Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended MARCH 31, 2010
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number: 1-13136
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
(Registrants 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 o
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).
(The Registrant is not yet required to submit Interactive Data) Yes o No o
Indicate by checkmark 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 o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a 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 issuers classes of common stock, as of
the latest practicable date.
|
|
|
Common Stock
|
|
Outstanding at April 30, 2010 |
|
|
|
$.01 par value
|
|
36,335,814 |
HOME PROPERTIES, INC.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2010 AND DECEMBER 31, 2009
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
508,087 |
|
|
$ |
508,087 |
|
Construction in progress |
|
|
198,329 |
|
|
|
184,617 |
|
Buildings, improvements and equipment |
|
|
3,238,007 |
|
|
|
3,223,275 |
|
|
|
|
|
|
|
|
|
|
|
3,944,423 |
|
|
|
3,915,979 |
|
Less: accumulated depreciation |
|
|
(763,337 |
) |
|
|
(733,142 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
|
3,181,086 |
|
|
|
3,182,837 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
9,119 |
|
|
|
8,809 |
|
Cash in escrows |
|
|
28,268 |
|
|
|
27,278 |
|
Accounts receivable, net |
|
|
14,423 |
|
|
|
14,137 |
|
Prepaid expenses |
|
|
15,657 |
|
|
|
16,783 |
|
Deferred charges, net |
|
|
12,807 |
|
|
|
13,931 |
|
Other assets |
|
|
5,155 |
|
|
|
4,259 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,266,515 |
|
|
$ |
3,268,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
2,114,132 |
|
|
$ |
2,112,645 |
|
Exchangeable senior notes, net |
|
|
136,644 |
|
|
|
136,136 |
|
Line of credit |
|
|
11,000 |
|
|
|
53,500 |
|
Accounts payable |
|
|
19,379 |
|
|
|
19,695 |
|
Accrued interest payable |
|
|
12,221 |
|
|
|
10,661 |
|
Accrued expenses and other liabilities |
|
|
28,199 |
|
|
|
27,989 |
|
Security deposits |
|
|
19,161 |
|
|
|
19,334 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,340,736 |
|
|
|
2,379,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 80,000,000
shares authorized; 36,150,628 and 34,655,428
shares issued and outstanding at March 31,
2010 and December 31, 2009, respectively |
|
|
361 |
|
|
|
347 |
|
Excess stock, $0.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
977,975 |
|
|
|
922,078 |
|
Distributions in excess of accumulated earnings |
|
|
(278,957 |
) |
|
|
(261,313 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
699,379 |
|
|
|
661,112 |
|
Noncontrolling interest |
|
|
226,400 |
|
|
|
226,962 |
|
|
|
|
|
|
|
|
Total equity |
|
|
925,779 |
|
|
|
888,074 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
3,266,515 |
|
|
$ |
3,268,034 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
114,315 |
|
|
$ |
115,375 |
|
Property other income |
|
|
12,621 |
|
|
|
12,193 |
|
Interest income |
|
|
4 |
|
|
|
8 |
|
Other income |
|
|
54 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
126,994 |
|
|
|
127,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
57,057 |
|
|
|
56,431 |
|
General and administrative |
|
|
5,558 |
|
|
|
5,888 |
|
Interest |
|
|
30,434 |
|
|
|
30,553 |
|
Depreciation and amortization |
|
|
30,395 |
|
|
|
29,654 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
123,444 |
|
|
|
122,526 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,550 |
|
|
|
5,328 |
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(28 |
) |
|
|
(3,777 |
) |
Gain (loss) on disposition of property |
|
|
(11 |
) |
|
|
13,508 |
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
(39 |
) |
|
|
9,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,511 |
|
|
|
15,059 |
|
Net income attributable to noncontrolling interest |
|
|
(874 |
) |
|
|
(4,157 |
) |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
2,637 |
|
|
$ |
10,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.08 |
|
|
$ |
0.12 |
|
Discontinued operations |
|
|
|
|
|
|
0.21 |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.08 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.07 |
|
|
$ |
0.12 |
|
Discontinued operations |
|
|
|
|
|
|
0.21 |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.07 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
34,970,442 |
|
|
|
32,668,662 |
|
|
|
|
|
|
|
|
Diluted |
|
|
35,406,846 |
|
|
|
32,699,764 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND THE YEAR ENDED DECEMBER 31, 2009
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
in Excess of |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Interest |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009 |
|
|
32,431,304 |
|
|
$ |
324 |
|
|
$ |
857,415 |
|
|
$ |
(206,961 |
) |
|
$ |
260,754 |
|
|
$ |
911,532 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,419 |
|
|
|
12,659 |
|
|
|
47,078 |
|
Issuance of common stock, net |
|
|
1,234,816 |
|
|
|
12 |
|
|
|
53,927 |
|
|
|
|
|
|
|
|
|
|
|
53,939 |
|
Repurchase of common stock |
|
|
(97,304 |
) |
|
|
|
|
|
|
(2,935 |
) |
|
|
|
|
|
|
|
|
|
|
(2,935 |
) |
Conversion of UPREIT Units for common stock |
|
|
1,086,612 |
|
|
|
11 |
|
|
|
21,321 |
|
|
|
|
|
|
|
(21,332 |
) |
|
|
|
|
Adjustment of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
(7,650 |
) |
|
|
|
|
|
|
7,650 |
|
|
|
|
|
Dividends and distributions paid ($2.68 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,771 |
) |
|
|
(32,769 |
) |
|
|
(121,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
34,655,428 |
|
|
$ |
347 |
|
|
$ |
922,078 |
|
|
$ |
(261,313 |
) |
|
$ |
226,962 |
|
|
$ |
888,074 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,637 |
|
|
|
874 |
|
|
|
3,511 |
|
Issuance of common stock, net |
|
|
1,320,132 |
|
|
|
13 |
|
|
|
61,709 |
|
|
|
|
|
|
|
|
|
|
|
61,722 |
|
Repurchase of common stock |
|
|
(11,395 |
) |
|
|
(1 |
) |
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
(522 |
) |
Conversion of UPREIT Units for common stock |
|
|
186,463 |
|
|
|
2 |
|
|
|
3,584 |
|
|
|
|
|
|
|
(3,586 |
) |
|
|
|
|
Adjustment of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
(8,875 |
) |
|
|
|
|
|
|
8,875 |
|
|
|
|
|
