treasury rate of 5.946% beginning on or before March 1, 1996. This transaction was terminated at no cost to the Company in February 1997. In June, 1996, the Company entered into a $75 million (notional amount) fixed pay forward starting swap agreement with a major Wall Street investment banking firm in order to reduce the interest rate risk associated with the anticipated issuance of medium-term notes during 1996. This transaction allowed the Company to lock-in a ten year Treasury rate of 6.75%. In July, 1996, the Company issued $125 million of ten year notes under this its $200 million medium-term note program (MTN's) at an interest rate of 7.95%. The two outstanding interest rate risk management agreements were terminated simultaneously with the $125 million MTN's issuance and the Company received $3.0 million in cash. This had the economic effect of reducing the interest rate on the MTN's to approximately 7.61% over the ten year term. In November 1996, the Company entered into a $100 million (notional amount) fixed pay forward starting swap agreement with a major Wall Street investment banking firm in order to reduce the interest rate risk associated with the anticipated issuance of unsecured notes in January 1997. The transaction allowed the Company to lock-in a ten year Treasury rate of 6.544% on or before January 21, 1997. The Company has not obtained collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties. While the Company is exposed to credit loss in the event of nonperformance by the counterparty, such nonperformance is not anticipated as the counterparties are highly rated, credit quality companies. 7. Income 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 deferral for tax purposes of certain gains on property sales. All realized gains (losses) on sales of investments are distributed to shareholders if and when recognized for income tax purposes. Since 1980, gains aggregating approximately $19.4 million have been deferred for income tax purposes and are undistributed at December 31, 1996. 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, 1996, distributions paid per common share were taxable as follows: 1996 1995 1994 ---- ----- ------ Ordinary income $.638 $.715 $ .629 Capital gains --- .003 .004 Return of capital .307 .152 .127 ------ ------ ------- $.945 $.870 $ .760 ===== ===== ====== F-18
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. 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 the Company 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 the Company's consolidated statements of operations for the three years ended December 31, 1996, 1995 and 1994 were $600,000 $536,000 and $350,000, respectively. 9. Stock Option Plan The Company's 1985 Share Option Plan, (the "Plan") as amended, authorizes the grant of options, at the discretion of the Board, to certain officers, directors and key employees of the Company, for up to 4,200,000 shares of the Company's common stock. The 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 all options granted subsequent to December 12, 1995, the options have 10 year terms and vest on December 31 of the year subsequent to grant. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of accounting as defined in Statement 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 1996 and 1995: 1996 1995 ---- ---- Risk free interest rate 6.6% 6.5% Dividend yields 6.1% 6.1% Volatility factor .166 .166 Weighted average expected life (years) 8.6 8.6 For the options granted in 1995 and 1996, the contractual life is 10 years and the stock price on the date of grant is equal to the exercise price. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company's employee stock options are significantly different from traded options and slight changes in the subjective input assumptions can materially affect the fair value estimate. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Statement 123 is applicable only to options granted subsequent to December 31, 1994, consequently, the pro forma effect will not be fully reflected until 1997. The Company's pro forma information is as follows (in thousands, except per share amounts): 1996 1995 ---- ------ Net income available to common shareholders As reported $ 28,278 $ 26,490 Pro forma 27,659 26,460 Earnings per common share As reported $.49 $.50 Pro forma .48 .50 F-19
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company's stock option activity during the three years ended December 31, 1996 is provided in the following table (in thousand of dollars, except per share amounts). <TABLE> <CAPTION> Options Outstanding ----------------------------------------------------- Shares Available Weighted Average Range of For Future Grant Options Exercise Price Exercise Prices ---------------- ---------- ---------------- --------------- <S> <C> Outstanding, December 31, 1993 1,307,900 934,600 $ 12.42 $ 7.44-$13.63 Granted (371,000) 371,000 13.13 13.13 Exercised -- (50,488) 10.33 7.44-11.56 Expired 23,240 (23,240) 12.41 11.56-13.63 ----------- ----------- ------ ------------- Outstanding, December 31, 1994 960,140 1,231,872 11.42 7.44- 13.63 Granted (372,000) 372,000 14.63 14.63 Exercised -- (98,536) 8.27 7.44-13.63 Expired 14,700 (14,700) 12.86 11.56-13.63 --------- ------------ ------ ------------ Outstanding, December 31, 1995 602,840 1,490,636 12.41 7.44-14.63 Granted (472,000) 472,000 15.21 13.88-15.25 Exercised -- (148,220) 10.33 7.44-13.63 Expired 39,200 (39,200) 14.17 13.13-14.63 Additional shares authorized 1,800,000 -- -- -- ----------- --------------- --------- -------------- Outstanding, December 31, 1996 1,970,040 1,775,216 $13.29 $ 7.44-$15.25 ============ ========== ========= ============= Exercisable at December 31, 1994 720,500 $11.16 $7.44-$13.63 1995 785,156 11.46 7.44- 14.63 1996 713,791 11.94 7.44- 15.25 </TABLE> Exercise prices for the options outstanding as of December 31, 1996, ranged from $7.44 to $15.25. The weighted average remaining contractual life on all options outstanding is 6.3 years. Approximately 817,000 of share options had exercise prices between $14.00 and $15.25 and approximately 958,000 had exercise prices between $11.50 and $13.99. The weighted-average fair value of options granted during 1996 and 1995 was $1.74 and $1.64, respectively. 