UDR

Business Context and Reporting Period

Company: United Dominion Realty Trust, Inc. (UDR, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: UDR is a self-administered equity REIT owning, acquiring, renovating, developing, and managing middle-market apartment communities nationwide. As of December 31, 2003, the portfolio consisted of 264 communities with 76,244 completed apartment homes across 55 markets in 19 states. The company also had three communities under development.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Activity: Acquired 21 communities (5,220 homes) for approximately $423.7 million. Disposed of seven communities (1,927 homes) for $88.9 million and two commercial properties for $7.3 million.
• Operating Performance: Same-community property operating income decreased 4.2% ($14.9 million) due to a 2.2% decrease in rental rates, partially offset by reduced vacancy loss and concession expenses. Physical occupancy remained constant at 93.2%.
• Capital Structure: Successfully lowered the weighted average interest rate on debt from 5.9% to 5.2%. Increased the unencumbered asset pool to $2.8 billion. Completed over $1 billion in capital transactions.
• Net Income Variance: While total Net Income increased significantly ($17.2 million), Net Income Available to Common Stockholders decreased slightly ($1.0 million). This was primarily due to a $19.3 million charge for premiums on preferred share repurchases and reduced gains on property sales, offset by a $15.8 million decrease in interest expense.
• Rating Upgrades: Upgraded by S&P to BBB (Stable) and Moody's to Baa3 (Positive outlook).

Guidance, Outlook, and Risks

Management Commentary & Strategy:

• Management aims to maximize economic returns by owning middle-market apartments across a national platform to enhance stability.
• Strategy involves exiting markets with limited long-term growth prospects and redeploying capital into core markets with strong job growth and household formation.
• Focus on aggressive lease management, expense control, and resident retention to improve operational performance.

Outlook:

• Anticipates meeting short-term liquidity needs through operating cash flow and credit facilities.
• Plans to fund future development primarily through joint ventures, property sales, and construction loans.
• Expects to continue channeling investments into markets offering the best long-term returns.

Risks and Contingencies:

• Market Conditions: Unfavorable economic conditions, low job growth, and low mortgage rates could adversely affect occupancy and rental rates.
• Competition: Intense competition for residents and acquisitions from other REITs, insurance companies, and pension funds.
• Interest Rate Risk: Exposure to variable rate debt; rising rates could increase interest costs.
• Environmental: Potential liability for hazardous materials (asbestos, lead paint, mold) though no material adverse impact is currently known.
• REIT Qualification: Risk of failing to meet REIT requirements, which would subject the company to corporate income taxes.

Key Facts for Investor Verification

• Dividend Sustainability: Verify the ability to maintain the 27th consecutive year of dividend increases given the slight decline in net income available to common stockholders and the impact of preferred stock redemption charges.
• Same-Community Trends: Monitor the 2.2% decline in rental rates and the ability to reverse this trend in 2004 through portfolio upgrades and market recovery.
• Debt Maturities: Review the schedule of debt maturities, noting approximately $147.9 million in long-term debt obligations due in 2004.
• Development Pipeline: Assess the progress and budget adherence of the three communities under development (Rancho Cucamonga, 2000 Post Phase III, Mandalay on the Lake) and the AEGON joint venture.
• Preferred Stock Conversions: Understand the impact of the $19.3 million premium charge related to the conversion of Series D preferred stock into common shares.