Dividends and distributions paid ($0.58 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,281 |
) |
|
|
(6,725 |
) |
|
|
(27,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 |
|
|
36,150,628 |
|
|
$ |
361 |
|
|
$ |
977,975 |
|
|
$ |
(278,957 |
) |
|
$ |
226,400 |
|
|
$ |
925,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(IN THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,511 |
|
|
$ |
15,059 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
31,894 |
|
|
|
30,494 |
|
Amortization of debt discount |
|
|
508 |
|
|
|
480 |
|
Gain (loss) on disposition of property |
|
|
11 |
|
|
|
(13,508 |
) |
Issuance of restricted stock, compensation cost of stock options
and deferred compensation |
|
|
1,442 |
|
|
|
1,195 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Cash in escrows, net |
|
|
(746 |
) |
|
|
781 |
|
Other assets |
|
|
(39 |
) |
|
|
4,644 |
|
Accounts payable and accrued liabilities |
|
|
1,767 |
|
|
|
(3,058 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
34,837 |
|
|
|
21,028 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
38,348 |
|
|
|
36,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to properties |
|
|
(15,531 |
) |
|
|
(20,313 |
) |
Additions to construction in progress |
|
|
(13,614 |
) |
|
|
(11,170 |
) |
Proceeds from (payments for) sale of properties, net |
|
|
(11 |
) |
|
|
66,912 |
|
Additions to cash in escrows, net |
|
|
(243 |
) |
|
|
(412 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(29,399 |
) |
|
|
35,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net |
|
|
60,280 |
|
|
|
847 |
|
Repurchase of common stock |
|
|
(522 |
) |
|
|
(711 |
) |
Proceeds from mortgage notes payable |
|
|
26,430 |
|
|
|
|
|
Payments of mortgage notes payable |
|
|
(24,943 |
) |
|
|
(43,887 |
) |
Proceeds from line of credit |
|
|
60,500 |
|
|
|
78,500 |
|
Payments on line of credit |
|
|
(103,000 |
) |
|
|
(74,000 |
) |
Proceeds from (payments of) deferred loan costs, net |
|
|
(377 |
) |
|
|
164 |
|
Additions to cash in escrows, net |
|
|
(1 |
) |
|
|
(7 |
) |
Dividends and distributions paid |
|
|
(27,006 |
) |
|
|
(30,317 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(8,639 |
) |
|
|
(69,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
310 |
|
|
|
1,693 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
8,809 |
|
|
|
6,567 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
9,119 |
|
|
$ |
8,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Exchange of UPREIT Units for common shares |
|
|
3,586 |
|
|
|
8,684 |
|
Additions to properties included in accounts payable |
|
|
1,652 |
|
|
|
5,587 |
|
Mortgage note premium write-off |
|
|
|
|
|
|
615 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. Unaudited Interim Financial Statements
The interim consolidated financial statements of Home Properties, Inc. (the Company) have been
prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. 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 accounting principles generally
accepted in the United States of America are omitted. The year-end balance sheet data was derived
from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. 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 current
periods results of operations are not necessarily indicative of results which ultimately may be
achieved for the year. The interim consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes thereto included in the
Companys Form 10-K for the year ended December 31, 2009.
2. Organization and Basis of Presentation
Organization
The Company was formed in November 1993, as a Maryland corporation and is engaged primarily in the
ownership, management, acquisition, rehabilitation and development of residential apartment
communities in select Northeast, Mid-Atlantic and Southeast Florida regions of the United States.
The Company conducts its business through Home Properties, L.P. (the Operating Partnership), a
New York limited partnership. As of March 31, 2010, the Company operated 108 apartment communities
with 37,062 apartments. Of this total, the Company owned 106 communities, consisting of 35,912
apartments, managed as general partner one partnership that owned 868 apartments, and fee managed
one community, consisting of 282 apartments, for a third party.
The Company elected to be taxed as a Real Estate Investment Trust (REIT) under the Internal
Revenue Code, as amended, for all periods presented. A corporate REIT is a legal entity which holds
real estate interests and must meet a number of organizational and operational requirements,
including a requirement that it currently distribute at least 90% of its adjusted taxable income to
stockholders. As a REIT, the Company generally will not be subject to corporate level tax on
taxable income it distributes currently to its stockholders. Management believes that all such
conditions for the avoidance of income taxes have been met for the periods presented.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its
ownership of 75.8% of the limited partnership units in the Operating Partnership (UPREIT Units)
at March 31, 2010 (74.7% at December 31, 2009). The remaining 24.2% is reflected as noncontrolling
interest in these consolidated financial statements at March 31, 2010 (25.3% at December 31, 2009).
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 Companys 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 or the Management Company). The Management Company is a wholly owned
subsidiary of the Company. In addition, the Company consolidates one affordable housing limited
partnership in accordance with Financial Accounting
Standards Board (FASB) authoritative guidance for the consolidation of variable interest
entities. All significant inter-company balances and transactions have been eliminated in these
consolidated financial statements.
7
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
3. Recently Adopted Accounting Standards
Effective January 1, 2010, the Company adopted the amended guidance related to the consolidation of
variable interest entities (Accounting Standards Update 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities). The
Companys adoption of this authoritative guidance did not have any impact on its financial position
and results of operations.
