Edgar Filing: HOME PROPERTIES INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number: 1-13136

HOME PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		16-1455126
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

850 Clinton Square, Rochester, New York		14604
(Address of principal executive offices)		(Zip Code)

(585) 546-4900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		Outstanding at April 23, 2014
$.01 par value		57,131,393

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HOME PROPERTIES, INC.

TABLE OF CONTENTS

		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets – March 31, 2014 and December 31, 2013	3

	Consolidated Statements of Operations – Three months ended March 31, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income – Three months ended March 31, 2014 and 2013	5

	Consolidated Statements of Equity – Three months ended March 31, 2014 and year ended December 31, 2013	6

	Consolidated Statements of Cash Flows – Three months ended March 31, 2014 and 2013	7

	Notes to Consolidated Financial Statements	8-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signatures	38

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOME PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2014 AND DECEMBER 31, 2013

(Dollars in thousands, except per share data)

(Unaudited)

	March 31,				December 31,
ASSETS	2014				2013
Real estate:
Land	$	770,851			$ 786,868
Construction in progress	192,111				187,976
Buildings, improvements and equipment	4,588,065				4,645,921
	5,551,027				5,620,765
Less: accumulated depreciation	(1,258,186			)	(1,243,243	)
Real estate, net	4,292,841				4,377,522
Cash and cash equivalents	8,403				9,853
Cash in escrows	26,006				23,738
Accounts receivable, net	15,118				14,937
Prepaid expenses	15,777				22,089
Deferred charges, net	11,021				11,945
Other assets	7,059				7,793

Total assets	$	4,376,225			$4,467,877

LIABILITIES AND EQUITY
Mortgage notes payable	$	1,725,359			$1,814,217
Unsecured notes payable	450,000				450,000
Unsecured line of credit	179,000				193,000
Accounts payable	28,193				27,540
Accrued interest payable	10,362				8,392
Accrued expenses and other liabilities	31,097				33,936
Security deposits	18,310				18,479
Total liabilities	2,442,321				2,545,564
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding	-				-
Common stock, $0.01 par value; 80,000,000 shares authorized; 57,106,862 and 56,961,646 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively	571				570
Excess stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding	-				-
Additional paid-in capital	2,016,474				2,007,300
Distributions in excess of accumulated earnings	(376,159			)	(380,168	)
Accumulated other comprehensive income	792				1,551
Total common stockholders’ equity	1,641,678				1,629,253
Noncontrolling interest	292,226				293,060
Total equity	1,933,904				1,922,313

Total liabilities and equity	$		4,376,225		$4,467,877

The accompanying notes are an integral part of these consolidated financial statements.

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HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2014			2013
Revenues:
Rental income	$	152,354		$	147,293
Property other income	15,560			14,181
Other income	141			249
Total revenues	168,055			161,723

Expenses:
Operating and maintenance	66,459			60,057
General and administrative	9,258			9,083
Interest	25,327			29,995
Depreciation and amortization	44,378			41,412
Other expenses	8			17
Total expenses	145,430			140,564

Income from continuing operations	22,625			21,159

Discontinued operations:
Income from discontinued operations	40			808
Gain on disposition of property	31,306			40,359
Discontinued operations	31,346			41,167
Net income	53,971			62,326


Net income attributable to noncontrolling interest	(8,180		)	(10,446		)
Net income attributable to common stockholders	$	45,791		$	51,880

Basic earnings per share:
Income from continuing operations	$	0.34		$	0.34
Discontinued operations	0.46			0.67
Net income attributable to common stockholders	$	0.80		$	1.01

Diluted earnings per share:
Income from continuing operations	$	0.33		$	0.34
Discontinued operations	0.46			0.65
Net income attributable to common stockholders	$	0.79		$	0.99

Weighted average number of shares outstanding:
Basic	57,106,853			51,618,734
Diluted	57,620,655			52,325,410

The accompanying notes are an integral part of these consolidated financial statements.

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HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

		Three months ended March 31,
		2014			2013

Net income	$	53,971			$	62,326
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap agreements		(895		)	212
Other comprehensive income (loss)		(895		)	212
Comprehensive income		53,076			62,538
Net income attributable to noncontrolling interest		(8,180		)	(10,446		)
Other comprehensive (income) loss attributable to noncontrolling interest		136			(35		)
Comprehensive income attributable to common stockholders		$	45,032		$	52,057

The accompanying notes are an integral part of these consolidated financial statements.

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HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND THE YEAR ENDED DECEMBER 31, 2013

(Dollars in thousands)

(Unaudited)


								Distributions			Accumulated
					Additional			in Excess of			Other					Non-
	Common Stock				Paid-In			Accumulated			Comprehensive					controlling
	Shares		Amount		Capital			Earnings			Income (Loss)					Interest			Total
Balance, January 1, 2013	51,508,142		$	515	$	1,709,919		$(388,397		)	$ (1,069				)	$	267,299		$		1,588,267
Net income	-		-		-			160,873			-					30,706			191,579
Unrealized gain (loss) on interest rate swap agreements	-		-		-			-			2,620					516			3,136
Issuance of common stock, net	902,934		9		47,477			-			-					-			47,486
Issuance of common stock through public offering, net	4,427,500		44		267,589			-			-					-			267,633
Stock-based compensation	3,137		-		9,055			-			-					-			9,055
Repurchase of common stock	(48,484	)	-		(3,133		)	-			-					-			(3,133			)
Conversion of UPREIT Units for common stock	168,417		2		4,493			-			-					(4,495		)	0
Adjustment of noncontrolling interest	-		-		(28,100		)	-			-					28,100			0
Dividends and distributions paid	-		-		-			(152,644		)	-					(29,066		)	(181,710			)
Balance, December 31, 2013	56,961,646		$	570	$	2,007,300		$(380,168		)		$		1,551		$	293,060			$	1,922,313
Net income	-		-		-			45,791			-					8,180			53,971
Unrealized gain (loss) on interest rate swap agreements	-		-		-			-			(759				)	(136		)	(895			)
Issuance of common stock, net	81,952		1		3,180			-			-					-			3,181
Stock-based compensation	2,990		-		5,064			-								-			5,064
Repurchase of common stock	(8,449	)	-		(484		)	-			-					-			(484			)
Conversion of UPREIT Units for common stock	68,723		-		1,957			-			-					(1,957		)	0
Adjustment of noncontrolling interest	-		-		(543		)	-			-					543			0
Dividends and distributions paid	-		-		-			(41,782		)	-					(7,464		)	(49,246			)
Balance, March 31, 2014	57,106,862		$	571	$	2,016,474		$	(376,159	)	$		792			$	292,226		$		1,933,904

The accompanying notes are an integral part of these consolidated financial statements.

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HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(Dollars in thousands)

(Unaudited)

	2014			2013
Cash flows from operating activities:
Net income	$	53,971		$	62,326
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	45,619			44,098
Gain on disposition of property	(31,306		)	(40,359		)
Stock-based compensation	5,064			4,327
Changes in assets and liabilities:
Cash in escrows, net	(2,271		)	(2,932		)
Other assets	6,100			3,481
Accounts payable and accrued liabilities	1,305			4,713
Total adjustments	24,511			13,328
Net cash provided by operating activities	78,482			75,654

Cash flows from investing activities:
Purchase of land for development	-			(28,088		)
Capital improvements to properties including redevelopment	(24,059		)	(27,072		)
Additions to construction in progress	(12,321		)	(19,124		)
Additions to predevelopment	(509		)	(78		)
Proceeds from sale of properties, net	106,273			106,158
Proceeds from insurance for property losses	88			-
Withdrawals from (additions to) cash held in escrow, net	3			(4,615		)
Net cash provided by investing activities	69,475			27,181

Cash flows from financing activities:
Proceeds from sale of common stock, net	3,181			31,693
Repurchase of common stock	(484		)	(241		)
Scheduled payments of mortgage notes payable	(8,124		)	(9,082		)
Payoff mortgage notes payable	(80,734		)	(101,020		)
Proceeds from unsecured line of credit	112,000			170,500
Payments on unsecured line of credit	(126,000		)	(164,000		)
Withdrawals from cash held in escrow, net	-			(227		)
Dividends and distributions paid	(49,246		)	(43,460		)
Net cash used in financing activities	(149,407		)	(115,837		)

Net decrease in cash and cash equivalents	(1,450		)	(13,002		)
Cash and cash equivalents:
Beginning of year	9,853			21,092
End of period	$	8,403		$	8,090

Supplemental disclosure:
Interest capitalized	$	2,169		$	1,578
Supplemental disclosure of non-cash investing and financing activities:
Exchange of UPREIT Units for common shares	1,957			1,138
Transfers of construction in progress to buildings, improvements and equipment	7,878			96
Capital improvements to properties and construction in progress included in accounts payable	4,961			4,054

The accompanying notes are an integral part of these consolidated financial statements.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

1 ORGANIZATION AND BASIS OF PRESENTATION

Organization

Home Properties, Inc. (the “Company”) was formed in November 1993, as a Maryland corporation and is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast and Mid-Atlantic regions of the United States. The Company completed an initial public offering of 5,408,000 shares of common stock on August 4, 1994 and is traded on the New York Stock Exchange (“NYSE”) under the symbol “HME”. The Company is included in Standard & Poor’s MidCap 400 Index.