10. Shareholders' Equity Preferred Stock The preferred stock is redeemable on or after April 24, 2000 at the sole option of the Company from the proceeds from the sale of additional capital stock (common or preferred). The preferred stock has no voting rights, no stated maturity, is not subject to any sinking fund or mandatory redemption and is not convertible into any other securities of the Company. Common Stock On January 28, 1997, the Company completed a public offering of 4,000,000 shares of its common stock at $15.75 per share. Net proceeds of the offering after deducting underwriting commissions and direct offering costs, aggregated approximately $59.7 million and were used to repay unsecured notes payable. Officers' Stock Purchase and Loan Plan At December 31, 1996, 585,500 shares of common stock had been issued under the Officer Stock Purchase and Loan Plan. Under the plan, certain officers have purchased common stock at the then current market price with financing provided by the Company at 7% interest only. The underlying notes mature beginning in November, 1998. A total of 14,500 shares are available for future issuance under this Plan. F-20
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dividend Reinvestment and Stock Purchase Plan The Company's Dividend Reinvestment and Stock Purchase Plan (the "Plan") allows common and preferred shareholders the opportunity to purchase, through reinvestment of cash dividends, additional shares of the Company's common stock at 95% of Average Market Value, as defined. Shareholders may make additional optional cash payments of not less than $50 and not more than $25,000 per quarter, of the Company's common stock at 97% of Average Market Value, as defined. As of December 31, 1996, 1,063,262 shares of common stock had been issued under the Company's Dividend Reinvestment and Stock Purchase Plan. Shares in the amount of 2,936,738 are reserved for further issuance under this plan. During 1996, 970,718 shares were issued under the Plan for a total market equity value of approximately $13.2 million. All costs of administration of the Plan are paid by the Company. F-21
UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Unaudited Summarized Consolidated Quarterly Financial Data Summarized consolidated quarterly financial data for the years ended December 31, 1996 and 1995 is as follows (In thousands, except per share information): <TABLE> <CAPTION> Three Months Ended (Unaudited) 1996 March 31* June 30 September 30* December 31* - - ---- ------------ -------------- ------------- ------------- <S> <C> Rental income $ 54,839 $ 57,197 $ 63,083 $ 66,993 Income before gains on sales of investments, minority interest of unitholders in operating partnership and extraordinary item 8,594 8,296 8,504 8,332 Net income 9,559 8,166 9,818 10,448 Preferred dividends 2,428 2,428 2,428 2,429 Net income available to common shareholders 7,131 5,738 7,390 8,019 Per share: Net income available to common shareholders $ .13 $ .10 $ .13 $ .14 Weighted average number of common shares outstanding 56,467 56,666 57,793 58,983 </TABLE> * For the quarters ended March 31, 1996, September 30, 1996 and December 31, 1996, the Company recognized $1.0 million, $1.3 million and $2.0 million, respectively, of aggregate book gains on the sale of real estate held for disposition. - - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended (Unaudited) 1995 March 31 June 30** September 30*** December 31 - - ---- ----------- --------------- ---------------- ------------ <S> <C> Rental income $ 45,493 $ 47,747 $ 49,842 $ 52,158 Income before gains on sales of investments, minority interest of unitholders in operating partnership and extraordinary item 6,087 6,993 5,599 9,358 Net income 6,150 11,569 5,804 9,604 Preferred dividends -- 1,781 2,428 2,428 Net income available to common shareholders 6,150 9,788 3,376 7,176 Per share: Net income available to common shareholders $ .12 $ .19 $ .07 $ .13 Weighted average number of common shares outstanding 51,125 51,776 51,883 56,293 </TABLE> ** For the quarter ended June 30, 1995, the Company recognized a $4.6 million aggregate book gain on the sales of real estate owned. *** For the quarter ended September 30, 1995, the Company recognized a $1.7 million impairment loss on real estate held for disposition. F-22
SCHEDULE III. Summary of Real Estate Owned <TABLE> <CAPTION> Cost of Improvements Capitalized Initial Cost Subsequent to Land and Buildings Acquisition Land and (Net of Encumbrances Improvements Improvements Disposals) ------------ ------------ ------------ ------------- <S> <C> Apartments: Real estate held for investment Alabama Indian Hills/Anniston -- $338,335 $3,726,661 $495,133 Three Fountains/Montgomery -- 1,075,009 6,872,302 1,020,119 Arkansas Shadow Lake/Little Rock -- 2,523,670 8,976,330 -- Turtle Creek/Little Rock $5,053,526 1,913,177 7,086,823 -- Arizona Greenway Park/Phoenix c 1,622,700 5,727,300 -- Sierra Palms/Phoenix -- 4,638,950 17,361,050 -- Vista Point/Phoenix d 1,587,400 5,612,600 -- Delaware Dover Country Club/Dover -- 2,007,878 6,365,053 1,476,968 Greens at Cedar Chase/Dover -- 1,528,667 4,830,738 395,261 Florida Alafaya Woods/Orlando -- 1,653,000 9,042,256 1,171,509 Andover Place/Orlando 5,925,000 3,692,187 7,756,919 1,010,413 Bay Cove/Clearwater -- 2,928,847 6,578,257 1,412,218 Bay Meadow/Clearwater 8,103,979 2,892,526 9,253,525 10,474 Brantley Pines/Ft. Myers -- 841,400 5,914,766 1,081,022 Cleary Court/Ft. Lauderdale -- 2,399,848 7,913,450 529,978 Copperfield/Ft. Lauderdale -- 4,424,128 20,428,969 518,433 Dover Village/Orlando -- 2,894,702 6,456,100 1,903,940 Fisherman's Village/Orlando -- 2,387,368 7,458,897 1,080,112 Foxcroft/Tampa -- 749,400 3,927,644 783,318 Greentree Place/Jacksonville 12,455,000 1,634,330 11,226,990 1,897,412 Hunters Ridge/Plant City -- 2,461,548 10,942,434 777,587 Lake Washington Downs/Melbourne -- 1,434,450 4,940,166 1,124,359 Lakeside North/Orlando 12,440,000 1,532,700 11,076,062 1,777,081 Lakewood Place/Tampa -- 1,395,051 10,647,377 581,176 Los Altos/Orlando -- 2,803,805 12,348,464 58,302 Mallards of Wedgewood/Lakeland -- 959,284 6,864,666 1,170,167 Mediterranean Village/Miami -- 2,064,788 11,939,113 721,522 Orange Orlando/Orlando -- 1,233,151 2,177,417 1,159,485 Palm Grove/Tampa -- 616,121 5,268,814 687,891 Pinebrook/Clearwater -- 1,780,375 2,458,172 2,069,324 Regatta Shores/Orlando -- 