4. Earnings Per Common Share
Basic earnings per share (EPS) is computed as net income attributable to common shareholders
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 including stock options (using the treasury stock method) and the conversion of any
exchangeable senior notes. The exchange of an UPREIT Unit for common stock will have 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.
The reconciliation of the basic and diluted earnings per share for the three months ended March 31,
2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,550 |
|
|
$ |
5,328 |
|
Less: Income from continuing operations attributable to noncontrolling interest |
|
|
(884 |
) |
|
|
(1,471 |
) |
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders |
|
$ |
2,666 |
|
|
$ |
3,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
$ |
(39 |
) |
|
$ |
9,731 |
|
Less: Discontinued operations attributable to noncontrolling interest |
|
|
10 |
|
|
|
(2,686 |
) |
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
$ |
(29 |
) |
|
$ |
7,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding |
|
|
34,970,442 |
|
|
|
32,668,662 |
|
Effect of dilutive stock options |
|
|
342,907 |
|
|
|
20,257 |
|
Effect of phantom and restricted shares |
|
|
93,497 |
|
|
|
10,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding |
|
|
35,406,846 |
|
|
|
32,699,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.08 |
|
|
$ |
0.12 |
|
Discontinued operations |
|
|
|
|
|
|
0.21 |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.08 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.07 |
|
|
$ |
0.12 |
|
Discontinued operations |
|
|
|
|
|
|
0.21 |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
0.07 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
8
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Unexercised stock options to purchase 1,410,388 and 2,558,268 shares of the Companys common stock
for the three months ended March 31, 2010 and 2009, respectively, were not included in the
computations of diluted EPS because
the effects would be antidilutive. Also, in conjunction with the issuance of the Senior Notes,
there were 331,257 and 335,802 potential shares issuable under certain circumstances, of which all
are considered antidilutive as of March 31, 2010 and 2009, respectively.
5. Variable Interest Entities
The Company is the general partner in one variable interest entity (VIE) syndicated using low
income housing tax credits under Section 42 of the Internal Revenue Code. As general partner, the
Company manages the day-to-day operations of the partnership for a management fee. In addition,
the Company has an operating deficit guarantee and tax credit guarantee to the limited partners of
that partnership (as discussed in Note 11). The Company is responsible for funding operating
deficits to the extent there are any and can receive operating incentive awards when cash flows
reach certain levels. Included in the Consolidated Balance Sheet for this VIE as of March 31, 2010
are total assets of $10,802, total liabilities of $16,860 and partners deficit of $6,058,
respectively. Of the $16,860 in total liabilities, $15,929 represents non-recourse mortgage debt.
6. Exchangeable Senior Notes
In October 2006, the Company issued $200,000 of exchangeable senior notes under an Indenture
Agreement (the Indenture), with a coupon rate of 4.125% (Senior Notes). In the fourth quarter
of 2008, the Company repurchased $60,000 principal amount of the Senior Notes, leaving $140,000
outstanding. The Senior Notes are exchangeable into cash equal to the principal amount of the
notes and, at the Companys option, cash or common stock for the exchange value, to the extent that
the market price of common stock exceeds the initial exchange price of $73.34 per share, subject to
adjustment. The exchange price is adjusted for payments of dividends in excess of the reference
dividend per the Indenture of $0.64 per share. The notes are not redeemable at the option of the
Company for five years, except to preserve the status of the Company as a REIT. Holders of the
notes may require the Company to repurchase the notes upon the occurrence of certain designated
events. In addition, prior to November 1, 2026, the holders may require the Company to repurchase
the notes on November 1, 2011, 2016 and 2021. The notes will mature on November 1, 2026, unless
previously redeemed, repurchased or exchanged in accordance with their terms prior to that date.
The notes are structurally subordinated to the secured indebtedness of the Company. The Company is
not subject to any financial covenants under the Indenture. In addition, the Indenture will not
restrict the ability to pay distributions, incur debt or issue or repurchase securities.
The following table provides additional information about the Senior Notes as of March 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Principal amount of liability component |
|
$ |
140,000 |
|
|
$ |
140,000 |
|
Unamortized discount |
|
|
(3,356 |
) |
|
|
(3,864 |
) |
|
|
|
|
|
|
|
Carrying amount of liability component |
|
$ |
136,644 |
|
|
$ |
136,136 |
|
|
|
|
|
|
|
|
Carrying amount of equity component |
|
$ |
13,950 |
|
|
$ |
13,950 |
|
|
|
|
|
|
|
|
The following table provides additional information about the Senior Notes for the three months
ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
Coupon interest |
|
$ |
1,444 |
|
|
$ |
1,444 |
|
Amortization issuance costs |
|
|
137 |
|
|
|
137 |
|
Discount amortization |
|
|
508 |
|
|
|
480 |
|
|
|
|
|
|
|
|
Total
interest expense Senior Notes |
|
$ |
2,089 |
|
|
$ |
2,061 |
|
|
|
|
|
|
|
|
Effective interest rate |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
|
Conversion price per share, as adjusted |
|
$ |
72.87 |
|
|
$ |
73.04 |
|
|
|
|
|
|
|
|
9
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
7. Line of Credit
As of March 31, 2010, the Company had a $175,000 unsecured line of credit agreement which expires
August 31, 2011 with an optional one-year extension at the Companys option. The Company had
$11,000 outstanding under the credit facility on March 31, 2010. Borrowings under the line of
credit bear interest at rates ranging from 2.50% to 3.25% over the one-month LIBOR rate, increasing
at higher levels of outstanding indebtedness, with a LIBOR floor of 1.50%. The one-month LIBOR was
0.25% at March 31, 2010 resulting in an effective rate of 4.50% for the Company.