The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership. As of March 31, 2014, the Company owned and operated 119 apartment communities with 41,532 apartments.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. As a result, the Company generally is not subject to federal or state income taxation at the corporate level to the extent it distributes annually at least 90% of its REIT taxable income to its shareholders and satisfies certain other requirements. For all periods presented, the Company distributed in excess of 100% of its taxable income; accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its ownership of 84.9% of the limited partnership units in the Operating Partnership (“UPREIT Units”) at March 31, 2014 (84.8% at December 31, 2013). The remaining 15.1% is included as noncontrolling interest in these consolidated financial statements at March 31, 2014 (15.2% at December 31, 2013). The Company periodically adjusts the carrying value of noncontrolling interest to reflect its share of the book value of the Operating Partnership. Such adjustments are recorded to additional paid in capital as a reallocation of noncontrolling interest in the accompanying consolidated statements of equity. The Company owns a 1.0% general partner interest in the Operating Partnership and the remainder indirectly as a limited partner through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, which is the limited partner. Home Properties Trust was formed in September 1997, as a Maryland real estate trust and as a qualified REIT subsidiary (“QRS”), and owns the Company’s share of the limited partner interests in the Operating Partnership.

The accompanying consolidated financial statements include the accounts of Home Properties Resident Services, Inc. (“HPRS”). HPRS is a wholly owned subsidiary of the Company. All significant inter-company balances and transactions have been eliminated in these consolidated financial statements.

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures that would accompany annual financial statements prepared in accordance with GAAP are omitted. The year-end December 31, 2013 balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the consolidated financial statements for the interim periods have been included. The results of operations for the interim periods are not necessarily indicative of results which ultimately may be achieved for the full year. These interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2013. Certain reclassifications have been made to the 2013 financial statements to conform to the 2014 presentation as a result of discontinued operations.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

2 RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for determining which disposals are required to be presented as discontinued operations and modifies related disclosure requirements. The standard is applied prospectively and is effective in 2015 with early adoption permitted. The Company is currently assessing the potential impact that the adoption of this guidance will have on its financial position and results of operations.

3 DEVELOPMENT

Redevelopment

The Company has one project under redevelopment. Arbor Park, located in Alexandria, Virginia, has 851 garden apartments in fifty-two buildings built in 1967. The Company is part way through a project to extensively renovate all of the units over several years on a building by building basis. As of March 31, 2014, there was one building with 36 units under renovation and forty buildings with 638 units completed and 522 of those units occupied. As of March 31, 2014, the Company has incurred costs of $23,200 for the renovation which is included in buildings, improvements and equipment. The entire project is expected to be completed in 2015.

Development

During the fourth quarter of 2011, the Company started construction on Eleven55 Ripley, located in Silver Spring, Maryland, consisting of two buildings, a 21 story high-rise and a 5 story mid-rise, for a total of 379 apartment units. Initial occupancy occurred in the fourth quarter of 2013. Construction is expected to be completed in the third quarter of 2014. The construction in progress for this development was $94,172 as of March 31, 2014.

During the second quarter of 2012, the Company started construction on The Courts at Spring Mill Station, located in Conshohocken, Pennsylvania, a suburb of Philadelphia. The combination donut/podium style project, consisting of two buildings, will have a total of 385 apartment units. Construction is expected to be completed in the second half of 2014 with initial occupancy in the third quarter of 2014. The construction in progress for this development was $48,419 as of March 31, 2014.

During the first quarter of 2013, the Company purchased a land parcel located in Tysons Corner, Virginia. The Company intends to develop approximately 694 units in a residential community on this entitled parcel. The construction in progress for this development, consisting primarily of land value, was $34,627 as of March 31, 2014.

During the fourth quarter of 2013, the Company purchased a land parcel located in Linthicum, Maryland, a suburb of Baltimore. The land is intended for future development of approximately 300 multifamily units. The construction in progress for this development, consisting primarily of land value, was $14,893 as of March 31, 2014.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

4 UNSECURED NOTES PAYABLE

Unsecured Term Loan

In December 2011, the Company entered into a five-year unsecured term loan for $250,000 with M&T Bank as lead bank, and ten other participating lenders, which was set to mature on December 8, 2016. On August 19, 2013, the Company amended the loan agreement to extend the maturity date to August 18, 2018. No other changes were made to the terms of the unsecured term loan. The loan bears monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio. The unsecured term loan has covenants that align with the unsecured line of credit facility described in Note 5. The Company was in compliance with these financial covenants for all periods presented.

On July 19, 2012, the Company entered into two interest rate swap agreements that effectively convert the variable LIBOR portion of this loan to a fixed rate of 0.685% through December 7, 2016. On November 4, 2013, the Company entered into three additional interest rate swap agreements that effectively convert the variable LIBOR portion of this loan to a fixed rate of 2.604% for the period of December 8, 2016 through August 18, 2018. The interest rate swap agreements are more fully described in Note 7. As of March 31, 2014, based on the Company’s leverage ratio, the spread was 1.00%, and the one-month LIBOR was swapped at 0.685%; resulting in an effective rate of 1.685% for the Company.

Unsecured Senior Notes

In December 2011, the Company issued $150,000 of unsecured senior notes. The notes were offered in a private placement in two series: Series A: $90,000 with a seven-year term due December 19, 2018 at a fixed interest rate of 4.46% (“Series A”); and, Series B: $60,000 with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00% (“Series B”).

On June 27, 2012, the Company issued another private placement note in the amount of $50,000 with a seven-year term, a fixed rate of 4.16% and a June 27, 2019 due date. The proceeds from this note were used to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012.

The unsecured senior notes are subject to various covenants and maintenance of certain financial ratios. Although the covenants of the notes do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the notes and the line are identical. The Company was in compliance with these financial covenants for all periods presented.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

5 UNSECURED LINE OF CREDIT

On August 19, 2013, the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the “Credit Agreement”), which provides for a $450,000 revolving credit facility with an initial maturity date of August 18, 2017 and a one-year extension at the Company’s option. The Credit Agreement amended the Company’s prior $275,000 facility, which was scheduled to expire on December 8, 2015, not including a one-year extension at the Company’s option. The Credit Agreement is with M&T Bank and U.S. Bank National Association as joint lead arrangers, M&T Bank as administrative agent and nine other commercial banks as participants. The Company had $179,000 outstanding under the credit facility as of March 31, 2014. Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio. As of March 31, 2014, based on the Company’s leverage ratio, the spread was 1.00%, and the one-month LIBOR was 0.19%; resulting in an effective rate of 1.19% for the Company.

The Credit Agreement requires the Company to maintain certain financial ratios and measurements including a limitation on outstanding indebtedness and a minimum interest coverage ratio. The Company was in compliance with these financial covenants for all periods presented.

The Credit Agreement also provides the ability to issue up to $20,000 in letters of credit. While the issuance of letters of credit does not increase borrowings outstanding under the line of credit, it does reduce the amount available. At March 31, 2014, the Company had outstanding letters of credit of $5,237 and the amount available on the credit facility was $265,763.

6 FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Carried at Fair Value

The fair value of interest rate swaps, which are more fully described in Note 7, are determined using the market standard of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rate forward curves derived from observable market interest rate curves (level 2 inputs, as defined by the authoritative guidance). The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The Company has determined that the significant inputs used in this model are observable in active markets, therefore considers the interest rate swap asset valuation of $945 at March 31, 2014 and the asset valuation of $1,840 at December 31, 2013 as level 2 classifications within the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

The Company follows the authoritative guidance for fair value measurements when valuing its financial instruments for disclosure purposes. The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments.

Cash and cash equivalents, cash in escrows, accounts receivable, other assets, accounts payable, accrued interest payable, accrued expenses and other liabilities, except for interest rate swaps, are all carried at their face amounts, which approximate their fair values due to their relatively short-term nature and high probability of realization.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

6 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Financial Instruments Not Carried at Fair Value (continued)

The Company determined the fair value of its mortgage notes payable, unsecured term loan, unsecured senior notes and unsecured line of credit facility using a discounted future cash flow technique that incorporates observable market-based inputs, including a market interest yield curve with adjustments for duration, loan to value (level 2 inputs), and risk profile (level 3 inputs). In determining the market interest yield curve, the Company considered its investment grade credit ratings (level 2 inputs). The Company has determined that the significant inputs used in this model are observable in active markets, therefore considers the valuation classified as level 2 of the fair value hierarchy. At March 31, 2014 and December 31, 2013, the fair value of the Company’s total debt, consisting of the mortgage notes, the unsecured term loan, unsecured senior notes and unsecured line of credit, amounted to a liability of $2,465,531 and $2,552,145, respectively, compared to its carrying amount of $2,354,359 and $2,457,217, respectively.