757,008 6,607,367 1,380,153 Santa Barbara Landing/Naples 4,909,149 1,134,120 8,019,814 824,884 Seabrook/Orlando -- 1,845,853 4,155,275 908,858 Summit West/Tampa -- 2,176,500 4,709,970 1,427,337 The Antlers/Jacksonville 9,999,958 4,034,039 11,192,842 710,703 The Groves/Daytona Beach -- 789,953 4,767,055 514,982 University Club/Ft. Lauderdale -- 1,390,220 6,992,620 293,147 Village at Old Tampa Bay/Tampa -- 1,750,320 10,756,337 1,171,806 Vinyards/Orlando 9,335,000 1,840,230 11,571,625 1,306,851 Westland Park/Jacksonville -- 1,834,535 14,864,742 316,264 Georgia Colony of Stone Mountain/Atlanta -- 3,160,000 5,641,646 3,379,547 Crescent Square/Atlanta -- 1,057,000 6,865,036 4,514,865 Dunwoody Pointe/Atlanta 5,953,313 2,763,324 6,902,996 750,913 Griffin Crossing/Atlanta -- 1,509,633 7,544,018 525,733 Gwinnett Square/Atlanta -- 1,924,325 7,376,454 757,602 Lake of the Woods/Atlanta -- 835,352 8,388,258 96,225 River Place/Macon -- 1,097,280 7,492,385 910,169 Riverwood/Atlanta 5,581,871 2,985,599 11,087,903 260,600 Royal Oaks/Savannah 6,337,580 533,100 9,926,017 634,926 Stanford Village/Atlanta -- 884,500 2,807,839 694,534 Maryland Brittingham Square/Salisbury -- 650,143 4,962,246 249,046 Dominion at Eden Brook/Columbia 8,320,000 2,361,167 9,384,171 611,395 Dominion Constant Friendship/Balt. -- 903,122 4,668,956 289,574 Dominion Great Oaks/Baltimore -- 2,919,481 9,099,691 1,396,435 Dominion Kings Place/Columbia 4,875,000 1,564,942 7,006,574 415,502 Gatewater Landing/Glen Burnie -- 2,078,422 6,084,526 872,405 Greens at Cross Court/Easton -- 1,182,414 4,544,012 385,992 Greens at Hilton Run/Lexington Park -- 2,754,447 10,482,579 489,973 Greens at Schumaker Pond/Salisbury -- 709,559 6,117,582 384,731 Holly Tree Park/Waldorf -- 1,576,366 5,106,716 797,799 Twin Coves/Baltimore 3,710,000 912,771 2,904,304 736,997 Woodside/Baltimore 13,490,000 3,112,881 8,893,721 2,810,029 North Carolina Beechwood/Greensboro -- 1,409,377 6,086,677 467,600 Bramblewood/Goldsboro -- 401,538 3,150,912 1,060,292 Brynn Marr/Jacksonville -- 432,974 3,821,508 1,194,526 Canterbury Woods/Charlotte -- 409,675 5,011,435 1,817,108 Cape Harbor/Wilmington 9,500,000 1,891,671 18,113,109 25,801 Chateau Village/Gastonia -- 1,046,610 6,979,555 53,362 Cinnamon Ridge/Raleigh 7,000,000 967,230 3,337,197 4,296,548 Clear Run/Wilmington -- 874,830 8,586,978 4,564,755 Colony Village/New Bern -- 346,330 3,036,956 1,128,131 Copper Mill/Durham -- 1,548,280 16,066,720 0 Cumberland Trace/Fayetteville -- 632,281 7,895,674 38,721 Deerwood Crossing/Winston-Salem -- 1,539,901 7,989,043 123,223 Dominion at Sharon/Charlotte 3,600,000 667,368 4,856,103 42,944 Dominion Courtney Place/Raleigh -- 1,114,600 5,119,259 1,374,559 Dominion Crown Point/Charlotte -- 1,115,261 8,648,865 532,745 Dominion Harris Pond/Charlotte 5,084,983 886,788 6,728,097 377,218 Dominion Mallard Creek/Charlotte 5,444,898 698,860 6,488,061 350,283 Dominion Mallard Green/Charlotte -- 329,300 2,772,449 187,981 Dominion on Lake Lynn/Raleigh -- 1,723,363 5,303,760 621,785 Dominion on Spring Forest/Raleigh -- 1,257,500 8,586,255 1,895,259 Dominion Park Green/Raleigh -- 500,000 4,321,872 880,230 Dominion Peppertree/Charlotte -- 1,546,267 7,699,221 742,936 Dominion Ramsgate/Carrboro 4,800,000 907,605 6,819,154 26,653 Dominion Walnut Creek/Raleigh -- 3,170,290 21,717,407 1,270,955 Dominion Walnut Ridge/Raleigh -- 1,791,215 11,968,852 1,280,839 Dutch Village/Winston-Salem -- 1,197,593 4,826,266 52,578 Emerald Bay/Charlotte -- 626,070 4,722,862 2,288,411 Forest Hills/Wilmington -- 1,028,000 5,420,478 850,950 Grand Oaks/Charlotte -- 446,075 4,463,344 2,592,916 Harbour Pointe/Raleigh -- 1,898,740 7,101,260 0 Lake Brandt/Greensboro -- 1,546,950 13,489,466 32,148 Liberty Crossing/Jacksonville 1,282,933 840,000 3,873,139 1,760,923 Mill Creek/Wilmington -- 597,248 4,618,561 850,650 Morganton Place/Fayetteville 8,623,694 819,090 13,217,086 10,054 Northwinds/Greensboro 5,600,000 1,072,996 7,454,959 83,735 Park Forest/Greensboro 4,274,909 679,671 5,770,413 39,534 Steeplechase/Greensboro -- 2,268,108 11,230,762 244,976 The Creek/Wilmington -- 417,500 2,506,206 954,805 The Highlands/Charlotte -- 321,400 2,830,346 2,149,703 The Ledges/Winston-Salem -- 492,283 1,561,947 4,701,951 Village At Cliffdale/Fayetteville 10,469,467 941,284 15,498,216 31,761 Westwinds/Greensboro 4,449,000 1,328,214 6,999,442 22,687 Windsor Harbor/Charlotte -- 475,000 3,928,113 2,321,268 Woodberry/Asheville 4,400,000 388,699 6,380,899 46,573 South Carolina Colonial Villa/Columbia -- 1,014,181 5,100,269 1,236,090 Country Walk/Columbia -- 422,113 3,133,622 1,317,477 Crossroads/Columbia -- 2,074,800 13,760,014 2,068,062 Hunting Ridge/Greenville 3,265,000 449,500 2,246,908 926,709 Forestbrook/Columbia 5,000,000 395,516 2,902,040 1,376,562 Gable Hill/Columbia -- 824,847 5,307,194 778,819 Hampton Forest/Greenville -- 454,140 2,588,388 583,027 Hampton Greene/Columbia 7,567,790 1,363,046 10,118,453 460,796 Heatherwood/Greenville -- 354,566 3,234,105 743,302 Key Pines/Spartanburg -- 601,693 3,773,304 1,287,485 Overlook/Greenville -- 824,600 5,098,194 2,208,772 Patriot Place/Florence 2,200,000 212,500 1,600,757 5,401,626 Plum Chase/Columbia 7,000,000 802,750 3,149,607 4,864,858 Rivergate/Columbia 9,790,671 1,122,500 12,055,625 32,111 Riverwind/Spartanburg -- 802,484 6,386,212 520,553 Somerset/Charleston -- 485,160 4,072,780 738,688 Stonesthrow/Greenville 17,151,000 1,557,015 16,334,483 29,082 St. Andrews Commons/Columbia -- 1,428,826 9,371,378 628,338 St. Andrews/Columbia -- 976,192 6,884,502 746,963 The Landing/Greenville -- 685,000 5,640,176 943,485 The Park/Columbia -- 1,004,072 5,558,436 1,583,298 Waterford/Columbia -- 957,980 6,947,939 779,279 Tennessee 2131 Apartments/Nashville -- 869,860 9,155,185 2,153,807 Briar Club/Memphis -- 1,214,400 6,928,959 1,004,699 Brookridge/Nashville -- 707,508 5,461,251 233,066 Covington Crossing/Memphis -- 1,296,240 3,792,590 1,883,813 Harbour Town/Nashville -- 572,567 3,522,092 458,453 Hickory Run/Nashville -- 1,468,727 11,583,786 531,673 Hickory Pointe/Memphis -- 1,074,424 6,052,020 910,032 Hunters Trace/Memphis 5,805,000 888,440 6,676,552 844,016 Legacy Hill/Nashville 5,183,402 1,147,660 5,867,567 1,008,929 The Lakes/Nashville -- 1,285,657 5,980,197 767,905 Texas Ashley Oaks/San Antonio c 4,590,782 16,809,218 0 Autumnwood/Dallas c 2,412,180 8,587,820 0 Bluffs/San