The credit agreement relating to this line of credit requires the Company to maintain certain
financial covenants. The Company was in compliance with these financial covenants for the three
months ended March 31, 2010.
The Companys line of credit agreement 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, 2010, the Company had
outstanding letters of credit of $5,174 and the amount available on the credit facility was
$158,826.
8. Fair Value of Financial Instruments
The Company follows the authoritative guidance for fair value measurements (ASC 820-10), 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.
The Company determined the fair value of its mortgage notes payable and line of credit facility
using a discounted future cash flow technique that incorporates a market interest yield curve with
adjustments for duration, loan to value, and risk profile (level 2 inputs, as defined by ASC
820-10). In determining the market interest yield curve, the Company considered its BBB credit
rating. The Company based the fair value of its exchangeable senior notes using quoted prices
(level 1 inputs, as defined by ASC 820-10).
At March 31, 2010 and December 31, 2009, the fair value of the Companys total debt, including the
exchangeable senior notes and line of credit, amounted to a liability of $2,322,869 and $2,337,866,
respectively, compared to its carrying amount of $2,261,776 and $2,302,281.
9. Interest Capitalized
Capitalized interest associated with communities under development or rehabilitation totaled $2,816
and $1,794 for the three months ended March 31, 2010 and 2009, respectively.
10. Stockholders Equity
At-the-Market Equity Offering Program
On December 3, 2009, the Company initiated an At-the-Market (ATM) equity offering program
through which it may sell up to 3.7 million shares of common stock (not to exceed $150,000 of gross
proceeds), from time to time in ATM offerings or negotiated transactions. The following are
issuances of common stock through this program through March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Gross |
|
|
|
|
|
|
Net Average |
|
Period |
|
Shares Sold |
|
|
Proceeds |
|
|
Net Proceeds |
|
|
Sales Price |
|
December 31, 2009 |
|
|
871,600 |
|
|
$ |
39,830 |
|
|
$ |
39,032 |
|
|
$ |
45.70 |
|
March 31, 2010 |
|
|
1,285,700 |
|
|
|
60,092 |
|
|
|
58,889 |
|
|
|
46.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,157,300 |
|
|
$ |
99,922 |
|
|
$ |
97,921 |
|
|
$ |
46.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
In addition, the Company issued an additional 155,900 shares of common stock at an average price
per share of $46.92, for aggregate gross proceeds of $7,315 with a trade date in March 2010 and a
settlement date in April 2010. Aggregate net proceeds from such issuances, after deducting
commissions and other transaction costs of $146 were $7,169. The Company includes only share
issuances that have settled in the calculation of shares outstanding at March 31, 2010.
Dividends Per Common Share
On March 5, 2010, the Company paid a dividend in the amount of $0.58 per share of common stock to
shareholders of record as of the close of business on March 1, 2010.
11. 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 stand alone
basis is less than 10% of the revenues, net operating income, and assets of the combined reported
operating segments and meets all 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 interest income and 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 all apartment communities which have been owned more than one full
calendar year. Therefore, the Core properties represent communities owned as of January 1, 2009.
Non-core properties consist of the VIE and apartment communities acquired or developed during 2009
and 2010, such that full year 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 of the Companys Form 10-K for the year ended December 31, 2009.
The revenues and net operating income for each of the operating segments are summarized for the
three months ended March 31, 2010 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
125,783 |
|
|
$ |
126,388 |
|
Non-core properties |
|
|
1,153 |
|
|
|
1,180 |
|
Reconciling items |
|
|
58 |
|
|
|
286 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
126,994 |
|
|
$ |
127,854 |
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
69,852 |
|
|
$ |
71,038 |
|
Non-core properties |
|
|
27 |
|
|
|
99 |
|
Reconciling items |
|
|
58 |
|
|
|
286 |
|
|
|
|
|
|
|
|
Net operating income, including reconciling items |
|
|
69,937 |
|
|
|
71,423 |
|
General and administrative expenses |
|
|
(5,558 |
) |
|
|
(5,888 |
) |
Interest expense |
|
|
(30,434 |
) |
|
|
(30,553 |
) |
Depreciation and amortization |
|
|
(30,395 |
) |
|
|
(29,654 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,550 |
|
|
$ |
5,328 |
|
|
|
|
|
|
|
|
11
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
The assets for each of the reportable segments are summarized as follows as of March 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
2,960,206 |
|
|
$ |
2,975,642 |
|
Non-core properties |
|
|
220,880 |
|
|
|
207,195 |
|
Reconciling items |
|
|
85,429 |
|
|
|
85,197 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,266,515 |
|
|
$ |
3,268,034 |
|
|
|
|
|
|
|
|
12. 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, 2009 are the operating
results of five apartment communities sold in three separate transactions during 2009 (the 2009
Disposed Communities). Included in discontinued operations for the three months ended March 31,
2010 are the operating results of the wind-up activities for the 2009 Disposed Communities. 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.
The operating results of discontinued operations are summarized for the three months ended March
31, 2010 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
|
|
|
$ |
2,098 |
|
Property other income |
|
|
9 |
|
|
|
273 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
9 |
|
|
|
2,371 |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
37 |
|
|
|
1,258 |
|
Interest expense, including prepayment penalties |
|
|
|
|
|
|
4,497 |
|
Depreciation and amortization |
|
|
|
|
|
|
393 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
37 |
|
|
|
6,148 |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(28 |
) |
|
$ |
(3,777 |
) |
|
|
|
|
|
|
|
13. Commitments and Contingencies
Letters of Credit
As of March 31, 2010 the Company had issued $5,174 in letters of credit, which were provided under
the Companys $175,000 unsecured line of credit agreement. The letters of credit were required to
be issued under certain tax escrow agreements, workers compensation and health insurance policies,
and construction projects.
