UDR

UDR, Inc. (United Dominion Realty Trust, Inc.) 10-K Summary

Business Context and Reporting Period

Company: United Dominion Realty Trust, Inc. (UDR)
Reporting Period: Fiscal year ended December 31, 2002
Business Model: Self-administered equity REIT owning, acquiring, renovating, developing, and managing middle-market apartment communities nationwide.
Portfolio Overview: As of December 31, 2002, the portfolio consisted of 260 communities with 74,480 completed apartment homes across 57 markets in 20 states. Additionally, 616 homes were under development.

Key Financial Metrics

Dividends: Total distributions declared were $1.11 per share in 2002, marking the 26th consecutive year of dividend increases.

Material Changes vs. Prior Period

• Net Income Decline: Net income available to common shareholders decreased to $25.8 million from $27.1 million in 2001. This was primarily driven by $37.0 million in extraordinary charges related to prepayment penalties and premiums for debt refinancing and repurchases.
• FFO Growth: Despite the net income decline, FFO grew 10.1% per diluted share and AFFO grew 12.3% per diluted share compared to 2001.
• Portfolio Optimization: The company sold 25 communities (6,990 homes) for approximately $319 million to exit non-core markets. It acquired 9 communities (3,041 homes) and one land parcel for approximately $267 million.
• Debt Management: The weighted average interest rate on debt decreased from 6.6% at the start of 2002 to 5.9% at year-end. The company repurchased $138 million of outstanding debt securities and issued $200 million of new senior unsecured notes.
• Operating Performance: Same-community property operating income decreased 0.8% due to a 17.1% increase in vacancy loss and a 37.1% increase in concessions, partially offset by higher rental rates and utility reimbursements.

Guidance, Outlook, and Risks

Management Commentary: Management emphasized a strategy of "Operational Excellence," focusing on the middle-market segment and proactive portfolio management. The company aims to exit markets with below-average growth and redeploy capital into core markets. A new development joint venture with AEGON USA Realty Advisors was formed to develop up to $210 million of new homes over the next 3-5 years.

Outlook: The company anticipates meeting short-term liquidity needs through operating cash flow and credit facilities. Long-term needs will be met through refinancing, dispositions, and capital market issuances. Recurring capital expenditures for 2003 are expected to be approximately $435 per home.

Risks and Contingencies:

• Economic Conditions: Weakness in the U.S. economy and employment levels could adversely affect occupancy and rental rates.
• Refinancing Risk: Significant debt maturities require refinancing; unfavorable terms could pressure asset sales or equity issuance.
• Interest Rate Risk: Exposure to variable rate debt, though partially hedged with interest rate swaps ($232 million notional value).
• Environmental Liability: Potential costs associated with hazardous materials (asbestos, lead paint, mold) at properties.

Key Facts for Investor Verification

• Extraordinary Charges: Verify the impact of the $37.0 million in debt extinguishment charges on 2002 net income versus the underlying operational performance (FFO).
• Occupancy Trends: Monitor the 17.1% increase in vacancy loss and 37.1% increase in concessions at same communities, which offset rental rate growth.
• Debt Maturities: Review the schedule of debt maturities, noting approximately $19.5 million of secured and $115.1 million of unsecured debt maturing in 2003.
• Portfolio Turnover: Assess the success of the strategy to exit non-core markets (25 communities sold) and redeploy capital into core markets (9 communities acquired).
• Development Pipeline: Track the progress of the new AEGON joint venture and the 616 homes currently under development.