Antonio d 1,901,146 6,898,854 0 Catalina/Dallas d 1,543,321 5,631,679 0 Chandler's Mill/Corpus Christ d 1,930,120 6,844,880 0 Citiscape/Dallas d 2,092,387 7,432,613 0 Cobblestone/Dallas c 2,925,372 10,527,738 0 Dove Park/Dallas -- 2,309,195 8,690,805 0 Foxfire/Amarillo d 2,240,530 6,259,470 0 Foxfire/Dallas -- 1,968,520 7,231,480 0 High Ridge/Dallas -- 2,370,206 8,829,794 0 Hunters Ridge/Ft. Worth -- 1,613,000 5,837,000 0 Lakeridge/Dallas c 1,631,350 5,668,650 0 Oak Forest/Dallas -- 5,630,740 20,969,260 0 Oak Park/Dallas -- 3,966,129 14,633,871 0 Park Trails/Houston d 1,144,750 4,105,250 0 Pavillion/Dallas -- 4,428,258 16,071,742 0 Pecan Grove/Austin d 1,406,750 5,193,250 0 Preston Oaks/Dallas d 1,783,626 6,416,374 0 Preston Trace/Dallas c 2,195,500 8,304,500 0 Promontory Pointe/San Antonio -- 7,548,219 28,051,781 0 Rock Creek/Dallas c 4,076,680 14,523,320 0 Ryan's Mill/El Paso c 1,522,900 5,277,100 0 Southern Oaks/Ft. Worth -- 1,565,000 5,335,000 0 Summergate/Dallas c 1,171,300 3,928,700 0 Sunflower/San Antonio -- 2,209,000 7,891,000 0 The Creeks/Austin c 1,758,065 6,241,935 0 Timbercreek/Dallas -- 6,860,979 25,089,021 0 Westlake Villas/San Antonio d 2,371,865 8,878,135 0 Wimbledon Court/Dallas c 2,464,600 9,235,400 0 Windridge/Dallas d 3,414,311 12,785,689 0 Woodtrail/Houston d 1,543,000 5,457,000 0 Virginia Bayberry Commons/Portsmouth -- 516,800 3,485,645 1,249,117 Courthouse Green/Richmond -- 732,050 4,702,353 1,589,688 Craig Manor/Salem -- 282,200 2,419,570 663,635 Dominion English Hills/Richmond -- 1,979,174 11,524,313 3,656,425 Dominion Gayton Crossing/Richmond 3,224,416 825,760 5,147,968 703,698 Dominion Lake Ridge/Woodbridge -- 2,366,061 8,386,439 285,765 Dominion Laurel Springs/Richmond -- 464,480 3,119,716 653,065 Dominion Middle Ridge/Woodbridge -- 3,311,468 13,283,047 181,273 Dominion Olde West/Richmond -- 1,965,097 12,203,965 1,953,772 Dominion West End/ Richmond -- 2,059,252 15,049,088 780,530 Eastwind/Virginia Beach -- 155,000 5,316,738 1,530,234 Forest Lakes at Oyster Point/ Newport News -- 780,117 8,861,878 955,281 Greens at Falls Run/Fredericksburg -- 2,730,722 5,300,203 262,109 Greens at Hollymead/Charlottesville -- 965,114 5,250,374 221,259 Hampton Court/Alexandria -- 7,388,420 4,811,937 1,060,132 Heather Lake/Hampton -- 616,800 3,400,672 2,345,494 Kings Arms/Virginia Beach -- 1,823,983 4,106,710 136,622 Knolls at Newgate/Fairfax -- 1,725,725 3,530,134 973,864 Laurel Ridge/Roanoke 2,920,000 445,400 2,531,357 1,176,569 Manor at England Run/Fredericksburg -- 402,749 6,413,447 1,710,307 Meadow Run/Richmond -- 636,059 3,423,884 1,390,062 Meadowdale Lakes/Richmond 663,665 1,581,671 6,717,237 3,304,632 Northview/Salem -- 171,600 1,238,501 651,043 Parkwood Court/Alexandria 6,045,000 2,482,633 3,813,116 1,764,158 River Road/Ettrick -- 229,699 1,648,394 994,933 Rollingwood/Richmond 2,294,996 777,971 5,058,707 2,164,297 The Melrose/Dumfries 5,312,182 662,000 3,705,404 4,584,687 Timbercreek/Richmond -- 379,000 2,030,525 1,270,441 Twin Rivers/Hopewell -- 149,200 885,671 1,313,959 Woodscape/Newport News -- 798,700 7,209,525 2,260,887 Other Alvarado/Albuquerque, NM d 1,930,229 7,369,771 0 Bluff Creek/Oklahoma City, OK c 2,172,063 7,602,937 0 Sunset Pointe/Las Vegas, NV -- 4,295,050 15,704,950 0 ----------------------------------------------------------------------- $369,310,458 $323,368,428 $1,504,280,566 $179,962,971 ======================================================================= Real estate under development New apartment communities Providence Court/Charlotte, NC -- $ 0 $22,047,803 Dominion Franklin/Nashville, TN -- 2,104,394 462,829 Additions to existing communities Brantley Pines/Ft. Myers, FL -- 1,051,488 2,332,855 Clear Run/Wilmington, NC -- -- 153,624 Greenway Park II/Phoenix, AZ -- -- 443,500 Manor at England Run/ Fredericksburg, VA -- 1,307,728 593,017 Oak Forest II/Dallas, TX -- -- 2,324,662 Oak Park II/Dallas, TX -- -- 3,214,979 Steeplechase/Greensboro, NC -- 940,000 283,216 Wimbledon II/Dallas, TX -- -- 594,906 ----------------------------------------------------------------- $0 $5,403,610 $32,451,391 ================================================================= Real estate held for disposition Apartments: Azalea/Richmond, VA -- $272,522 $2,721,686 $1,130,308 Cedar Point/Raleigh, NC -- 75,400 4,514,435 3,041,472 Heritage Trace/Newport News, $3,900,000 880,000 2,312,285 1,734,353 Summit-on-Park/Charlotte, NC -- 147,000 1,021,602 984,668 Westgate/Spartanburg, SC -- 292,464 1,625,626 6,077 Woodscape/Houston c 1,836,600 6,163,400 -- Shopping Centers/Office & Industrial Buildings: Franklin St./Richmond, VA -- 67,900 282,173 60,843 Gloucester Exchange/Gloucester, VA -- 403,688 2,278,553 (2,519) Hanover Village-Land/Richmond, VA -- 1,623,910 0 0 Meadowdale Office/Richmond, VA -- 240,563 359,913 93,342 The Village/Durham, NC -- 1,355,000 3,814,496 3,535,568 Tri-County Buildings/Bristol, TN -- 275,580 900,281 1,263,115 Willow Oaks/Hampton, VA 3,350,000 402,612 1,211,045 7,247,967 --------------------------------------------------------------------- $7,250,000 $7,873,239 $27,205,495 $19,095,194 ===================================================================== </TABLE> SCHEDULE III. Summary of Real Estate Owned <TABLE> <CAPTION> Gross Amount at Which Carried at Close of Period Land and Buildings Land and Total Accumulated Improvements Improvements (a) Depreciation ------------ ------------ ------------ ------------ <S> <C> Apartments: Real estate held for investment Alabama Indian Hills/Anniston $455,323 $4,104,806 $4,560,129 $385,752 Three Fountains/Montgomery 1,101,964 7,865,466 8,967,430 760,262 Arkansas Shadow Lake/Little Rock 2,523,670 8,976,330 11,500,000 b Turtle Creek/Little Rock 1,913,177 7,086,823 9,000,000 b Arizona Greenway Park/Phoenix 1,622,700 5,727,300 7,350,000 b Sierra Palms/Phoenix 4,638,950 17,361,050 22,000,000 b Vista Point/Phoenix 1,587,400 5,612,600 7,200,000 b Delaware Dover Country Club/Dover 2,286,692 7,563,207 9,849,899 676,715 Greens at Cedar Chase/Dover 1,643,974 5,110,692 6,754,666 305,822 Florida Alafaya Woods/Orlando 1,932,238 9,934,527 11,866,765 871,356 Andover Place/Orlando 3,837,349 8,622,170 12,459,519 333,951 Bay Cove/Clearwater 3,107,550 7,811,772 10,919,322 1,390,144 Bay Meadow/Clearwater 2,893,583 9,262,942 12,156,525 27,923 Brantley Pines/Ft. Myers 1,346,923 6,490,265 