12
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Debt Covenants
The line of credit agreement contains restrictions which, among other things, require maintenance
of certain financial ratios.
Tax Protection Obligations
In connection with various UPREIT transactions, the Company has agreed to maintain certain levels
of nonrecourse debt for a period of 5 to 10 years associated with the contributed properties
acquired. In addition, the Company is restricted in its ability to sell certain contributed
properties (23% by number of apartment communities of the owned portfolio) for a period of 7 to 15
years except through a tax deferred like-kind exchange. The remaining terms on the sale
restrictions range from 1 to 5.75 years.
Limited Partnership
The Company, through its general partnership interest in an affordable property limited
partnership, has guaranteed certain low income housing tax credits to limited partners for a
remaining period of six years totaling approximately $3,000. As of March 31, 2010, there were no
known conditions that would make such payments necessary relating to these guarantees. In
addition, the Company, acting as general partner in this partnership, is obligated to advance funds
to meet partnership operating deficits.
Contingencies
The Company is not a party to any legal proceedings which are expected to have a material adverse
effect on the Companys 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 Companys liquidity, financial position or results
of operations.
14. Subsequent Events
On April 1, 2010, the Company acquired two communities located in Westminster, Maryland from the
same seller. Middlebrooke Apartments and Westbrooke Apartments, with 208 units and 110 units,
respectively, were purchased for $17,350 and $6,350, respectively. In connection with these
acquisitions, closing costs of $227 were expensed and will be reflected in general and
administrative costs for the second quarter of 2010. The purchase price and closing costs were
funded with the line of credit.
On May 4, 2010, the Board of Directors approved a dividend of $0.58 per share on the Companys
common stock for the quarter ended March 31, 2010. This is the equivalent of an annual
distribution of $2.32 per share. The dividend is payable May 27, 2010 to shareholders of record on
May 17, 2010.
13
HOME PROPERTIES, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(UNAUDITED)
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 Companys 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, 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 Companys control and could materially
affect the Companys actual results, performance or achievements.
Liquidity and Capital Resources
General
In 2000, the Company obtained an investment grade rating from Fitch, Inc. The rating in effect at
March 31, 2010 (no change from initial rating) is a corporate credit rating of BBB (Triple-B).
The Companys 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 net cash flows provided
by operating activities and its existing bank 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 Unit holders in
accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.
Cash Flow Summary
The Companys net cash flow from operating activities increased from $36 million in 2009, to $38
million in 2010. The $2 million increase was primarily due to timing differences in cash
disbursements between periods.
14
Cash used in investing activities was $29 million during 2010 compared to cash provided by
investing activities of $35 million in 2009. The $64 million swing between periods is primarily
due to the 2009 period receiving the benefit of $67 million proceeds from the sale of properties, while the
2010 period realized no property sales. There were no
cash outflows for the purchase of properties and land for development in either period. Cash
outflows for capital improvements were $16 million during 2010 as compared to $20 million for 2009.
The $4 million lower outflow in 2010 reflects managements conscious efforts to conserve cash and
focus only on selective rehabilitation in markets that are able to support rent increases. Cash
outflows for additions to construction in progress were $14 million in 2010 as compared to $11
million in 2009. The higher spending on development in 2010 reflects the ongoing construction of
two communities which will be placed into service in 2010.
Net cash used in financing activities totaled $9 million in 2010. Cash flows from net proceeds of
the ATM common stock offering of $59 million, proceeds from stock option exercises of $1 million
and net proceeds from mortgage financing of $1 million were more than offset by distributions paid to
shareholders and UPREIT unitholders of $27 million, and a net paydown of $43 million on the line of
credit. Net cash used in financing activities totaled $69 million for 2009, primarily as a result
of net borrowing under our line of credit of $5 million and proceeds from stock option exercises of
$1 million being more than offset by paydown on mortgage notes of $44 million, distributions paid
to shareholders and UPREIT unitholders of $30 million, and common stock repurchases of $1 million.
Line of Credit
As of March 31, 2010, the Company had a $175 million unsecured line of credit agreement with M&T
Bank, as administrative agent and lead bank, which expires August 31, 2011, with a one-year
extension, at the Companys option. The Company had $11.0 million outstanding under the credit
facility on March 31, 2010. 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,
2010, the Company had outstanding letters of credit of $5.2 million. As of March 31, 2010, the
amount available on the credit facility was $158.8 million. Borrowings under the line of credit
bear interest at rates ranging from 2.50% to 3.25% over the one-month LIBOR rate, increasing at
higher levels of outstanding indebtedness, with a LIBOR floor of 1.50%. The one-month LIBOR was
0.25% at March 31, 2010, resulting in an effective rate of 4.50% for the Company.
Accordingly, increases in interest rates will increase the Companys interest expense and as a
result will affect the Companys results of operations and financial condition.
Exchangeable Senior Notes
In October 2006, the Company issued $200 million of exchangeable senior notes with a coupon rate of
4.125%, which generated net proceeds of $195.8 million. The net proceeds were used to repurchase
933,000 shares of common stock for a total of $58 million, pay down $70 million on the line of
credit, with the balance used for redemption of the Series F Preferred Shares and property
acquisitions. During the fourth quarter of 2008, the Company repurchased $60 million of the
exchangeable senior notes for $45.4 million. The exchange terms and conditions are more fully
described under Contractual Obligations and Other Commitments, below.
Indebtedness
As of March 31, 2010, the weighted average interest rate on the Companys total indebtedness of
$2.3 billion was 5.54% with staggered maturities averaging approximately six years. Approximately
89% of total indebtedness is at fixed rates. This limits the exposure to changes in interest
rates, minimizing the effect of interest rate fluctuations on the Companys results of operations
and cash flows.
