United Dominion Realty Trust, Inc. Business Information, Profile, and History

Company Perspectives:

The middle market apartments that comprise United Dominion's portfolio are generally affordable to approximately 75 percent of all renters in the country. This large base of prospective residents creates a high degree of earnings predictability for the Company. Another degree of predictability and safety is created by our resident profile. Our residents tend to be renters-by-necessity that are attracted to our apartments because of their proximity to employment centers, their price point, and, to a lesser extent, their services and amenities. Given our average rent of $703 per month, we have less exposure to the higher rental rates that new development apartments command.

History of United Dominion Realty Trust, Inc.

United Dominion Realty Trust, Inc. (UDRT) is the fourth largest public apartment real estate investment trust in the United States. UDRT owns and operates more than 77,000 apartment units housed within 274 communities spread across 21 states. The company manages, develops, and renovates middle-market apartment communities, owning a portfolio including "B" to "A" quality properties, having evolved from its roots in Virginia as an owner of "C" grade properties. The company's biggest market is in Houston, followed by Dallas.

Origins

UDRT was founded as a Virginia corporation in 1972, beginning its business life as a real estate investment trust (REIT), then a relatively new corporate breed. REITs were authorized by the passage of the Real Estate Investment Act of 1960, whose purpose was to stimulate investment in real estate. As a general rule, REITs were exempt from federal income taxation provided they distributed nearly all of their taxable income as dividends to shareholders. The exemption from taxation opened the doors to investors who otherwise would have been precluded from engaging in real estate ownership and professional real estate management. For the first time, small investors, encouraged by the provisions of the Real Estate Investment Act, could pool their investments and participate in an industry previously restricted to the wealthy elite. In the wake of the democratization that followed the passage of the Real Estate Investment Act, REITs--companies dedicated to owning and, in most cases, operating income-producing real estate--began to appear. REITs focused their investment activities on a variety of property types, including apartments, offices, warehouses, and shopping centers. For its part, UDRT focused primarily on acquiring and managing apartment complexes, although during its first decades in business the company invested in shopping centers, office buildings, and industrial buildings.

By the time UDRT celebrated its 30th anniversary, it could count itself among the five largest publicly held apartment REITs in the nation, but the company's first years in business hardly suggested the stature it would later attain. The company did not gain its second employee until its third year of business, in 1974, when it owned only five apartment properties and a shopping center. UDRT's second employee, John P. McCann, was an important addition, marking the arrival of the single most influential individual in the company's first 30 years of business. McCann, who eventually was named chairman emeritus of the company after 27 years of service, joined the firm when it was no more than a locally oriented concern. Under McCann's stewardship, UDRT evolved from a local into a regional company, before maturing into a nationally operating concern.

As UDRT began its gradual evolution into one of the country's largest apartment REITs, it did so by building a portfolio of older B and C grade properties, that is, lower-grade apartment complexes. Although the company would later shy from acquiring lower-grade properties, particularly apartment properties classified as C grade, the strategy enabled the firm to gain its footing in a burgeoning industry. The two acquisition strategies defined the two eras of the company's development during the 20th century, each philosophy adopted because of extant economic conditions and because of UDRT's own economic strength. During the company's first era of development, which spanned nearly 20 years, it was forced, in large part, by a limited supply of capital to acquire only C grade apartments, relegated to targeting properties deemed underleased, undermanaged, and undermaintained. In this market segment, the company excelled, exhibiting great talent for exploiting the resale market. Success in this area was determined predominantly by renovation and assiduous scrutiny of property management costs. By demonstrating skills in these two disciplines, UDRT was able to succeed financially where other property management companies had failed.

Underpinned by a sound operating strategy, UDRT gained momentum and flowered into a regional concern. The company expanded in the southeastern United States initially, acquiring properties in North Carolina, Tennessee, Florida, and Georgia, as well as properties located closer to home in Virginia and Maryland. As the company expanded during the 1980s, it added significantly to its shopping center assets, the last decade UDRT would seek to embellish its mall holdings. The company acquired 12 shopping centers during the decade, purchasing properties located predominantly in Virginia, but on the whole UDRT was interested in apartment complexes. During the late 1980s, 70 percent of UDRT's portfolio consisted of apartment holdings, an unusually high percentage in the industry. The company's bias toward apartment properties held it in good stead as rising interest rates slowed the migration of apartment dwellers into homes of their own, proving to be a countercyclical boon to business during the latter years of the decade.

Expansion Beginning in Earnest in 1991

A turning point in UDRT's development occurred as the company's 20th anniversary neared. In 1991, economic conditions, notably a real estate credit crisis, created unique opportunities that UDRT was able to take advantage of because of its financial strength. The changes enabled UDRT's management to distance itself from the acquisition mantra of "underleased, undermanaged, and undermaintained" and to begin to pursue more attractive real estate properties. For the first time in its history, the company started to acquire more stable properties, specifically apartment complexes with high occupancy levels that required little substantial renovation. Economic conditions also allowed the company to embark on a major expansion of its apartment portfolio, triggering growth that inevitably led to UDRT's geographic expansion. The company entered new markets in the Washington, D.C., and Baltimore area, central and south Florida, and Nashville and Memphis, Tennessee, fleshing out its presence in the Southeast.