7,837,188 594,074 Cleary Court/Ft. Lauderdale 2,489,126 8,354,150 10,843,276 581,135 Copperfield/Ft. Lauderdale 4,502,470 20,869,060 25,371,530 1,515,170 Dover Village/Orlando 3,106,452 8,148,290 11,254,742 1,371,027 Fisherman's Village/Orlando 2,573,422 8,352,955 10,926,377 329,573 Foxcroft/Tampa 915,692 4,544,670 5,460,362 807,773 Greentree Place/Jacksonville 1,832,100 12,926,632 14,758,732 1,105,431 Hunters Ridge/Plant City 2,756,175 11,425,394 14,181,569 655,813 Lake Washington Downs/Melbourne 1,612,310 5,886,665 7,498,975 813,930 Lakeside North/Orlando 1,635,640 12,750,203 14,385,843 1,308,028 Lakewood Place/Tampa 1,524,190 11,099,414 12,623,604 1,174,795 Los Altos/Orlando 2,823,107 12,387,464 15,210,571 125,724 Mallards of Wedgewood/Lakeland 1,163,543 7,830,574 8,994,117 420,830 Mediterranean Village/Miami 2,232,762 12,492,661 14,725,423 960,157 Orange Orlando/Orlando 1,393,000 3,177,053 4,570,053 706,253 Palm Grove/Tampa 788,753 5,784,073 6,572,826 695,370 Pinebrook/Clearwater 1,868,577 4,439,294 6,307,871 759,933 Regatta Shores/Orlando 1,259,449 7,485,079 8,744,528 840,182 Santa Barbara Landing/Naples 1,437,007 8,541,811 9,978,818 796,626 Seabrook/Orlando 2,046,539 4,863,447 6,909,986 201,405 Summit West/Tampa 2,375,646 5,938,161 8,313,807 1,051,261 The Antlers/Jacksonville 4,094,879 11,842,705 15,937,584 313,917 The Groves/Daytona Beach 918,648 5,153,342 6,071,990 213,946 University Club/Ft. Lauderdale 1,479,721 7,196,266 8,675,987 350,257 Village at Old Tampa Bay/Tampa 1,989,172 11,689,291 13,678,463 1,449,168 Vinyards/Orlando 2,220,553 12,498,153 14,718,706 1,104,512 Westland Park/Jacksonville 1,890,261 15,125,280 17,015,541 375,573 Georgia Colony of Stone Mountain/Atlanta 3,889,619 8,291,574 12,181,193 3,003,390 Crescent Square/Atlanta 1,350,612 11,086,289 12,436,901 3,790,830 Dunwoody Pointe/Atlanta 2,787,816 7,629,417 10,417,233 330,087 Griffin Crossing/Atlanta 1,621,096 7,958,288 9,579,384 832,230 Gwinnett Square/Atlanta 2,013,262 8,045,119 10,058,381 492,903 Lake of the Woods/Atlanta 845,305 8,474,530 9,319,835 137,034 River Place/Macon 1,416,470 8,083,364 9,499,834 981,570 Riverwood/Atlanta 2,999,124 11,334,978 14,334,102 242,178 Royal Oaks/Savannah 633,407 10,460,636 11,094,043 962,347 Stanford Village/Atlanta 1,058,379 3,328,494 4,386,873 1,209,213 Maryland Brittingham Square/Salisbury 725,904 5,135,531 5,861,435 299,346 Dominion at Eden Brook/Columbia 2,448,284 9,908,449 12,356,733 1,521,311 Dominion Constant Friendship/ Baltimore 976,805 4,884,847 5,861,652 288,524 Dominion Great Oaks/Baltimore 3,178,195 10,237,412 13,415,607 1,066,340 Dominion Kings Place/Columbia 1,626,559 7,360,459 8,987,018 1,102,458 Gatewater Landing/Glen Burnie 2,120,940 6,914,413 9,035,353 1,142,730 Greens at Cross Court/Easton 1,271,600 4,840,818 6,112,418 307,384 Greens at Hilton Run/Lexington Park 2,916,420 10,810,579 13,726,999 639,171 Greens at Schumaker Pond/Salisbury 779,464 6,432,408 7,211,872 373,433 Holly Tree Park/Waldorf 1,715,724 5,765,157 7,480,881 538,616 Twin Coves/Baltimore 1,019,290 3,534,782 4,554,072 332,942 Woodside/Baltimore 3,394,353 11,422,278 14,816,631 1,164,162 North Carolina Beechwood/Greensboro 1,563,539 6,400,115 7,963,654 781,034 Bramblewood/Goldsboro 535,559 4,077,183 4,612,742 1,931,969 Brynn Marr/Jacksonville 565,833 4,883,175 5,449,008 2,314,640 Canterbury Woods/Charlotte 549,477 6,688,741 7,238,218 2,910,481 Cape Harbor/Wilmington 1,898,231 18,132,350 20,030,581 294,385 Chateau Village/Gastonia 1,062,604 7,016,923 8,079,527 135,070 Cinnamon Ridge/Raleigh 1,268,513 7,332,462 8,600,975 3,146,897 Clear Run/Wilmington 1,194,874 12,831,689 14,026,563 909,611 Colony Village/New Bern 509,493 4,001,924 4,511,417 1,990,694 Copper Mill/Durham 1,548,280 16,066,720 17,615,000 b Cumberland Trace/Fayetteville 632,281 7,934,395 8,566,676 120,822 Deerwood Crossing/Winston-Salem 1,544,293 8,107,874 9,652,167 143,019 Dominion at Sharon/Charlotte 673,103 4,893,312 5,566,415 77,845 Dominion Courtney Place/Raleigh 1,283,049 6,325,369 7,608,418 860,898 Dominion Crown Point/Charlotte 1,185,798 9,111,073 10,296,871 873,403 Dominion Harris Pond/Charlotte 960,874 7,031,229 7,992,103 615,204 Dominion Mallard Creek/Charlotte 791,565 6,745,639 7,537,204 586,773 Dominion Mallard Green/Charlotte 449,263 2,840,467 3,289,730 259,734 Dominion on Lake Lynn/Raleigh 1,869,072 5,779,836 7,648,908 1,174,624 Dominion on Spring Forest/Raleigh 1,413,358 10,325,656 11,739,014 2,716,500 Dominion Park Green/Raleigh 561,307 5,140,795 5,702,102 1,282,447 Dominion Peppertree/Charlotte 1,625,076 8,363,348 9,988,424 1,067,707 Dominion Ramsgate/Carrboro 916,463 6,836,949 7,753,412 97,293 Dominion Walnut Creek/Raleigh 3,459,239 22,699,413 26,158,652 2,253,480 Dominion Walnut Ridge/Raleigh 2,024,559 13,016,347 15,040,906 1,358,274 Dutch Village/Winston-Salem 1,197,593 4,878,844 6,076,437 91,957 Emerald Bay/Charlotte 1,169,926 6,467,417 7,637,343 2,397,123 Forest Hills/Wilmington 1,137,458 6,161,970 7,299,428 1,129,788 Grand Oaks/Charlotte 884,191 6,618,144 7,502,335 3,451,413 Harbour Pointe/Raleigh 1,898,740 7,101,260 9,000,000 b Lake Brandt/Greensboro 1,569,960 13,498,604 15,068,564 215,749 Liberty Crossing/Jacksonville 1,190,846 5,283,216 6,474,062 1,875,524 Mill Creek/Wilmington 800,593 5,265,866 6,066,459 1,221,714 Morganton Place/Fayetteville 819,090 13,227,140 14,046,230 184,505 Northwinds/Greensboro 1,073,571 7,538,119 8,611,690 116,788 Park Forest/Greensboro 691,467 5,798,151 6,489,618 69,311 Steeplechase/Greensboro 2,303,522 11,440,324 13,743,846 334,631 The Creek/Wilmington 459,772 3,418,739 3,878,511 764,080 The Highlands/Charlotte 615,159 4,686,290 5,301,449 2,522,958 The Ledges/Winston-Salem 1,195,204 5,560,977 6,756,181 3,435,325 Village At Cliffdale/Fayetteville 949,855 15,521,406 16,471,261 218,910 Westwinds/Greensboro 1,328,214 7,022,129 8,350,343 114,937 Windsor Harbor/Charlotte 895,750 5,828,631 6,724,381 2,073,212 Woodberry/Asheville 388,699 6,427,472 6,816,171 97,915 South Carolina Colonial Villa/Columbia 1,378,149 5,972,391 7,350,540 1,083,928 Country Walk/Columbia 686,979 4,186,233 4,873,212 1,269,676 Crossroads/Columbia 2,403,190 15,499,686 17,902,876 1,388,998 Hunting Ridge/Greenville 605,610 3,017,507 3,623,117 277,577 Forestbrook/Columbia 572,479 4,101,639 4,674,118 716,610 Gable Hill/Columbia 1,053,085 5,857,775 6,910,860 1,683,206 