7 DERIVATIVE AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not utilize these arrangements for trading or speculative purposes.

Cash Flow Hedges of Interest Rate Risk

On July 19, 2012, the Company entered into two interest rate swap agreements that effectively convert the one-month LIBOR portion of a $250,000 five-year variable rate unsecured term loan, originally due on December 8, 2016, from a variable rate of one-month LIBOR plus a spread of 1.00% to 2.00% based on the Company’s leverage ratio to a fixed rate of 0.685% plus the applicable spread. As further described in Note 4, the $250,000 unsecured term loan was amended to extend the maturity date to August 18, 2018. On November 4, 2013, the Company entered into three additional interest rate swap agreements for the period of December 8, 2016 through August 18, 2018 to succeed the original two swaps. These three forward swaps effectively convert the variable rate of one-month LIBOR plus a spread of 1.00% to 2.00% based on the Company’s leverage ratio to a fixed rate of 2.604% plus the applicable spread.

As of March 31, 2014, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate
Derivative

Notional
Amount

Fixed
Interest
Rate

Variable
Interest Rate

Effective Date

Maturity Date

Interest rate swap

150,000

0.6800%

One-month LIBOR

August 13, 2012

December 8, 2016

Interest rate swap

100,000

0.6925%

One-month LIBOR

August 13, 2012

December 8, 2016

Interest rate swap

100,000

2.6010%

One-month LIBOR

December 8, 2016

August 18, 2018

Interest rate swap

75,000

2.6010%

One-month LIBOR

December 8, 2016

August 18, 2018

Interest rate swap

75,000

2.6125%

One-month LIBOR

December 8, 2016

August 18, 2018

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

7 DERIVATIVE AND HEDGING ACTIVITIES (continued)

Cash Flow Hedges of Interest Rate Risk (continued)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of March 31, 2014 and December 31, 2013:

Fair Value of Derivative Instruments

Asset Derivatives

Liability Derivatives

Balance

Fair Value at

Balance

Fair Value at

Sheet Location

3/31/2014

12/31/2013

Sheet Location

3/31/2014

12/31/2013

Interest Rate Swap

Other Assets

945

1,840

Other Liabilities

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2014 and 2013, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2014 and 2013, the Company did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that an additional $1,178 will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next twelve months.

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2014 and 2013, respectively:

	Three Months Ended March 31,

	2014		2013
Amount of gain (loss) recognized in accumulated other comprehensive income on interest rate derivatives (effective portion)	$	(1,206)	$	(60)

Amount of gain (loss) reclassified from accumulated other comprehensive income into income as interest expense (effective portion)	$	(311)	$	(272)

Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	-	$	-

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

7 DERIVATIVE AND HEDGING ACTIVITIES (continued)

Disclosure of Offsetting Derivatives

As of March 31, 2014 and December 31, 2013, the gross amount of derivative assets classified on the balance sheet in other assets was $945 and $1,840, respectively. As of March 31, 2014 and December 31, 2013, the gross amount of derivative liabilities classified on the balance sheet in accrued expenses and other liabilities was $0. The Company does not have any derivative instruments offset on the balance sheet or subject to master netting arrangements or similar agreements.

Credit-risk-related Contingent Features

The Company is exposed to credit risk in the event of non-performance by the counterparties to the swaps. The Company minimizes this risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.

The Company has agreements with each of its derivative counterparties that provide, among other defaults, that if the Company defaults on indebtedness having an aggregate principal amount in excess of $20,000, including default where repayment of the indebtedness has not been accelerated by the lender, the counterparty could declare the Company in default on its derivative obligations.

As of March 31, 2014, the Company had no derivatives in a net liability position, has not posted any collateral related to these agreements and was not in breach of any agreement provisions.

8 STOCKHOLDERS’ EQUITY

At-The-Market Equity Offering Program

On May 14, 2012, the Company initiated an At-The-Market (“ATM”) equity offering program through which it is authorized to sell up to 4,400,000 shares of common stock from time to time in ATM offerings or negotiated transactions. From inception through March 31, 2014, the Company issued 2,430,233 shares of common stock at an average price of $62.81 per share, for aggregate gross proceeds of $152,636 and aggregate net proceeds of $149,401 after deducting commissions and other transaction costs of $3,235. As of March 31, 2014, 1,969,767 shares remain available under this ATM program.

The Company used the net proceeds from the ATM offerings primarily for general corporate purposes including acquisitions, development and redevelopment of apartment communities.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

8 STOCKHOLDERS’ EQUITY (continued)

Public Equity Offering Program

On July 9, 2013, the Company filed a prospectus supplement for a follow-on offering of 4,427,500 shares of its common stock at a price of $63.00 per share, including 577,500 shares issued pursuant to the exercise in full of an underwriters’ option to purchase additional shares. Net proceeds were $267,633 after underwriting discounts, commissions and offering expenses and were used to pay off outstanding indebtedness. All of the 4,427,500 shares offered were purchased and subsequently delivered on July 12, 2013.

Dividends and Distributions

On February 25, 2014, the Company paid a dividend in the amount of $0.73 per share of common stock to stockholders of record and a distribution of $0.73 per UPREIT Unit to unitholders of record as of the close of business on February 13, 2014.

Stock-based Compensation

The Company’s Board of Directors has approved a performance-based equity program for administering awards under the Company’s 2011 Stock Benefit Plan for the executive officers (the “2011 Executive Performance-Based Equity Program”). It is a subplan of the 2011 Stock Benefit Plan, approved by the stockholders at their 2011 Annual Meeting. On February 11, 2014, awards in connection with the 2011 Executive Performance-Based Equity Program, with an estimated fair value of $4,642, were granted to executive officers of the Company. Awards are in the form of restricted stock units with a service condition and three market conditions. The measurement period for these awards began on January 1, 2014 and will end on December 31, 2016. Expense attributed to the awards will be recognized based on the underlying vesting conditions of the awards, which substantially vest during the measurement period, taking into account retirement eligibility. During the three months ended March 31, 2014, the Company recognized stock-based compensation expense of $3,851 for the February 11, 2014 awards.

Earnings Per Share

Basic earnings per share (“EPS”) is computed as net income attributable to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation (using the treasury stock method). The exchange of an UPREIT Unit for a share of common stock has no effect on diluted EPS as unitholders and stockholders effectively share equally in the net income of the Operating Partnership. Income from continuing operations and discontinued operations is the same for both the basic and diluted calculation.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

8 STOCKHOLDERS’ EQUITY (continued)

Earnings Per Share (continued)

The reconciliation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013 is as follows:

	Three Months
	2014			2013
Numerator:
Income from continuing operations	$	22,625		$	21,159
Less: Income from continuing operations attributable to noncontrolling interest	(3,429		)	(3,546		)

Income from continuing operations attributable to common stockholders	$	19,196		$	17,613

Discontinued operations	$	31,346		$	41,167
Less: Discontinued operations attributable to noncontrolling interest	(4,751		)	(6,900		)

Discontinued operations attributable to common stockholders	$	26,595		$	34,267

Denominator:
Basic weighted average number of common shares outstanding	57,106,853			51,618,734
Effect of dilutive stock options	355,002			540,425
Effect of restricted shares and restricted stock units	158,800			166,251

Diluted weighted average number of common shares outstanding	57,620,655			52,325,410

Earnings per common share:
Basic earnings per share:
Income from continuing operations	$	0.34		$	0.34
Discontinued operations	0.46			0.67
Net income attributable to common stockholders	$	0.80		$	1.01

Diluted earnings per share:
Income from continuing operations	$	0.33		$	0.34
Discontinued operations	0.46			0.65

Net income attributable to common stockholders	$	0.79		$	0.99

Unexercised stock options to purchase 418,113 and 386,609 shares of the Company’s common stock were not included in the computations of diluted EPS because the options’ exercise prices were greater than the average market price of the Company’s stock during the three months ended March 31, 2014 and 2013, respectively.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

9 SEGMENT REPORTING

The Company is engaged in the ownership and management of market rate apartment communities. Each apartment community is considered a separate operating segment. Each segment on a standalone basis is less than 10% of the revenues, net operating income and assets of the combined reported operating segment and meets a majority of the aggregation criteria under authoritative guidance. The operating segments are aggregated as Core and Non-core properties.

Non-segment revenue to reconcile to total revenue consists of other income. Non-segment assets to reconcile to total assets include cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, deferred charges and other assets.

Core properties consist of apartment communities which have been owned more than one full calendar year. Therefore, the Core properties represent communities owned as of January 1, 2013. Non-core properties consist of apartment communities acquired, developed or redeveloped during 2013 and 2014, such that comparable operating results are not available.