UDRT's buying opportunities--the fuel for its expansion--came from several types of sellers. During the early 1990s, insurance companies were interested in reducing their real estate exposure, many real estate limited partnerships were financially distressed, the RTC and FDIC were inclined to dispose real estate assets, and numerous lenders had foreclosed on properties. With scores of attractive acquisition candidates on offer, McCann and his management team pressed ahead aggressively, beginning the gradual transformation of UDRT's portfolio. Between 1991 and 1993, the company spent $250 million to acquire 36 apartment communities, which represented the addition of 9,237 units. The following year, the company eclipsed the efforts of the previous two years, spending $404 million to acquire 11,433 units grouped within 47 apartment complexes. The year's purchases moved UDRT into Alabama and Delaware for the first time. Midway through this initial expansion phase of the 1990s, management strengthened its commitment to apartment investments, resolving, near the end of 1992, to concentrate exclusively on its apartment business. Toward this end, the company began divesting its interests in shopping centers and commercial and industrial buildings. One shopping center was sold in 1994 and another four malls were divested the following year, as well as an industrial park.

As UDRT entered the latter half of the 1990s, the transformation sweeping through the company's portfolio became more readily discernible. The company's actions in 1991 represented a turning point, but the definitive moment of change did not occur until 1997, its arrival engendered by a signal acquisition. In December 1996, UDRT acquired Southwest Property Trust Inc., a publicly traded REIT that owned 44 apartment complexes with 14,320 units. The significance of the acquisition was not in its size--although the addition of more than 14,000 units represented a sizable boost to UDRT's portfolio. Rather, the significance was geographic: Southwest Property's apartments were located primarily in Texas, moving UDRT out of its traditional markets in the Southeast and the Mid-Atlantic for the first time. The former local concern, turned regional, was now chasing recognition as a national REIT.

Following the purchase of Southwest Property, UDRT continued its geographic march across the country. In March 1998, the company purchased ASR Investments Corporation, another publicly traded REIT. ASR owned 7,550 apartment homes grouped within 39 communities in Arizona, Texas, New Mexico, and Washington, further broadening UDRT's coverage in the Southwest and providing entry into the Pacific Northwest. Before the end of the year, in December, UDRT completed another acquisition, acquiring American Apartment Communities II, Inc. American Apartment owned 53 apartment communities with 14,001 units located in California, the Pacific Northwest, the Midwest, and Florida. Once integrated into the company's fold, the acquisition provided UDRT with entry into markets in Portland, San Francisco, Sacramento, San Jose, Monterey, Los Angeles, Denver, Indianapolis, and Detroit. By the end of 1998, with its presence stretching across the country, UDRT owned 86,893 apartment homes.

Restructuring in the Late 1990s

UDRT was moving in both directions during the last years of the 1990s. As the company added to its portfolio in sizable chunks, it also disposed of properties that were experiencing slow growth and no longer reflected the company's emphasis on higher-grade apartments. Between 1998 and 2001, the company sold more than 15,000 apartment homes as part of its restructuring effort. In a December 1999 interview with National Mortgage News, McCann explained the transformation: "Prior to 1997, the company was really a regional company operating in the Southeast. At that point in time, we owned about 35,000 apartments from Baltimore to Florida. Over the last three years, we have been growing our target markets, getting to what we would define as a more efficient size. We have been upgrading our portfolio." By the end of the decade, UDRT could accurately describe its portfolio as primarily B to A quality, which meant that the average UDRT tenant paid rent equivalent to $.75 per square foot per month. In his interview with National Mortgage News, McCann drew a comparison: "If someone were to define our portfolio back in 1996, they would have said that on the quality scale, it is B to C grade. That means the resident is a middle- to lower-income household. Our average rent would have been more in the range of $.60 per square foot per month."

As UDRT entered the 21st century, its pace of physical growth shuddered to a halt. Dispositions exceeded acquisitions between 1998 and 2001, as the restructuring process ensued. The changes were not limited to weeding out lower-quality apartment homes; sweeping management changes also occurred. McCann ended his service as president and chief executive officer as UDRT's 30th anniversary approached. In February 2001, Thomas Toomey was selected as president and chief executive officer. Previously chief operating officer for Apartment Investment Management Company, Toomey was one of seven new additions to UDRT's executive ranks as the new decade began.

During UDRT's 30th anniversary, the company continued to expand, promising further acquisitions in the future. In January 2002, the company purchased the remaining stake it did not own in three apartment communities located in Euless and Carrollton, Texas, and in Phoenix. UDRT paid Credit Suisse First Boston roughly $46 million for its 75 percent interest in the nearly 800 units housed within the three communities. In May 2002, the company acquired a 416-unit apartment complex in suburban Denver, paying $34 million for the A graded units. With further acquisitions expected, UDRT, ranked as the fourth largest concern of its kind in the nation, threatened to catch its large rivals. The company's new management team, led by Toomey, was energized for the task at hand.

Principal Subsidiaries: United Dominion Realty, L.P.; Heritage Communities L.P.

Principal Competitors: Archstone-Smith Trust; Equity Residential; Gables Residential Trust.

Chronology

• Key Dates:
• 1972: United Dominion Realty Trust (UDRT) is founded in Virginia.
• 1974: John P. McCann joins UDRT.
• 1991: An accelerated expansion program begins.
• 1996: Southwest Property Trust Inc. is acquired.
• 1998: ASR Investments Corporation and American Apartment Communities are acquired.
• 2001: McCann retires and is replaced by Thomas Toomey.