Hampton Forest/Greenville 593,097 3,032,458 3,625,555 332,004 Hampton Greene/Columbia 1,579,958 10,362,337 11,942,295 918,397 Heatherwood/Greenville 436,200 3,895,773 4,331,973 597,117 Key Pines/Spartanburg 708,961 4,953,521 5,662,482 1,022,918 Overlook/Greenville 1,305,749 6,825,817 8,131,566 675,388 Patriot Place/Florence 1,357,867 5,857,016 7,214,883 2,595,003 Plum Chase/Columbia 1,094,325 7,722,890 8,817,215 2,652,113 Rivergate/Columbia 1,125,594 12,084,642 13,210,236 179,753 Riverwind/Spartanburg 896,651 6,812,598 7,709,249 862,925 Somerset/Charleston 638,107 4,658,521 5,296,628 428,230 Stonesthrow/Greenville 1,557,015 16,363,565 17,920,580 261,795 St. Andrews Commons/Columbia 1,573,241 9,855,301 11,428,542 1,549,082 St. Andrews/Columbia 1,125,264 7,482,393 8,607,657 656,039 The Landing/Greenville 954,780 6,313,881 7,268,661 589,529 The Park/Columbia 1,354,416 6,791,390 8,145,806 618,013 Waterford/Columbia 1,198,194 7,487,004 8,685,198 739,911 Tennessee 2131 Apartments/Nashville 1,079,766 11,099,086 12,178,852 1,600,014 Briar Club/Memphis 1,370,069 7,777,989 9,148,058 732,908 Brookridge/Nashville 732,962 5,668,863 6,401,825 181,043 Covington Crossing/Memphis 1,705,278 5,267,365 6,972,643 543,841 Harbour Town/Nashville 703,367 3,849,745 4,553,112 515,874 Hickory Run/Nashville 1,590,842 11,993,344 13,584,186 431,403 Hickory Pointe/Memphis 1,428,838 6,607,638 8,036,476 503,547 Hunters Trace/Memphis 1,015,305 7,393,703 8,409,008 642,417 Legacy Hill/Nashville 1,212,143 6,812,013 8,024,156 259,426 The Lakes/Nashville 1,421,522 6,612,237 8,033,759 969,797 Texas Ashley Oaks/San Antonio 4,590,782 16,809,218 21,400,000 b Autumnwood/Dallas 2,412,180 8,587,820 11,000,000 b Bluffs/San Antonio 1,901,146 6,898,854 8,800,000 b Catalina/Dallas 1,543,321 5,631,679 7,175,000 b Chandler's Mill/Corpus Christi 1,930,120 6,844,880 8,775,000 b Citiscape/Dallas 2,092,387 7,432,613 9,525,000 b Cobblestone/Dallas 2,925,372 10,527,738 13,453,110 b Dove Park/Dallas 2,309,195 8,690,805 11,000,000 b Foxfire/Amarillo 2,240,530 6,259,470 8,500,000 b Foxfire/Dallas 1,968,520 7,231,480 9,200,000 b High Ridge/Dallas 2,370,206 8,829,794 11,200,000 b Hunters Ridge/Ft. Worth 1,613,000 5,837,000 7,450,000 b Lakeridge/Dallas 1,631,350 5,668,650 7,300,000 b Oak Forest/Dallas 5,630,740 20,969,260 26,600,000 b Oak Park/Dallas 3,966,129 14,633,871 18,600,000 b Park Trails/Houston 1,144,750 4,105,250 5,250,000 b Pavillion/Dallas 4,428,258 16,071,742 20,500,000 b Pecan Grove/Austin 1,406,750 5,193,250 6,600,000 b Preston Oaks/Dallas 1,783,626 6,416,374 8,200,000 b Preston Trace/Dallas 2,195,500 8,304,500 10,500,000 b Promontory Pointe/San Antonio 7,548,219 28,051,781 35,600,000 b Rock Creek/Dallas 4,076,680 14,523,320 18,600,000 b Ryan's Mill/El Paso 1,522,900 5,277,100 6,800,000 b Southern Oaks/Ft. Worth 1,565,000 5,335,000 6,900,000 b Summergate/Dallas 1,171,300 3,928,700 5,100,000 b Sunflower/San Antonio 2,209,000 7,891,000 10,100,000 b The Creeks/Austin 1,758,065 6,241,935 8,000,000 b Timbercreek/Dallas 6,860,979 25,089,021 31,950,000 b Westlake Villas/San Antonio 2,371,865 8,878,135 11,250,000 b Wimbledon Court/Dallas 2,464,600 9,235,400 11,700,000 b Windridge/Dallas 3,414,311 12,785,689 16,200,000 b Woodtrail/Houston 1,543,000 5,457,000 7,000,000 b Virginia Bayberry Commons/Portsmouth 724,027 4,527,535 5,251,562 1,746,690 Courthouse Green/Richmond 979,146 6,044,945 7,024,091 2,780,862 Craig Manor/Salem 355,236 3,010,169 3,365,405 1,135,241 Dominion English Hills/Richmond 2,496,645 14,663,267 17,159,912 3,490,178 Dominion Gayton Crossing/Richmond 890,069 5,787,357 6,677,426 316,643 Dominion Lake Ridge/Woodbridge 2,426,281 8,611,984 11,038,265 289,535 Dominion Laurel Springs/Richmond 564,660 3,672,601 4,237,261 955,472 Dominion Middle Ridge/Woodbridge 3,357,199 13,418,589 16,775,788 271,788 Dominion Olde West/Richmond 2,314,529 13,808,305 16,122,834 5,256,563 Dominion West End/ Richmond 2,179,987 15,708,883 17,888,870 569,999 Eastwind/Virginia Beach 324,361 6,677,611 7,001,972 2,437,239 Forest Lakes at Oyster Point/ Newport News 1,038,762 9,558,514 10,597,276 487,103 Greens at Falls Run/Fredericksburg 2,776,321 5,516,713 8,293,034 335,200 Greens at Hollymead/Charlotte 1,021,155 5,415,592 6,436,747 317,027 Hampton Court/Alexandria 7,587,189 5,673,300 13,260,489 933,132 Heather Lake/Hampton 911,499 5,451,467 6,362,966 3,509,340 Kings Arms/Virginia Beach 1,817,984 4,249,331 6,067,315 71,669 Knolls at Newgate/Fairfax 1,769,257 4,460,466 6,229,723 474,727 Laurel Ridge/Roanoke 655,267 3,498,059 4,153,326 1,526,049 Manor at England Run/Fredericksburg 1,766,331 6,760,172 8,526,503 364,865 Meadow Run/Richmond 846,340 4,603,665 5,450,005 2,317,191 Meadowdale Lakes/Richmond 2,204,827 9,398,713 11,603,540 4,823,658 Northview/Salem 229,844 1,831,300 2,061,144 1,158,754 Parkwood Court/Alexandria 2,610,009 5,449,898 8,059,907 818,352 River Road/Ettrick 326,726 2,546,300 2,873,026 1,495,191 Rollingwood/Richmond 1,054,957 6,946,018 8,000,975 3,517,823 The Melrose/Dumfries 1,336,997 7,615,094 8,952,091 3,638,135 Timbercreek/Richmond 536,692 3,143,274 3,679,966 1,854,180 Twin Rivers/Hopewell 359,092 1,989,738 2,348,830 1,356,394 Woodscape/Newport News 1,040,926 9,228,186 10,269,112 3,213,350 Other Alvarado/Albuquerque, NM 1,930,229 7,369,771 9,300,000 b Bluff Creek/Oklahoma City, OK 2,172,063 7,602,937 9,775,000 b Sunset Pointe/Las Vegas, NV 4,295,050 15,704,950 20,000,000 b --------------------------------------------------------------------- $353,213,069 $1,654,398,896 $2,007,611,965 $173,291,463 ===================================================================== Real estate under development New apartment communities Providence Court/Charlotte, NC $ 0 $22,047,803 $22,047,803 $ 0 Dominion Franklin/Nashville, TN 2,104,395 462,828 2,567,223 0 Additions to existing communities Brantley Pines/ Fort Myers, FL 1,051,488 2,332,855 3,384,343 0 Clear Run/Wilmington, NC 0 153,624 153,624 0 Greenway Park II/Phoenix, AZ 0 443,500 443,500 0 Manor at England Run/Fredericksburg 1,307,728 593,017 1,900,745 0 Oak Forest II/Dallas, TX 0 2,324,662 2,324,662 0 Oak Park II/Dallas, TX 0 3,214,979 3,214,979 0 Steeplechase/Greensboro, NC 940,000 283,216 1,223,216 0 Wimbledon II/Dallas, TX 0 594,906 594,906 0 ----------- ---------- ----------- ---------- 5,403,611 32,451,390 37,855,001 0 ========= ========== =========== ========== Real