The Company assesses and measures segment operating results based on a performance measure referred to as net operating income. Net operating income is defined as total revenues less operating and maintenance expenses. The accounting policies of the segments are the same as those described in Notes 1, 2 and 3 to the Consolidated Financial Statements contained in the Company’s Form 10-K for the year ended December 31, 2013.

The revenues and net operating income for each of the reportable segments are summarized as follows for the three months ended March 31, 2014 and 2013:

	Three Months
	2014		2013
Revenues:
Core properties	$ 162,678		$ 158,255
Non-core properties	5,236		3,219
Reconciling items	141		249
Total revenues	$ 168,055		$ 161,723
Net operating income:
Core properties	$ 98,620		$ 99,421
Non-core properties	2,835		1,996
Reconciling items	141		249
Net operating income, including reconciling items	101,596		101,666
General and administrative expenses	(9,258	)	(9,083	)
Interest expense	(25,327	)	(29,995	)
Depreciation and amortization	(44,378	)	(41,412	)
Other expenses	(8	)	(17	)
Income from continuing operations	$ 22,625		$ 21,159

The assets for each of the reportable segments are summarized as follows as of March 31, 2014 and December 31, 2013:

Assets	2014	2013
Apartment communities
Core properties	$ 3,936,558	$ 3,958,260
Non-core properties	356,283	419,262
Reconciling items	83,384	90,355
Total assets	$ 4,376,225	$ 4,467,877

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

10 DISPOSITION OF PROPERTY AND DISCONTINUED OPERATIONS

The Company reports its property dispositions as discontinued operations as prescribed by the authoritative guidance. Pursuant to the definition of a component of an entity, assuming no significant continuing involvement by the former owner after the sale, the sale of an apartment community is considered a discontinued operation. In addition, apartment communities classified as held for sale are also considered discontinued operations. The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date.

Included in discontinued operations for the three months ended March 31, 2014 are the operating results of one apartment community sold during the three months ended March 31, 2014 (the “2014 Disposed Community”). Included in discontinued operations for the three months ended March 31, 2013 are the operating results of four apartment communities sold in separate transactions during the year ended December 31, 2013 (“2013 Disposed Communities”) and the 2014 Disposed Community. For purposes of the discontinued operations presentation, the Company only includes interest expense and losses from early extinguishment of debt associated with specific mortgage indebtedness of the properties that are sold or held for sale.

On February 26, 2014, the Company sold a property located in the Washington, D.C. region with a total of 864 units for $110,000. At closing, a $58,472 mortgage was repaid, prepayment penalties of $585 and closing costs of $3,326 were incurred for a net cash flow of $47,617. A gain on sale of $31,306 was recorded in the first quarter of 2014 related to this sale.

The results of discontinued operations are summarized for the three months ended March 31, 2014 and 2013 as follows:

	Three Months
	2014		2013
Revenues:
Rental income	$	2,015	$	6,852
Property other income	286		718
Total revenues	2,301		7,570
Expenses:
Operating and maintenance	892		2,626
Interest expense (1)	1,109		2,369
Depreciation and amortization	260		1,767
Total expenses	2,261		6,762
Income (loss) from discontinued operations	40		808
Gain on disposition of property	31,306		40,359
Discontinued operations	$	31,346	$	41,167

(1) Includes debt extinguishment costs and other one-time costs of $802 and $1,416 incurred as a result of repaying property specific debt triggered upon sale for the three months ended March 31, 2014 and 2013.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

11 COMMITMENTS AND CONTINGENCIES

Letters of Credit

As of March 31, 2014, the Company had issued $5,237 in letters of credit, which were provided under the Company’s $450,000 unsecured Credit Agreement. The letters of credit were required to be issued under certain construction projects, workers’ compensation and health insurance policies.

Debt Covenants

The unsecured notes payable and unsecured Credit Agreement require the Company to maintain certain financial ratios and measurements including a limitation on outstanding indebtedness and a minimum interest coverage ratio. The Company was in compliance with these financial ratios for all periods presented.

Included in the Company’s consolidated balance sheet at March 31, 2014 are assets of its subsidiary Home Properties Fair Oaks, LLC, owner of The Courts at Fair Oaks, Fairfax County, VA, that are pledged as collateral for specific indebtedness and are not available to satisfy any other obligations of the Company.

Tax Protection Obligations

In connection with various UPREIT transactions, the Company agreed to maintain certain levels of nonrecourse debt for a period of 7 to 10 years associated with the contributed properties acquired. In addition, the Company is restricted in its ability to sell certain contributed properties (6% of the owned portfolio at March 31, 2014) for a contract period of 7 to 10 years except through a tax deferred Internal Revenue Code Section 1031 like-kind exchange. The remaining terms sale restrictions range from 6 months to 3.25 years.

Tax Credit Guarantee

For periods before October 13, 2010, the Company, through its general partnership interest in an affordable property limited partnership, had guaranteed certain low income housing tax credits to limited partners in this partnership through 2015 totaling approximately $3,000. The Company’s general partner interest in this entity was sold on October 13, 2010. The tax credit guarantee was reduced to a $3,000 secondary guarantee. As of March 31, 2014, there were no known conditions that would make such payments necessary relating to the tax credit guarantee; therefore, no liability has been recorded in the financial statements.

Executive Retention Plan

The Executive Retention Plan provides for severance benefits and other compensation to be paid to certain employees in the event of a change in control of the Company and a subsequent termination of their employment.

Contingencies

The Company is not a party to any legal proceedings that are expected to have a material adverse effect on the Company’s liquidity, financial position or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of employment and resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

12 SUBSEQUENT EVENTS

On April 29, 2014, the Board of Directors declared a dividend of $0.73 per share on the Company’s common stock and approved a distribution of $0.73 per UPREIT Unit for the quarter ended March 31, 2014. The dividend and distribution are payable May 23, 2014, to stockholders and unitholders of record on May 12, 2014.

On April 29, 2014, the stockholders of the Company approved an amendment to the Company’s Articles of Amendment and Restatement of the Articles of Incorporation, as amended, to increase the number of authorized shares of the Company’s Common Stock, par value $.01 per share, from 80,000,000 shares to 160,000,000 shares.

On April 29, 2014, the stockholders of the Company approved an amendment to the Company’s 2011 Stock Benefit Plan (the “2011 Plan”) to increase the maximum number of shares of Common Stock which may be subject to awards issued under the 2011 Plan by 4,000,000 shares; and to provide that each full value award granted after April 29, 2014 will count as 5.45 shares available for issuance under the 2011 Plan. For additional information about the 2011 Plan, refer to Note 12 of the Company’s Form 10-K for the year ended December 31, 2013.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Forward-Looking Statements

This discussion contains forward-looking statements. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. The Company considers portions of the information to be “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Some examples of forward-looking statements include statements related to acquisitions (including any related pro forma financial information), future capital expenditures, potential development and redevelopment opportunities, projected costs and rental rates for development and redevelopment projects, financing sources and availability, and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Factors that may cause actual results to differ include general economic and local real estate conditions, the weather and other conditions that might affect operating expenses, the timely completion of repositioning activities and development within anticipated budgets, the actual pace of future development, acquisitions and sales, and continued access to capital to fund growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact should be considered to be forward-looking statements. Some of the words used to identify forward-looking statements include “believes”, “anticipates”, “plans”, “expects”, “seeks”, “estimates”, “intends”, and any other similar expressions. Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect the Company’s actual results, performance or achievements.

Liquidity and Capital Resources

General

The Company’s principal liquidity demands are expected to be distributions to the common stockholders and holders of UPREIT Units, capital improvements and repairs and maintenance for its properties, acquisition and development of additional properties and debt repayments. The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities.

The Company intends to meet its short-term liquidity requirements through cash flows provided by operating activities and its existing bank unsecured line of credit, described below. The Company considers its ability to generate cash to be adequate to meet all operating requirements, including availability to pay dividends to its stockholders and make distributions to its unitholders in accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.

To the extent that the Company does not satisfy its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank unsecured line of credit, it intends to satisfy such requirements through proceeds from the issuance of unsecured senior notes and from the issuance of its common stock through its equity offering program, described below, and from the sale of properties.

On November 11, 2013, Moody’s Investors Service assigned a Baa2 issuer rating to the Company with a rating outlook of stable. On June 25, 2013, Fitch, Inc. reaffirmed the Company’s corporate credit rating of “BBB” (Triple B).

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Liquidity and Capital Resources (continued)

Cash Flow Summary

The Company’s cash flow activities for the three months ended March 31, 2014 and 2013, respectively, are summarized as follows (in millions):

Operating Cash Flow Activities	2014		2013
Net income	$	54	$	62
Non-cash adjustments to net income	19		8
Changes in operating assets and liabilities	5		6
Cash provided by operating activities	$	78	$	76

The Company’s cash flow from operating activities was $78 million in 2014 compared to $76 million in 2013. The increase is primarily attributable to interest expense savings, primarily as a result of paying off maturing debt over the past year.