Unencumbered Assets
The Company increased the percentage of unencumbered assets of the total property pool. At the end
of 2009, assets free of mortgage financings, inclusive of unencumbered development properties, were
20% of the property portfolio. This grew to 21% as of March 31, 2010. Higher levels of unsecured
assets add borrowing flexibility because more capacity is available for unsecured debt under the
terms of the Companys unsecured line of credit agreement.
15
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; however, during 2009 and through March 31, 2010,
the Company has not issued any UPREIT Units as consideration for acquired properties.
Property Dispositions
During 2009, the Company sold five communities, with a total of 1,333 units, for $108.3 million. A
gain on sale of approximately $24.3 million was realized from these sales. The weighted average
first year capitalization rate projected on these dispositions was 7.8%.
Management has not specifically targeted additional communities for sale in 2010 but will continue
to evaluate the sale of its communities.
Universal Shelf Registration
On March 3, 2010, 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 Companys At-the-Market
offering described below are made under this registration statement.
At-the-Market Equity Offering Program
On December 3, 2009, the Company initiated an At-the-Market (ATM) equity offering program
through which it may sell up to 3.7 million shares of common stock (not to exceed $150 million of
gross proceeds), from time to time in ATM offerings or negotiated transactions. During December 2009, the Company issued 871,600 shares of common stock at an average price per share of
$45.70, for aggregate gross proceeds of $39.8 million. Aggregate net proceeds from such issuances,
after deducting commissions and other transaction costs of $0.8 million were $39.0 million. During
the three months ended March 31, 2010, the Company issued 1,285,700 shares of common stock at an
average price per share of $46.74, for aggregate gross proceeds of $60.1 million. Aggregate net
proceeds from such issuances, after deducting commissions and other transaction costs of $1.2
million were $58.9 million. In addition, the Company issued an additional 155,900 shares of common
stock at an average price per share of $46.92, for aggregate proceeds of $7.3 million with a trade
date in March 2010 and a settlement date in April 2010. Aggregate net proceeds from such
issuances, after deducting commissions and other transaction costs of $0.1 million were $7.2
million. As of April 30, 2010, the Company has $43 million remaining common stock to be issued
under the ATM program.
Dividend Reinvestment and Direct Stock Purchase Plan (DRIP)
The Companys DRIP provides the stockholders of the Company an opportunity to automatically invest
their cash dividends in additional shares of common stock. In addition, eligible participants may
make monthly payments or other voluntary cash investments in shares of common stock. The maximum
monthly investment permitted without
prior Company approval is currently $10,000. The Company meets share demand under the DRIP through
share repurchases by the transfer agent in the open market on the Companys behalf or new share
issuances. Management monitors the relationship between the Companys stock price and its
estimated net asset value (NAV). During times when the difference between these two values is
small, resulting in little dilution of NAV by common stock issuances, the Company can choose to
issue new shares. At times when the gap between NAV and stock price is greater, the Company has
the flexibility to satisfy the demand for DRIP shares with stock repurchased by the transfer agent
in the open market. In addition, the Company can issue waivers to DRIP participants to provide for
investments in excess of the $10,000 maximum monthly investment. No such waivers were granted
during 2009 and through March 31, 2010.
16
Stock Repurchase Program
In 1997, the Companys Board of Directors (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/units may be repurchased through open market or privately negotiated transactions at the
discretion of Company management. The Boards action did not establish a target stock price or a
specific timetable for repurchase. There were no repurchases under the Company Program during 2009
and through March 31, 2010. The remaining authorization level as of March 31, 2010 is 2,291,160
shares. The Company will continue to monitor stock prices, the NAV, and acquisition/development
alternatives to determine the current best use of capital between the two major uses of capital
stock buybacks and acquisitions/development. At the present time, the Company has no intention of
buying any stock back during the remainder of 2010.
Variable Interest Entities
The Company is the general partner in one variable interest entity (VIE) syndicated using low
income housing tax credits under Section 42 of the Internal Revenue Code. As general partner, the
Company manages the day-to-day operations of the partnership for a management fee. In addition,
the Company has an operating deficit guarantee and tax credit guarantee to the limited partner of
that partnership. The Company is responsible to fund operating deficits to the extent there are
any and can receive operating incentive awards if cash flows reach certain levels. Included in the
Consolidated Balance Sheet for this VIE as of March 31, 2010 are total assets of $10.8 million,
total liabilities of $16.9 million and partners deficit of $6.1 million. Of the $16.9 million in
total liabilities, $15.9 million represents non-recourse mortgage debt. The VIE is included in the
Consolidated Statement of Operations for the three months ended March 31, 2010 and 2009.
The Company, through its general partnership interest in the VIE, has guaranteed the low income
housing tax credits to the limited partners for a remaining period of six years totaling
approximately $3 million. Such guarantee requires the Company to operate the property in
compliance with Internal Revenue Code Section 42 for a total of 15 years. The Company believes the
propertys operations conform to the applicable requirements as set forth above. In addition, as
the general partner in this partnership, the Company is obligated to advance funds to meet
partnership operating deficits.
Acquisitions, Development and Dispositions
Acquisitions
On April 1, 2010, the Company acquired two communities located in the Baltimore region from the
same seller with a total of 318 units for $23.7 million. In connection with these acquisitions,
closing costs of $0.2 million were expensed and will be reflected in general and administrative
costs for the second quarter of 2010. The purchase price and closing costs were funded with the
line of credit. The weighted average first year capitalization rate projected by the Company on
these acquisitions was 6.3%.
Development
The Company has two projects currently under construction, 1200 East West Highway and The Courts at
Huntington Station.