estate held for disposition Apartments: Azalea/Richmond, VA $409,606 $3,714,910 $4,124,516 $1,650,368 Cedar Point/Raleigh, NC 236,422 7,394,885 7,631,307 3,455,287 Heritage Trace/Newport News, VA 1,200,782 3,725,856 4,926,638 1,612,957 Summit-on-Park/Charlotte, NC 246,626 1,906,644 2,153,270 1,091,746 Westgate/Spartanburg, SC 292,464 1,631,703 1,924,167 9,899 Woodscape/Houston 1,836,600 6,163,400 8,000,000 b Shopping Centers/Office & Industrial Buildings: Franklin St./Richmond, VA 67,900 343,016 410,916 132,421 Gloucester Exchange/Gloucester 531,881 2,147,841 2,679,722 757,307 Hanover Village-Land/Richmond, VA 1,103,600 520,310 1,623,910 10,180 Meadowdale Office/Richmond, VA 258,144 435,674 693,818 300,034 The Village/Durham, NC 2,179,259 6,525,805 8,705,064 2,138,586 Tri-County Buildings/Bristol, TN 364,123 2,074,853 2,438,976 733,820 Willow Oaks/Hampton, VA 2,957,929 5,903,695 8,861,624 2,725,268 -------------------------------------------------------------------- $11,685,336 $42,488,592 $54,173,928 $14,617,873 ==================================================================== </TABLE> <TABLE> <CAPTION> Depreciable Life of Date of Date Building Construction Acquired Component ------------ -------- ----------- <S> <C> Apartments: Real estate held for investment Alabama Indian Hills/Anniston 1975 07/01/94 35 yrs. Three Fountains/Montgomery 1973 07/01/94 35 yrs. Arkansas Shadow Lake/Little Rock 1984 12/31/96 35 yrs. Turtle Creek/Little Rock 1985 12/31/96 35 yrs. Arizona Greenway Park/Phoenix 1986 12/31/96 35 yrs. Sierra Palms/Phoenix 1996 12/31/96 35 yrs. Vista Point/Phoenix 1986 12/31/96 35 yrs. Delaware Dover Country Club/Dover 1970 07/01/94 35 yrs. Greens at Cedar Chase/Dover 1988 05/04/95 35 yrs. Florida Alafaya Woods/Orlando 1988/90 10/21/94 35 yrs. Andover Place/Orlando 1988 09/29/95 & 09/30/96 35 yrs. Bay Cove/Clearwater 1972 12/16/92 35 yrs. Bay Meadow/Clearwater 1985 12/09/96 35 yrs. Brantley Pines/Ft. Myers 1986 08/11/94 35 yrs. Cleary Court/Ft. Lauderdale 1984/85 11/30/94 35 yrs. Copperfield/Ft. Lauderdale 1991 09/21/94 35 yrs. Dover Village/Orlando 1981 03/31/93 35 yrs. Fisherman's Village/Orlando 1984 12/29/95 35 yrs. Foxcroft/Tampa 1972 01/28/93 35 yrs. Greentree Place/Jacksonville 1986 07/22/94 35 yrs. Hunters Ridge/Plant City 1992 06/30/95 35 yrs. Lake Washington Downs/Melbourne 1984 09/24/93 35 yrs. Lakeside North/Orlando 1984 04/14/94 35 yrs. Lakewood Place/Tampa 1986 03/10/94 35 yrs. Los Altos/Orlando 1990 10/31/96 35 yrs. Mallards of Wedgewood/Lakeland 1985 07/27/95 35 yrs. Mediterranean Village/Miami 1989 09/30/94 35 yrs. Orange Orlando/Orlando 1971 01/21/93 35 yrs. Palm Grove/Tampa 1969/71 04/15/94 35 yrs. Pinebrook/Clearwater 1977 09/28/93 35 yrs. Regatta Shores/Orlando 1988 06/30/94 35 yrs. Santa Barbara Landing/Naples 1987 09/01/94 35 yrs. Seabrook/Orlando 1984 02/20/96 35 yrs. Summit West/Tampa 1972 12/16/92 35 yrs. The Antlers/Jacksonville 1985 05/28/96 35 yrs. The Groves/Daytona Beach 1989 12/13/95 35 yrs. University Club/Ft. Lauderdale 1988 09/26/95 35 yrs. Village at Old Tampa Bay/Tampa 1986 12/08/93 35 yrs. Vinyards/Orlando 1984/86 10/31/94 35 yrs. Westland Park/Jacksonville 1990 05/09/96 35 yrs. Georgia Colony of Stone Mountain/Atlanta 1970/72 06/12/90 35 yrs. Crescent Square/Atlanta 1970 03/22/89 35 yrs. Dunwoody Pointe/Atlanta 1980 10/24/95 35 yrs. Griffin Crossing/Atlanta 1987/89 06/08/94 35 yrs. Gwinnett Square/Atlanta 1985 03/29/95 35 yrs. Lake of the Woods/Atlanta 1989 08/15/96 35 yrs. River Place/Macon 1988 04/08/94 35 yrs. Riverwood/Atlanta 1980 06/26/96 35 yrs. Royal Oaks/Savannah 1980 07/01/94 35 yrs. Stanford Village/Atlanta 1985 09/26/89 35 yrs. Maryland Brittingham Square/Salisbury 1991 05/04/95 35 yrs. Dominion at Eden Brook/Columbia 1984 12/29/92 35 yrs. Dominion Constant Friendship/Baltimore 1990 05/04/95 35 yrs. Dominion Great Oaks/Baltimore 1974 07/01/94 35 yrs. Dominion Kings Place/Columbia 1983 12/29/92 35 yrs. Gatewater Landing/Glen Burnie 1970 12/16/92 35 yrs. Greens at Cross Court/Easton 1987 05/04/95 35 yrs. Greens at Hilton Run/Lexington 1988 05/04/95 35 yrs. Greens at Schumaker Pond/Salisbury 1988 05/04/95 35 yrs. Holly Tree Park/Waldorf 1973 07/01/94 35 yrs. Twin Coves/Baltimore 1974 08/16/94 35 yrs. Woodside/Baltimore 1966 08/16/94 35 yrs. North Carolina Beechwood/Greensboro 1985 12/22/93 35 yrs. Bramblewood/Goldsboro 1980/82 12/31/84 35 yrs. Brynn Marr/Jacksonville 1973/77 12/31/84 35 yrs. Canterbury Woods/Charlotte 1968/70 12/18/85 35 yrs. Cape Harbor/Wilmington 1996 08/15/96 35 yrs. Chateau Village/Gastonia 1974 08/15/96 35 yrs. Cinnamon Ridge/Raleigh 1968/70 12/01/89 35 yrs. Clear Run/Wilmington 1987/89 07/22/94 35 yrs. Colony Village/New Bern 1972/74 12/31/84 35 yrs. Copper Mill/Durham 1997 12/31/96 35 yrs. Cumberland Trace/Fayetteville 1973 08/15/96 35 yrs. Deerwood Crossing/Winston-Salem 1973 08/15/96 35 yrs. Dominion at Sharon/Charlotte 1984 08/15/96 35 yrs. Dominion Courtney Place/Raleigh 1979/81 07/08/93 35 yrs. Dominion Crown Point/Charlotte 1987 07/01/94 35 yrs. Dominion Harris Pond/Charlotte 1987 07/01/94 35 yrs. Dominion Mallard Creek/Charlotte 1989 08/16/94 35 yrs. Dominion Mallard Green/Charlotte 1985 07/01/94 35 yrs. Dominion on Lake Lynn/Raleigh 1986 12/01/92 35 yrs. Dominion on Spring Forest/Raleigh 1978/81 05/21/91 35 yrs. Dominion Park Green/Raleigh 1987 09/27/91 35 yrs. Dominion Peppertree/Charlotte 1987 12/14/93 35 yrs. Dominion Ramsgate/Carrboro 1988 08/15/96 35 yrs. Dominion Walnut Creek/Raleigh 1985/86 05/17/94 35 yrs. Dominion Walnut Ridge/Raleigh 1982/84 03/04/94 35 yrs. Dutch Village/Winston-Salem 1970 08/15/96 35 yrs. Emerald Bay/Charlotte 1972 02/06/90 35 yrs. Forest Hills/Wilmington 1964/69 06/30/92 35 yrs. Grand Oaks/Charlotte 1966/67 05/01/84 35 yrs. Harbour Pointe/Raleigh 1984 12/31/96 35 yrs. Lake Brandt/Greensboro 1995 08/15/96 35 yrs. Liberty Crossing/Jacksonville 1972/74 11/30/90 35 yrs. Mill Creek/Wilmington 1986 09/30/91 35 yrs. Morganton Place/Fayetteville 1994 08/15/96 35 yrs. Northwinds/Greensboro 1989 08/15/96 35 yrs. Park Forest/Greensboro 1987 09/26/96 35 yrs. Steeplechase/Greensboro 1990 03/07/96 35 yrs. The Creek/Wilmington 1973 06/30/92 35 yrs. The Highlands/Charlotte 1970 01/17/84 35 yrs. The Ledges/Winston-Salem 1959 08/13/86 35 yrs. Village At Cliffdale/Fayetteville 1992 08/15/96 35 yrs. Westwinds/Greensboro 