Investing Cash Flow Activities	2014			2013
Proceeds from sale of properties	$	106		$	106
Purchase of properties and land for development	-			(28		)
Capital improvements to properties including redevelopment	(24		)	(27		)
Construction in progress and predevelopment costs	(13		)	(19		)
Other investing activities	-			(5		)
Cash provided by investing activities	$	69		$	27

Investing activities include the sale and purchase of properties and land for development, capital improvements to properties, redevelopment, construction in progress and predevelopment. The Company considers the sale of properties as a potential source of capital for funding acquisitions. Management’s strategy also includes continuous repositioning and performance of selective rehabilitation in markets that are able to support rent increases, with a demand in the market for upgraded apartments. Changes between periods are primarily due to net acquisition and disposition activity, the rate of capital improvements and construction in progress expenditures for active development projects.

Cash provided by investing activities was $69 million during 2014. In 2014, the Company raised $106 million in net proceeds from the sale of one property with 864 units. Cash outflows for capital improvements and redevelopment were $23 million and $1 million, respectively. Cash outflows for additions to construction in progress were $13 million which were primarily for the development of Eleven55 Ripley and The Courts at Spring Mill Station.

Cash provided by investing activities was $27 million during 2013. In 2013, the Company raised $106 million in net proceeds from the sale of two properties with 511 units. These proceeds were partially used to fund the purchase of a land parcel for development for $28 million. Cash outflows for capital improvements and redevelopment were $25 million and $2 million, respectively. Cash outflows for additions to construction in progress were $19 million which were primarily for the development of Eleven55 Ripley and The Courts at Spring Mill Station.

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Liquidity and Capital Resources (continued)

Cash Flow Summary (continued)

Financing Cash Flow Activities	2014		2013
Proceeds from equity issuance	$	3	$	31
Proceeds from (payments on) unsecured debt	(14)		6
Secured debt repayments	(89)		(110)
Dividends and distributions paid	(49)		(43)
Cash used in financing activities	$	(149)	$	(116)

Financing activities include proceeds from equity issuances, net debt proceeds or payments and dividend and distribution payments. Equity and debt activities are closely aligned with investing activities discussed above. The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, which requires the Company to distribute annually at least 90% of its REIT taxable income to its shareholders.

Cash used in financing activities totaled $149 million for 2014, comprised primarily of reducing secured and unsecured indebtedness. Proceeds raised through the sale of common stock from stock option exercises of $3 million were more than offset by net payments on the unsecured line of credit of $14 million, scheduled payments on mortgages of $8 million, payoff of mortgages of $81 million and distributions paid to stockholders and UPREIT Unitholders of $49 million.

Cash used in financing activities totaled $116 million for 2013, comprised primarily of reducing secured indebtedness. Proceeds raised through the sale of common stock under the ATM offering of $25 million and from stock option exercises of $6 million, combined with net proceeds from the unsecured line of credit of $6 million were more than offset by scheduled payments on mortgages of $9 million, payoff of mortgages of $101 million and distributions paid to stockholders and UPREIT Unitholders of $43 million.

Unsecured Line of Credit

As of March 31, 2014, the Company had a $450 million unsecured line of credit agreement with M&T Bank and U.S. Bank National Association, as joint lead banks, and nine other participating commercial banks, with an initial maturity date of August 18, 2017 and a one-year extension, at the Company’s option. The Company had $179 million outstanding under the credit facility on March 31, 2014. The line of credit agreement provides the ability to issue up to $20 million in letters of credit. While the issuance of letters of credit does not increase the borrowings outstanding under the line of credit, it does reduce the amount available. At March 31, 2014, the Company had outstanding letters of credit of $5.2 million resulting in the amount available on the credit facility of $265.8 million. Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio. As of March 31, 2014, based on the Company’s leverage ratio, the LIBOR margin was 1.00%, and the one-month LIBOR was 0.19%; resulting in an effective rate of 1.19% for the Company.

The unsecured line of credit has not been used for long-term financing but adds a certain amount of flexibility, especially in meeting the Company’s acquisition goals. Many times it is easier to temporarily finance an acquisition, development or stock repurchases by short-term use of the line of credit, with long-term secured and unsecured financing or other sources of capital replenishing the line of credit availability.

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Liquidity and Capital Resources (continued)

Unsecured Term Loan

On December 9, 2011, the Company entered into a $250 million five-year unsecured term loan with M&T Bank as lead bank, and ten other participating lenders, which was set to mature on December 8, 2016. The term loan generated net proceeds of $248 million, after fees and closing costs, which were used to pay off an unsecured term loan, purchase an unencumbered property and acquire land for future development. On August 19, 2013, the Company amended the term loan agreement to extend the maturity date to August 18, 2018. No other changes were made to the terms of the unsecured term loan. The loan bears monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio. On July 19, 2012, the Company entered into two interest rate swap agreements with major financial institutions that effectively convert the variable LIBOR portion of this loan to a fixed rate of 0.685% through December 7, 2016. On November 4, 2013, the Company entered into three additional interest rate swap agreements that effectively convert the variable LIBOR portion of this loan to a fixed rate of 2.604% for the period of December 8, 2016 through August 18, 2018. As of March 31, 2014, based on the Company’s leverage ratio, the spread was 1.00%, and the swapped one-month LIBOR was 0.685%; resulting in an effective rate of 1.685% for the Company. The loan has covenants that align with the unsecured line of credit facility.

Unsecured Senior Notes

On December 19, 2011, the Company issued $150 million of unsecured senior notes. The notes were offered in a private placement in two series: Series A: $90 million with a seven-year term due December 19, 2018 at a fixed interest rate of 4.46% (“Series A”); and, Series B: $60 million with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00% (“Series B”). The net proceeds of $89 million and $60 million for Series A and Series B, respectively, after fees and closing costs, were used to purchase an unencumbered property and pay off a maturing mortgage note. The notes require semiannual interest payments on June 19 and December 19 of each year until maturity and are subject to various covenants and maintenance of certain financial ratios. Although the covenants of the notes do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the notes and the line are identical.

On June 27, 2012, the Company issued a private placement note in the amount of $50 million with a seven-year term, a fixed rate of 4.16% and a June 27, 2019 due date. The proceeds from this note were used to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012. The note requires semiannual interest payments on June 27 and December 27 of each year until maturity and is subject to various covenants and maintenance of certain financial ratios. Although the covenants of the note do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the note and the line are identical.

Indebtedness

As of March 31, 2014, the weighted average interest rate on the Company’s total indebtedness of $2.4 billion was 4.45% with staggered maturities ranging from 3 months to 15 years and averaging approximately 4.3 years. Approximately 91% of total indebtedness is at fixed rates, including the $250 million unsecured term loan subject to interest rate swap agreements. This limits the exposure to changes in interest rates, minimizing the effect of interest rate fluctuations on the Company’s results of operations and cash flows.

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Liquidity and Capital Resources (continued)

Unencumbered Assets

The value of the unencumbered asset pool (as calculated pursuant to the covenants of the line of credit agreement) was 49% as of March 31, 2014 compared to 48% as of December 31, 2013. Higher levels of unsecured assets add borrowing flexibility because more capacity is available for unsecured debt under the terms of the Company’s unsecured line of credit agreement, and/or for the issuance of additional unsecured senior notes. It also permits the Company to place secured financing on unencumbered assets if desired.

UPREIT Units

The Company believes that the issuance of UPREIT Units for property acquisitions will continue to be a potential source of capital for the Company. During 2013 and continuing through March 31, 2014, there were no UPREIT Units issued for property acquisitions.

Universal Shelf Registration

On February 28, 2013, the Company filed a Form S-3 universal shelf registration statement with the SEC that registers the issuance, from time to time, of common stock, preferred stock or debt securities. The Company may offer and sell securities issued pursuant to the universal shelf registration statement after a prospectus supplement, describing the type of security and amount being offered, is filed with the SEC. Sales of common stock under the Company’s equity offerings on or after February 28, 2013 described below were made under this registration statement.

On March 3, 2010, the Company filed a Form S-3 universal shelf registration statement with the SEC having substantially the same provisions and purposes as the February 2013 registration statement. The registration statement was set to expire in March 2013. Sales of common stock under the Company’s equity offerings from September 2010 to February 27, 2013 as described below were made under this registration statement.

At-the-Market Equity Offering Program

On May 14, 2012, the Company filed a prospectus supplement with respect to an ATM equity offering program through which it is authorized to sell up to 4.4 million shares of common stock, from time to time in ATM offerings or negotiated transactions. Through the second quarter of 2013, the Company issued 2,430,233 shares of common stock at an average price per share of $62.81, for aggregate gross proceeds of $152.6 million and aggregate net proceeds of $149.4 million after deducting commissions and other transaction costs of $3.2 million and approximately 2.0 million shares remain available.