1200 East West Highway is in Silver Spring, Maryland and construction is expected to be completed
by the end of May 2010. It is a 14-story high rise with 247 apartments and 10,600 square feet of
commercial space that realized initial occupancy in March 2010. As of March 31, 2010, 22 of the
114 units available to rent were occupied and another 34 units were pre-leased. Stabilization is
anticipated by year-end.
The Courts at Huntington Station is in Alexandria, Virginia and construction of the 202 units in
Phase I is expected to be complete by the end of May 2010. Initial occupancy is expected in May
2010 and the lease-up period is projected to last eleven months. Construction on Phase II (219
units) has commenced and is scheduled to be complete in the second quarter of 2011, reaching
stabilized occupancy a year later.
17
The Company owns no raw land and has no real estate development investments in which the cost is in
excess of the
Companys estimate of the investments fair market value. Therefore, the Company has not had to
record any development pipeline impairment charges. The Company does not currently plan to acquire
new entitled or raw land for development in 2010.
Dispositions
During the three months ended March 31, 2010, there were no property dispositions.
Contractual Obligations and Other Commitments
The primary obligations of the Company relate to its borrowings under the line of credit, Senior
Notes and mortgage notes payable. The Companys line of credit matures in August 2011 (not
including a one-year extension, at the option of the Company) and had $11.0 million in loans and
letters of credit totaling $5.2 million outstanding at March 31, 2010. The $2.1 billion in
mortgage notes payable have varying maturities ranging from 1 month to 25 years. The weighted
average interest rate of the Companys secured debt was 5.53% at March 31, 2010. The weighted
average rate of interest on the Companys total indebtedness of $2.3 billion at March 31, 2010 was
5.54%.
In October 2006, the Company issued $200 million of Senior Notes with a coupon rate of 4.125%.
During 2008, the Company repurchased and retired $60 million principal amount of its Senior Notes
and $140 million remain outstanding at March 31, 2010. The notes are exchangeable into cash equal
to the principal amount of the notes and, at the Companys option, cash or common stock for the
exchange value, to the extent that the market price of common stock exceeds the initial exchange
price of $73.34 per share, subject to adjustment. The exchange price is adjusted for payments of
dividends in excess of the reference dividend set in the indenture of $0.64 per share. The
adjusted exchange price at March 31, 2010 was $72.87 per share. Upon an exchange of the notes, the
Company will settle any amounts up to the principal amount of the notes in cash and the remaining
exchange value, if any, will be settled, at the Companys option, in cash, common stock or a
combination of both. The notes are not redeemable at the option of the Company for five years,
except to preserve the status of the Company as a REIT. Holders of the notes may require the
Company to repurchase the notes upon the occurrence of certain designated events. In addition,
prior to November 1, 2026, the holders may require the Company to repurchase the notes on November
1, 2011, 2016 and 2021. The notes will mature on November 1, 2026, unless previously redeemed,
repurchased or exchanged in accordance with their terms prior to that date.
The Company leases its corporate office space from an affiliate and the office space for its
regional offices 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.
Capital Improvements (dollars in thousands, except unit and per unit data)
For 2010, the Company estimates that the amount of recurring, non-revenue enhancing capital
expenditures incurred on an annual basis for a standard garden style apartment will remain
unchanged at $800 per apartment unit.
The Companys 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/bath cabinets, new roofs, site improvements and various exterior building improvements.
Non-recurring, revenue generating upgrades include, among other items community centers, new
windows, and kitchen/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.
18
The Company estimates that on an annual basis $800 per unit is spent on recurring capital
expenditures in 2010 and 2009. During the three months ended March 31, 2010 and 2009,
approximately $200 per unit was estimated to be spent on recurring capital expenditures. The table
below summarizes the actual total capital improvements incurred by major categories for the three
months ended March 31, 2010 and 2009 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, 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
49 |
|
|
$ |
1 |
|
|
$ |
49 |
|
|
$ |
1 |
|
|
$ |
521 |
|
|
$ |
15 |
|
Major building improvements |
|
|
1,128 |
|
|
|
32 |
|
|
|
185 |
|
|
|
5 |
|
|
|
1,313 |
|
|
|
37 |
|
|
|
2,708 |
|
|
|
76 |
|
Roof replacements |
|
|
195 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
5 |
|
|
|
384 |
|
|
|
11 |
|
Site improvements |
|
|
394 |
|
|
|
11 |
|
|
|
829 |
|
|
|
23 |
|
|
|
1,223 |
|
|
|
34 |
|
|
|
390 |
|
|
|
11 |
|
Apartment upgrades |
|
|
1,639 |
|
|
|
46 |
|
|
|
3,412 |
|
|
|
96 |
|
|
|
5,051 |
|
|
|
142 |
|
|
|
6,444 |
|
|
|
180 |
|
Appliances |
|
|
1,012 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
1,012 |
|
|
|
28 |
|
|
|
1,198 |
|
|
|
33 |
|
Carpeting/flooring |
|
|
1,978 |
|
|
|
55 |
|
|
|
8 |
|
|
|
|
|
|
|
1,986 |
|
|
|
55 |
|
|
|
2,575 |
|
|
|
72 |
|
HVAC/mechanicals |
|
|
635 |
|
|
|
18 |
|
|
|
2,139 |
|
|
|
60 |
|
|
|
2,774 |
|
|
|
78 |
|
|
|
1,860 |
|
|
|
52 |
|
Miscellaneous |
|
|
179 |
|
|
|
5 |
|
|
|
175 |
|
|
|
5 |
|
|
|
354 |
|
|
|
10 |
|
|
|
697 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
7,160 |
|
|
$ |
200 |
|
|
$ |
6,797 |
|
|
$ |
190 |
|
|
$ |
13,957 |
|
|
$ |
390 |
|
|
$ |
16,777 |
|
|
$ |
469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Calculated using 35,798 core units for the three months ended March 31, 2010 and
2009. |
The schedule below summarizes the breakdown of total capital improvements between core and non-core
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Recurring |
|
|
Per |
|
|
Recurring |
|
|
Per |
|
|
Capital |
|
|
Per |
|
|
Capital |
|
|
Per |
|
|
|
Cap Ex |
|
|
Unit(b) |
|
|
Cap Ex |
|
|
Unit(b) |
|
|
Improvements |
|
|
Unit(b) |
|
|
Improvements |
|
|
Unit(b) |
|
Core Communities |
|
$ |
7,160 |
|
|
$ |
200 |
|
|
$ |
6,797 |
|
|
$ |
190 |
|
|
$ |
13,957 |
|
|
$ |
390 |
|
|
$ |
16,777 |
|
|
$ |
469 |
|
2009 Disposed Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343 |
|
|
|
409 |
|
Corporate office expenditures(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911 |
|
|
|
|
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
7,160 |
|
|
$ |
200 |
|
|
$ |
6,797 |
|
|
$ |
190 |
|
|
$ |
14,868 |
|
|
$ |
390 |
|
|
$ |
17,430 |
|
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
(b) |
|
Calculated using the weighted average number of units owned, including 35,798 core
units for the three months ended March 31, 2010; and 35,798 core units and 2009 disposed units of
839 for the three months ended March 31, 2009. |
Results of Operations (dollars in thousands, except unit and per unit data)
Net operating income (NOI) may 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 may be 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 Companys apartment communities. In
addition, the apartment communities are valued and sold in the market by using a multiple of NOI.