1986 08/15/96 35 yrs. Windsor Harbor/Charlotte 1971 01/13/89 35 yrs. Woodberry/Asheville 1987 08/15/96 35 yrs. South Carolina Colonial Villa/Columbia 1974 09/16/92 35 yrs. Country Walk/Columbia 1974 12/19/91 35 yrs. Crossroads/Columbia 1977/84 07/01/94 35 yrs. Hunting Ridge/Greenville 1972 11/01/94 35 yrs. Forestbrook/Columbia 1974 07/01/93 35 yrs. Gable Hill/Columbia 1985 12/04/89 35 yrs. Hampton Forest/Greenville 1968 08/16/94 35 yrs. Hampton Greene/Columbia 1990 08/19/94 35 yrs. Heatherwood/Greenville 1978 09/30/93 35 yrs. Key Pines/Spartanburg 1974 09/25/92 35 yrs. Overlook/Greenville 1976 07/01/94 35 yrs. Patriot Place/Florence 1974 10/23/85 35 yrs. Plum Chase/Columbia 1974 01/04/91 35 yrs. Rivergate/Columbia 1989 08/15/96 35 yrs. Riverwind/Spartanburg 1987 12/31/93 35 yrs. Somerset/Charleston 1979 07/01/94 35 yrs. Stonesthrow/Greenville 1993 08/15/96 35 yrs. St. Andrews Commons/Columbia 1986 05/20/93 35 yrs. St. Andrews/Columbia 1972 07/01/94 35 yrs. The Landing/Greenville 1976 07/01/94 35 yrs. The Park/Columbia 1975/77 07/01/94 35 yrs. Waterford/Columbia 1985 07/01/94 35 yrs. Tennessee 2131 Apartments/Nashville 1972 12/16/92 35 yrs. Briar Club/Memphis 1987 10/14/94 35 yrs. Brookridge/Nashville 1986 03/28/96 35 yrs. Covington Crossing/Memphis 1974 10/14/94 35 yrs. Harbour Town/Nashville 1974 12/10/93 35 yrs. Hickory Run/Nashville 1989 12/29/95 35 yrs. Hickory Pointe/Memphis 1985 02/10/95 35 yrs. Hunters Trace/Memphis 1986 10/14/94 35 yrs. Legacy Hill/Nashville 1977 11/06/95 35 yrs. The Lakes/Nashville 1986 09/15/93 35 yrs. Texas Ashley Oaks/San Antonio 1993 12/31/96 35 yrs. Autumnwood/Dallas 1984 12/31/96 35 yrs. Bluffs/San Antonio 1978 12/31/96 35 yrs. Catalina/Dallas 1982 12/31/96 35 yrs. Chandler's Mill/Corpus Christi 1984 12/31/96 35 yrs. Citiscape/Dallas 1973 12/31/96 35 yrs. Cobblestone/Dallas 1984 12/31/96 35 yrs. Dove Park/Dallas 1984 12/31/96 35 yrs. Foxfire/Amarillo 1978 12/31/96 35 yrs. Foxfire/Dallas 1978 12/31/96 35 yrs. High Ridge/Dallas 1979 12/31/96 35 yrs. Hunters Ridge/Ft. Worth 1992 12/31/96 35 yrs. Lakeridge/Dallas 1984 12/31/96 35 yrs. Oak Forest/Dallas 1996 12/31/96 35 yrs. Oak Park/Dallas 1982 12/31/96 35 yrs. Park Trails/Houston 1983 12/31/96 35 yrs. Pavillion/Dallas 1979 12/31/96 35 yrs. Pecan Grove/Austin 1984 12/31/96 35 yrs. Preston Oaks/Dallas 1980 12/31/96 35 yrs. Preston Trace/Dallas 1984 12/31/96 35 yrs. Promontory Pointe/San Antonio 1997 12/31/96 35 yrs. Rock Creek/Dallas 1979 12/31/96 35 yrs. Ryan's Mill/El Paso 1985 12/31/96 35 yrs. Southern Oaks/Ft. Worth 1982 12/31/96 35 yrs. Summergate/Dallas 1984 12/31/96 35 yrs. Sunflower/San Antonio 1974 12/31/96 35 yrs. The Creeks/Austin 1975 12/31/96 35 yrs. Timbercreek/Dallas 1977 12/31/96 35 yrs. Westlake Villas/San Antonio 1985 12/31/96 35 yrs. Wimbledon Court/Dallas 1983 12/31/96 35 yrs. Windridge/Dallas 1980 12/31/96 35 yrs. Woodtrail/Houston 1978 12/31/96 35 yrs. Virginia Bayberry Commons/Portsmouth 1973/74 04/07/88 35 yrs. Courthouse Green/Richmond 1974/78 12/31/84 35 yrs. Craig Manor/Salem 1975 11/06/87 35 yrs. Dominion English Hills/Richmond 1969/76 12/06/91 35 yrs. Dominion Gayton Crossing/Richmond 1973 09/28/95 35 yrs. Dominion Lake Ridge/Woodbridge 1987 02/23/96 35 yrs. Dominion Laurel Springs/Richmond 1972 09/06/91 35 yrs. Dominion Middle Ridge/Woodbridge 1990 06/25/96 35 yrs. Dominion Olde West/Richmond 1978/82/85/87 12/31/84 & 8/27/91 35 yrs. Dominion West End/ Richmond 1989 12/28/95 35 yrs. Eastwind/Virginia Beach 1970 04/04/88 35 yrs. Forest Lakes at Oyster Point/ Newport News 1986 08/15/95 35 yrs. Greens at Falls Run/Fredericksburg 1989 05/04/95 35 yrs. Greens at Hollymead/Charlotte, NC 1990 05/04/95 35 yrs. Hampton Court/Alexandria 1967 02/19/93 35 yrs. Heather Lake/Hampton 1972/74 03/01/80 35 yrs. Kings Arms/Virginia Beach 1966 08/15/96 35 yrs. Knolls at Newgate/Fairfax 1972 07/01/94 35 yrs. Laurel Ridge/Roanoke 1970/72 05/17/88 35 yrs. Manor at England Run/Fredericksburg 1990 05/04/95 35 yrs. Meadow Run/Richmond 1973/74 12/31/84 35 yrs. Meadowdale Lakes/Richmond 1967/71 12/31/84 35 yrs. Northview/Salem 1969 09/29/78 35 yrs. Parkwood Court/Alexandria 1964 06/30/93 35 yrs. River Road/Ettrick 1973/74 08/31/81 35 yrs. Rollingwood/Richmond 1974/78 12/31/84 35 yrs. The Melrose/Dumfries 1951 12/11/85 35 yrs. Timbercreek/Richmond 1969 08/31/83 35 yrs. Twin Rivers/Hopewell 1972 01/06/82 35 yrs. Woodscape/Newport News 1974/76 12/29/87 35 yrs. Other Alvarado/Albuquerque, NM 1984 12/31/96 35 yrs. Bluff Creek/Oklahoma City, OK 1984 12/31/96 35 yrs. Sunset Pointe/Las Vegas, NV 1990 12/31/96 35 yrs. Real estate under development New apartment communities Providence Court/Charlotte, NC Dominion Franklin/Nashville, TN Additions to existing communities Brantley Pines/ Ft. Myers, FL Clear Run/Wilmington, NC Greenway Park II/Phoenix, AZ Manor at England Run/Fredericksburg Oak Forest II/Dallas, TX Oak Park II/Dallas, TX Steeplechase/Greensboro, NC Wimbledon II/Dallas, TX Real estate held for disposition Apartments: Azalea/Richmond, VA 1967 12/31/84 35 yrs. Cedar Point/Raleigh, NC 1972 12/18/85 35 yrs. Heritage Trace/Newport News, 1973 06/30/89 35 yrs. Summit-on-Park/Charlotte, NC 1963 01/17/84 35 yrs. Westgate/Spartanburg, SC 1976 08/15/96 35 yrs. Woodscape/Houston 1980 12/31/96 35 yrs. Shopping Centers/Office & Industrial Buildings: Franklin St./Richmond, VA 1890 07/01/86 35 yrs. Gloucester Exchange/Gloucester 1974 11/12/87 35 yrs. Hanover Village-Land/Richmond -- 06/30/86 35 yrs. Meadowdale Office/Richmond, VA 1976/82 12/31/84 35 yrs. The Village/Durham, NC 1965 08/28/86 35 yrs. Tri-County Buildings/Bristol, TN 1976/79 01/21/81 35 yrs. Willow Oaks/Hampton, VA 1968/74 08/01/84 35 yrs. </TABLE> (a) The aggregate cost for federal income tax purposes was approximately $1.932 billion and $1.192 billion at December 31, 1996 and 1995, respectively. (b) These properties were purchased at the close of business on 12/31/96 in connection with the statutory merger (the "Merger") with South West Property Trust Inc. The Merger has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. (c) Represents a $46,289,018 REMIC financing encumbering 13 apartment communities assumed on December 31, 1996 in connection with the Merger. (d) Represents a $48,579,058 REMIC financing encumbering 14 apartment communities assumed on December 31, 1996 in connection with the Merger.