The Company used the net proceeds from the ATM offerings primarily for general corporate purposes including acquisitions, development and redevelopment of apartment communities.

Public Equity Offering Program

On July 9, 2013, the Company issued a prospectus supplement offering 4.4 million shares of its common stock at a price of $63.00 per share, including 0.6 million shares issued pursuant to the exercise in full of an underwriters’ option to purchase additional shares. Net proceeds were $267.6 million after underwriting discounts, commissions and offering expenses. All of the 4.4 million shares offered were purchased and subsequently delivered on July 12, 2013. The net proceeds were used to pay off outstanding indebtedness.

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Liquidity and Capital Resources (continued)

Stock Repurchase Program

In 1997, the Board approved a stock repurchase program under which the Company may repurchase shares of its common stock or UPREIT Units (“Company Program”). The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board’s action did not establish a target stock price or a specific timetable for repurchase. There were no repurchases under the Company Program during 2013 and through March 31, 2014. The remaining authorization level as of March 31, 2014 is 2.3 million shares. The Company will continue to monitor stock prices relative to the NAV to determine the current best use of capital among our major uses of capital: stock buybacks, debt paydown to increase the unencumbered pool, acquisitions, rehabilitation and/or redevelopment of owned properties and development of new properties.

Dispositions

On February 26, 2014, the Company sold a property located in the Washington, D.C. region with a total of 864 units for $110.0 million. At closing, a $58.5 million mortgage was repaid, prepayment penalties of $0.6 million and closing costs of $3.3 million were incurred for a net cash flow of $47.6 million. A gain on sale of $31.3 million was recorded in the first quarter of 2014 related to this sale.

Property Development

Current Construction Projects

Eleven55 Ripley, a 379 unit high rise development consisting of two buildings, a 21 story high-rise and a 5 story mid-rise, is located in Silver Spring, Maryland. Construction commenced in the fourth quarter of 2011, and is expected to continue through the third quarter of 2014. Initial occupancy occurred in the fourth quarter of 2013 with 91 of 309 available units leased or preleased as of March 31, 2014. The construction in progress for this development was $94.2 million as of March 31, 2014 and the total estimated cost is $111 million.

The Courts at Spring Mill Station, a 385 unit development consisting of two buildings, being built in a combination donut/podium style, is located in Conshohocken, Pennsylvania. Construction commenced in the second quarter of 2012, and is expected to continue through the second half of 2014 with initial occupancy in the third quarter of 2014. The construction in progress for this development was $48.4 million as of March 31, 2014 and the total estimated cost is $89 million.

During the first quarter of 2013, the Company purchased a land parcel located in Tysons Corner, Virginia within a development known as Arbor Row. This project, referred to as Westpark Tysons, involves development in two phases of a residential community with wood-framed mid-rise and concrete high-rise buildings containing a combined 694 units with a total projected cost of $232 million. The construction in progress for this development, consisting primarily of land value, was $34.6 million as of March 31, 2014.

During the fourth quarter of 2013, the Company purchased a land parcel located in Linthicum, Maryland. The land is intended for future development of approximately 300 multifamily units and is currently in the design phase. The construction in progress for this development, consisting primarily of land value, was $14.9 million as of March 31, 2014.

Redevelopment

The Company has one project under redevelopment. Arbor Park, located in Alexandria, Virginia, has 851 garden apartments in fifty-two buildings built in 1967. The Company plans to extensively renovate all of the units over several years on a building by building basis. As of March 31, 2014, there was one building with 36 units under renovation and forty buildings with 638 units completed and 522 units occupied, with rents in the renovated units averaging $1,688 compared to $1,368 for the existing non-renovated units. As of March 31, 2014, the Company has incurred costs of $23 million for the renovation which is included in buildings, improvements and equipment. The entire project is expected to be completed in 2015 for a total estimated cost of $32 million.

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Contractual Obligations and Other Commitments

The primary obligations of the Company relate to its borrowings under the unsecured line of credit, unsecured notes and mortgage notes. The Company’s line of credit matures in August 2017 (not including a one-year extension at the option of the Company), and had $179 million in loans and letters of credit totaling $5.2 million outstanding at March 31, 2014. The $450 million in unsecured notes have maturities ranging from approximately four to eight years. The $1.7 billion in mortgage notes have varying maturities ranging from three months to fifteen years. The weighted average interest rate of the Company’s secured debt was 5.18% at March 31, 2014. The weighted average interest rate on the Company’s total indebtedness of $2.4 billion at March 31, 2014 was 4.45%.

The Company leases its corporate and regional office space from non-affiliated third parties. The rent for the corporate office space is a gross rent that includes real estate taxes and common area maintenance. The regional office leases are net leases which require an annual base rent plus a pro-rata portion of real estate taxes.

The Company has a secondary guarantee through 2015 on certain low income housing tax credits to limited partners in a partnership in which it previously was a general partner totaling approximately $3 million. With respect to the guarantee of the low income housing tax credits, the new unrelated general partner assumed operating deficit guarantee and primary tax credit guarantee positions. The Company believes the property’s operations conform to the applicable requirements and does not anticipate any payment on the guarantee; therefore, no liability has been recorded in the financial statements.

Capital Improvements (dollars in thousands, except unit and per unit data)

The Company’s policy is to capitalize costs related to the acquisition, development, rehabilitation, construction and improvement of properties. Capital improvements are costs that increase the value and extend the useful life of an asset. Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred. Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn. Recurring capital improvements typically include appliances, carpeting and flooring, HVAC equipment, kitchen and bath cabinets, new roofs, site improvements and various exterior building improvements. Non-recurring revenue generating upgrades include community centers, new windows, and kitchen and bath apartment upgrades. Revenue generating capital improvements are expected to directly result in increased rental earnings or expense savings. The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.

The Company estimates, that on an annual basis, $900 and $848 per apartment unit is spent on recurring capital expenditures in 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, approximately $225 and $212 per apartment unit, respectively, was estimated to be spent on recurring capital expenditures.

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Capital Improvements (continued)

The table below summarizes the actual total capital improvements incurred by major categories for the three months ended March 31, 2014 and 2013 and an estimate of the breakdown of total capital improvements by major categories between recurring, and non-recurring revenue generating, capital improvements for the three months ended March 31, 2014 as follows:

	For the three months ended March 31,
	2014																			2013
							Non-						Total							Total
	Recurring			Per			Recurring			Per			Capital			Per				Capital			Per
		Cap Ex			Unit(a)			Cap Ex			Unit(a)		Improvements				Unit(a)		Improvements					Unit(a)
New buildings	$		-	$		-	$		159	$		4		$	159	$		4			$	174	$		4
Major building improvements	1,272			31			1,977			49				3,249		80					4,579		115
Roof replacements	384			10			1			-				385		10					447		11
Site improvements	466			12			-			-				466		12					958		24
Apartment upgrades	1,842			46			6,051			150				7,893		196					8,034		201
Appliances	1,426			35			-			-				1,426		35					1,405		35
Carpeting, flooring	2,584			64			96			2				2,680		66					2,503		63
HVAC, mechanicals	898			22			2,630			65				3,528		87					2,217		56
Miscellaneous	212			5			562			14				774		19					1,125		28

Total	$		9,084	$		225	$		11,476	$		284		$	20,560	$		509			$	21,442	$		537

(a) Calculated using the weighted average number of apartment units, including 39,915 core units, and 2013 acquisition units of 457 for the three months ended March 31, 2014; and 39,915 core units for the three months ended March 31, 2013.

The schedule below summarizes the breakdown of total capital improvements between core and non-core as follows:

	For the three months ended March 31,
	2014																			2013
							Non-						Total							Total
	Recurring			Per			Recurring			Per			Capital			Per				Capital			Per
		Cap Ex			Unit(a)			Cap Ex			Unit(a)		Improvements				Unit(a)		Improvements					Unit(a)
Core Communities	$		8,981	$		225	$		10,956	$		274		$	19,937	$		499			$	21,442	$		537
2013 Acquisition Communities	103			225			520			1,138				623		1,363					-		-
Sub-total	9,084			225			11,476			284				20,560		509					21,442		537
2014 Disposed Community	45			82			-			-				45		82					227		263
2013 Disposed Communities	-			-			-			-				-		-					176		178
Corporate office expenditures(b)	-			-			-			-				363		-					311		-

Total	$		9,129	$		223	$		11,476	$		284		$	20,968	$		504			$	22,156	$		523

(a) Calculated using the weighted average number of apartment units, including 39,915 core units, and 2013 acquisition units of 457, and 2014 disposed units of 547 for the three months ended March 31, 2014; and 39,915 core units, 2013 disposed units of 991, and 2014 disposed units of 864 for the three months ended March 31, 2013.

(b) No distinction is made between recurring and non-recurring expenditures for corporate office. Corporate office expenditures include principally computer hardware, software, office furniture, fixtures and leasehold improvements. Corporate office expenditures are excluded from per unit figures.

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Results of Operations (dollars in thousands, except unit and per unit data)

Net operating income (“NOI”) falls within the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K and, as a result, the Company is required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities. In addition, the apartment communities are valued and sold in the market by using a multiple of NOI. The Company uses this measure to compare its performance to that of its peer group. For a reconciliation of NOI to income from continuing operations, please refer to Note 9 to Consolidated Financial Statements of this Form 10-Q.

Summary of Core Properties

The Company had 115 apartment communities with 39,915 units which were owned during the three months ended March 31, 2014 and 2013 (the “Core Properties”). The Company has one property with 851 units undergoing significant renovations that began in 2011; therefore, the operating results for 2014 are not comparable to 2013 due to those units being taken out of service during the redevelopment period (the “Redevelopment Property”). The Company acquired two apartment communities with 457 units, placed into service another 90 units at one development community during 2013; and had another 219 units become available to rent at one development community during 2014 (the “Acquisition Communities”). The inclusion of these acquired and developed communities generally accounted for the significant changes in operating results for the three months ended March 31, 2014 as compared to the operating results for the three months ended March 31, 2013.

A summary of the net operating income for Core Properties is as follows:

	Three Months
	2014			2013			$ Change			% Change
Rent	$	147,428		$	144,343		$	3,085		2.1%
Utility recovery revenue	8,316			7,149			1,167			16.3%
Rent including recoveries	155,744			151,492			4,252			2.8%
Property other income	6,934			6,763			171			2.5%
Total revenue	162,678			158,255			4,423			2.8%
Operating and maintenance	(64,058		)	(58,834		)	(5,224		)	(8.9%	)
Net operating income	$	98,620		$	99,421		$	(801	)	(0.8%	)

A summary of the net operating income for the Company as a whole is as follows:

	Three Months
	2014			2013			$ Change			% Change
Rent	$	152,354		$	147,293		$	5,061		3.4%
Utility recovery revenue	8,462			7,315			1,147			15.7%
Rent including recoveries	160,816			154,608			6,208			4.0%
Property other income	7,098			6,866			232			3.4%
Total revenue	167,914			161,474			6,440			4.0%
Operating and maintenance	(66,459		)	(60,057		)	(6,402		)	(10.7%	)
Net operating income	$	101,455		$	101,417		$	38		0.0%

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Results of Operations (continued)

Comparison of three months ended March 31, 2014 to the same period in 2013

Of the $5,061 increase in rental income, $1,674 is attributable to the Acquisition Communities and $302 is attributable to the Redevelopment Property. The balance, an increase of $3,085, relates to a 2.1% increase from the Core Properties as the result of an increase of 2.8% in weighted average rental rates to $1,311 from $1,275 per apartment unit, partially offset by a 0.6% decrease in economic occupancy to 93.9% from 94.5%. Economic occupancy is defined as total possible rental income, net of vacancy and bad debt expense, as a percentage of total possible rental income. Total possible rental income is determined by valuing occupied units at contract rents and vacant units at market rents. Of the $1,147 increase in utility recovery revenue, $1,167 is attributable to the Core Properties offset by a $20 decrease attributable to the Redevelopment Property. The higher Core Properties utility recovery revenue is a direct result of higher energy consumption due to the extreme cold weather experienced during the 2014 period.

Property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased by $232. Of the increase, $171 is attributable to the Core Properties, and $61 is attributable to the Acquisition Communities and Redevelopment Property. The increase in Core Properties is primarily from increases in renters’ insurance fees, pet charges, late charges, damages and other miscellaneous charges.

Of the $6,402 increase in operating and maintenance expenses, $1,103 is attributable to the Acquisition Communities, $75 is attributable to the Redevelopment Property and $5,224 is attributable to the Core Properties. The increase in Core Properties is primarily due to increases in electricity, natural gas heating costs, property insurance, real estate taxes and snow removal costs; partially offset by a decrease in property management G&A.

Electricity costs were up $228, or 11.3%, from a year ago primarily due to portable heat pumps being used to heat certain common areas and apartment units during the extreme cold temperatures in the 2014 period.

Natural gas heating costs were up $801, or 13.2%, from a year ago due to a significant increase in consumption due to the extreme cold winter of 2014 compared to slightly warmer than average temperatures in the first quarter of 2013, partially offset by lower commodity rates. For the first quarter 2014, our natural gas weighted average cost, including transportation of $3.00 per decatherm, was $7.70 per decatherm, compared to $7.92 per decatherm for the 2013 period, a 2.8% decrease.

Property insurance increased $2,061, or 176.0%, due primarily to $1,800 in self insured property losses in 2014 compared to $100 in 2013. The 2014 losses were comprised of $986 in fire losses, primarily at two properties, and seventy-five properties experiencing $814 in losses due to pipe breaks caused by the extreme cold weather in all of our regions.

Real estate taxes increased $679, or 4.4%, primarily due to annual tax assessment increases, some of which are triggered by our investments in apartment upgrades and repositioning. The Company continues to challenge tax assessments on existing properties and apply for tax incentive programs for newly developed properties where appropriate.

Snow removal costs were up $1,127, or 135.8%, due primarily to the Mid-Atlantic region experiencing significantly higher than normal snowfall and more numerous snow storms than in the 2013 period.

Property management general & administrative costs decreased $149, or 3.4%. Despite increases in the number of apartment communities and units, the Company has been able to offset costs of growth due to its scalable operating platform, including efficiencies enabled by key application software investments.

General and administrative expenses increased in 2014 by $175, or 1.9%. General and administrative expenses as a percentage of total revenues were 5.4% for both 2014 and 2013.

Interest expense decreased by $4,668, or 15.6%, in 2014 primarily as a result of paying off $212,000 in maturing loans on several Core Properties over the past year. In addition, both 2013 Acquisition Communities were acquired without secured mortgage debt. Refer to the information under the heading “Liquidity and Capital Resources” above for specific discussion of debt transactions impacting the average rate and overall interest expense.

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Results of Operations (continued)

Depreciation and amortization expense increased $2,966, or 7.2%, due to the depreciation on the Acquisition Communities and the capital additions to the Core Properties and Redevelopment Property.

Other expenses of $8 in 2014 and $17 in 2013 are property acquisition costs of the Acquisition Communities.

Funds From Operations

Pursuant to the updated guidance for Funds From Operations (“FFO”) provided by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is defined as net income (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”)) excluding gains or losses from sales of property, impairment write-downs of depreciable real estate, noncontrolling interest, extraordinary items and cumulative effect of change in accounting principle plus depreciation from real property including adjustments for unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares. Because of the limitations of the FFO definition as published by NAREIT as set forth above, the Company has made certain interpretations in applying the definition. The Company believes all adjustments not specifically provided for are consistent with the definition.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after a specific and defined supplemental adjustment to exclude losses from early extinguishments of debt associated with the sales of real estate (“FFO as adjusted”). The adjustment to exclude losses from early extinguishments of debt results when the sale of real estate encumbered by debt requires us to pay the extinguishment and other one-time costs prior to the debt’s stated maturity and to write-off unamortized loan costs at the date of the extinguishment. Such costs are excluded from the gains on sales of real estate reported in accordance with GAAP. However, we view the losses from early extinguishments of debt associated with the sales of real estate as an incremental cost of the sale transactions because we extinguished the debt in connection with the consummation of the sale transactions and we had no intent to extinguish the debt absent such transactions. We believe that this supplemental adjustment more appropriately reflects the results of our operations exclusive of the impact of our sale transactions.

Although our FFO as adjusted clearly differs from NAREIT’s definition of FFO, and may not be comparable to that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance because we believe that, by excluding the effects of the losses from early extinguishments of debt associated with the sales of real estate, management and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO.

Neither FFO, nor FFO as adjusted, should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. Neither FFO, nor FFO as adjusted, represents cash generated from operating activities determined in accordance with GAAP, and neither is a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO, and FFO as adjusted, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

FFO, and FFO as adjusted, fall within the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K and as a result the Company is required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. Management believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, FFO, and FFO as adjusted, should be considered in conjunction with net income as presented in the consolidated financial statements included herein. Management believes that by excluding gains or losses related to dispositions of property and excluding real estate depreciation (which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life estimates), FFO, and FFO as adjusted, can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. In addition, FFO as adjusted ties the losses on early extinguishment of debt to the real estate which was sold triggering the extinguishment. The Company also uses these measures to compare its performance to that of its peer group.

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Funds From Operations (continued)

The calculation of FFO, and FFO as adjusted, and reconciliation to GAAP net income attributable to common stockholders for the three months ended March 31, 2014 and 2013 are presented below (in thousands):

	Three Months
	2014			2013
Net income attributable to common stockholders	$	45,791		$	51,880
Real property depreciation and amortization	44,088			42,665
Noncontrolling interest	8,180			10,446
Gain on disposition of property	(31,306		)	(40,359		)
FFO – Basic and Diluted, as defined by NAREIT	66,753			64,632
Loss from early extinguishment of debt in connection with sale of real estate	802			1,416
FFO – Basic and Diluted, as adjusted by the Company	$	67,555		$	66,048
Weighted average common shares/units outstanding (1):
Basic	67,336.5			62,045.9
Diluted	67,850.3			62,752.6

(1) Basic includes common stock outstanding plus UPREIT Units which can be converted into shares of common stock. Diluted includes additional common stock equivalents.

All REITs may not be using the same definition for FFO. Accordingly, the above presentation may not be comparable to other similarly titled measures of FFO of other REITs.

Debt Covenants

The unsecured notes payable agreements and Credit Agreement provide for the Company to maintain certain financial ratios and measurements including a limitation on outstanding indebtedness and a minimum interest coverage ratio. The Company was in compliance with these financial covenants for all periods presented.

Economic Conditions

Substantially all of the leases at the communities are for a term of one year or less, which enables the Company to seek increased rents upon renewal of existing leases or commencement of new leases. These short-term leases minimize the potential adverse effect of inflation on rental income, although residents may leave without penalty at the end of their lease terms and may do so if rents are increased significantly.

Dividends and Distributions

On April 29, 2014, the Board of Directors declared a dividend of $0.73 per share on the Company’s common stock and approved a distribution of $0.73 per UPREIT Unit for the quarter ended March 31, 2014. This is the equivalent of an annual dividend/distribution of $2.92 per share/unit. The dividend and distribution are payable May 23, 2014, to stockholders and unitholders of record on May 12, 2014.

Contingencies

The Company is not a party to any legal proceedings which are expected to have a material adverse effect on the Company’s liquidity, financial position or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by general liability and property insurance. Various claims of employment and resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

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Recently Adopted and Recently Issued Accounting Standards

Disclosure of recently adopted and recently issued accounting standards is incorporated herein by reference to the discussion under Part I, Item 1, Notes to Consolidated Financial Statements, Note 2.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk. The Company’s debt is summarized as follows:

	March 31, 2014									December 31, 2013
	Amount (Millions)		Weighted- Average Maturity Years		Weighted- Average Interest Rate		Percent of Total			Amount (Millions)		Weighted- Average Maturity Years		Weighted- Average Interest Rate		Percent of Total
Fixed rate secured debt		$1,701		4.23		5.21%		72.3%			$1,731		4.42		5.21%		70.5%

Variable rate secured debt		24		3.01		2.90%		1.0%			83		3.08		3.02%		3.4%

Fixed rate unsecured debt(a)		450		5.00		2.96%		19.1%			450		5.24		2.96%		18.2%

Variable rate unsecured debt		179		3.39		1.19%			7.6%		193		3.63		1.19%			7.9%

Total		$2,354		4.30		4.45%		100.0%			$2,457		4.46		4.41%		100.0%

(a) Includes $250 million of variable rate debt that the one-month LIBOR was swapped to a fixed rate of 0.685% at March 31, 2014 and December 31, 2013.

The Company uses a combination of fixed and variable rate secured and unsecured debt. The Company intends to use cash flow provided by operating activities and its existing bank line of credit to repay indebtedness and fund capital expenditures. On occasion, the Company may use its unsecured line of credit in connection with a property acquisition with the intention to refinance at a later date. The Company believes that increases in interest expense as a result of inflation would not significantly impact the Company’s distributable cash flow.

On July 19, 2012, the Company entered into two interest rate swap agreements that effectively convert the one-month LIBOR portion of a $250 million five-year variable rate unsecured term loan, originally due on December 8, 2016, from a variable rate of one-month LIBOR plus a spread of 1.00% to 2.00% based on the Company’s leverage ratio to a fixed rate of 0.685% plus the applicable spread. On August 19, 2013, the Company amended the five-year variable rate unsecured term loan agreement to extend the maturity date to August 18, 2018. On November 4, 2013, the Company entered into three additional interest rate swap agreements that effectively convert the LIBOR portion of this loan to a fixed rate of 2.604% plus the applicable spread for the period of December 8, 2016 through August 18, 2018. The Company is exposed to credit risk in the event of non-performance by the counterparties to the swaps. The Company minimizes this risk exposure by limiting counterparties to major banks who meet established credit and capital guidelines.

At March 31, 2014 and December 31, 2013, the fair value of the Company’s total debt, including the unsecured notes payable and line of credit, amounted to a liability of $2.47 billion and $2.55 billion, respectively, compared to its carrying amount of $2.35 billion and $2.46 billion, respectively. The Company estimates that a 100 basis point increase in market interest rates at March 31, 2014 would have changed the fair value of the Company’s total debt to a liability of $2.38 billion and would result in $2.0 million higher interest expense on the variable rate debt on an annualized basis.

The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio and may enter into swap positions based upon market fluctuations. Accordingly, the cost of obtaining such interest rate protection agreements in relation to the Company’s access to capital markets will continue to be evaluated. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. In addition, the Company believes that it has the ability to obtain funds through additional debt and equity offerings and the issuance of UPREIT Units for property acquisitions. As of March 31, 2014, the Company had no other material exposure to market risk.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the officers who certify the Company’s financial reports and to the other members of senior management and the Board.

The principal executive officer and principal financial officer evaluated, as of March 31, 2014, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) and have determined that such disclosure controls and procedures are effective.

There have been no changes in the internal controls over financial reporting identified in connection with that evaluation, or that occurred during the first quarter of the year ending December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. Various claims of employment and resident discrimination are also periodically brought. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

ITEM 1A. RISK FACTORS

Refer to the Risk Factors disclosure in the Company’s Form 10-K for the year ended December 31, 2013. There have been no material changes in these risk factors during the three months ended March 31, 2014 and through the date of this report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

The Company has a stock repurchase program, approved by its Board of Directors (the “Board”), under which it may repurchase shares of its common stock or UPREIT Units (the “Company Program”). The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board’s action did not establish a specific target stock price or a specific timetable for share repurchase. At March 31, 2014, the Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the Company Program. During the three months ended March 31, 2014, the Company did not repurchase any shares under the Company Program. The last year where the Company repurchased any shares under the program was 2008.

Participants in the Company’s Stock Benefit Plan can use common stock of the Company that they already own to pay: 1) all or a portion of the exercise price payable to the Company upon the exercise of an option; and 2) the taxes associated with option exercises and the vesting of restricted stock awards. In such event, the common stock used to pay the exercise price or taxes is returned to authorized but unissued status, and for purposes of this table is deemed to have been repurchased by the Company, but does not represent repurchases under the Company Program.

The following table summarizes the total number of shares (units) repurchased by the Company during the quarter ended March 31, 2014:

	Total		Average		Maximum shares/units
	shares/units		price per		available under the
Period	Purchased (1)(2)		share/unit		Company Program
Balance December 31, 2013:						2,291,160
January 1 to 31, 2014		3,075		$ 54.17		2,291,160
February 1 to 28, 2014		3,057		58.39		2,291,160
March 1 to 31, 2014		2,317		59.97		2,291,160
Balance March 31, 2014:		8,449		$ 57.29		2,291,160

(1) 1,638 shares of common stock already owned by option holders were used by those holders to pay the exercise price associated with their option exercise; and 188 and 5,944 shares of common stock already owned by restricted stock award and restricted stock unitholders, respectively, were used by those holders to pay the taxes associated with their award vesting;

(2) The Company repurchased 679 shares of common stock through share repurchases by the transfer agent in the open market in connection with the Company’s 401(k) Savings Plan employee deferral and Company matching elections.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS – See Exhibit Index below.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOME PROPERTIES, INC.
	(Registrant)

	Date:	May 2, 2014



	By:	/s/ Edward J. Pettinella
		Edward J. Pettinella
		President and Chief Executive Officer


	Date:	May 2, 2014



	By:	/s/ David P. Gardner
		David P. Gardner
		Executive Vice President and
		Chief Financial Officer

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Exhibit Index

Except as otherwise indicated, the exhibits listed below are filed as part of this report. References to exhibits or other filings under the caption “Location” indicate that exhibit 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.

Exhibit
Number	Exhibit	Location

3.1	Third Amended and Restated Bylaws of Home Properties, Inc. adopted February 1, 2014	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on February 2, 2014

10.1	Home Properties, Inc. 2011 Stock Benefit Plan 2014 Restricted Stock Master Agreement and form of Award Certificate*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on February 13, 2014

31.1	Section 302 Certification of Chief Executive Officer	Filed herewith

31.2	Section 302 Certification of Chief Financial Officer	Filed herewith

32.1	Section 906 Certification of Chief Executive Officer	Furnished herewith

32.2	Section 906 Certification of Chief Financial Officer	Furnished herewith

101	XBRL (eXtensible Business Reporting Language). The following materials from the Home Properties, Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2014, formatted in XBRL: (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of equity, (v) consolidated statements of cash flows and (vi) notes to consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.	Filed herewith

*Management contract or compensatory plan or arrangement.