The Company also uses this measure to compare its performance to that of its peer group.
19
Comparison of three months ended March 31, 2010 to the same period in 2009
The Company had 105 apartment communities with 35,798 units which were owned during the three
months ended March, 2010 and 2009 (the Core Properties). The Company has acquired/developed an
additional one apartment community with 114 units during 2010 (the Acquisition Communities).
During 2009, the Company disposed of five apartment communities with a total of 1,333 units, which
had partial results for 2009 (the 2009 Disposed Communities). The results of these disposed
properties have been classified as discontinued operations and are not included in the table below.
The reported income from operations in the table below includes the results of one investment where
the Company is the managing general partner that has been determined to be a VIE and consolidated
with the Company.
A summary of the net operating income for Core Properties is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Rent |
|
$ |
113,185 |
|
|
$ |
114,225 |
|
|
$ |
(1,040 |
) |
|
|
(0.9 |
%) |
Utility recovery revenue |
|
|
7,684 |
|
|
|
7,249 |
|
|
|
435 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent including recoveries |
|
|
120,869 |
|
|
|
121,474 |
|
|
|
(605 |
) |
|
|
(0.5 |
%) |
Property other income |
|
|
4,914 |
|
|
|
4,914 |
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
125,783 |
|
|
|
126,388 |
|
|
|
(605 |
) |
|
|
(0.5 |
%) |
Operating and maintenance |
|
|
(55,931 |
) |
|
|
(55,350 |
) |
|
|
(581 |
) |
|
|
(1.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
69,852 |
|
|
$ |
71,038 |
|
|
$ |
(1,186 |
) |
|
|
(1.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the net operating income for the Company as a whole is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Rent |
|
$ |
114,315 |
|
|
$ |
115,375 |
|
|
$ |
(1,060 |
) |
|
|
(0.9 |
%) |
Utility recovery revenue |
|
|
7,688 |
|
|
|
7,256 |
|
|
|
432 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent including recoveries |
|
|
122,003 |
|
|
|
122,631 |
|
|
|
(628 |
) |
|
|
(0.5 |
%) |
Property other income |
|
|
4,933 |
|
|
|
4,937 |
|
|
|
(4 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
126,936 |
|
|
|
127,568 |
|
|
|
(632 |
) |
|
|
(0.5 |
%) |
Operating and maintenance |
|
|
(57,057 |
) |
|
|
(56,431 |
) |
|
|
(626 |
) |
|
|
(1.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
69,879 |
|
|
$ |
71,137 |
|
|
$ |
(1,258 |
) |
|
|
(1.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $1,060 decrease in rental income, $70 is attributable to the Acquisition Communities and
$1,040 is attributable to the Core Properties as the result of a decrease of 1.5% in weighted
average rental rates from $1,143 to $1,126 per apartment unit; partially offset by a 0.6% increase
in economic occupancy from 93.0% to 93.6%. This is offset by an increase of $50 attributable to
the consolidation of the VIE. 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 $432 increase in utility recovery revenue, $435 is attributable to the Core
Properties offset by a $3 decrease attributable to the consolidation of the VIE.
The remaining 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 decreased by $4
attributable to the consolidation of the VIE.
Of the $626 increase in operating and maintenance expenses, $94 is attributable to the Acquisition
Communities and $581 is attributable to the Core Properties; partially offset by a $49 decrease
that is attributable to the consolidation of the VIE reflecting a decrease in repairs and
maintenance expenses from 2009. The increase in Core Properties is primarily due to increases in
property insurance and snow removal costs, partially offset by decreases in electricity and natural
gas heating costs.
Electricity costs were down $205, or 8.5% from a year ago primarily a result of lower consumption
due to the compact fluorescent bulb replacement program that was rolled out in the third quarter of
2009 and a one time rebate
of $94 received in the Baltimore region.
20
Natural gas heating costs were down $1,128, or 12.6% from a year ago due to a combination of lower
commodity rates offset by increased consumption due to a slightly colder first quarter than the
prior year quarter. For the first quarter 2010, our natural gas weighted average cost, including
transportation of $3.00 per decatherm, was $9.54 per decatherm, compared to $11.37 per decatherm
for the 2009 period, a 16% decrease.
Property insurance increased by $527, or 21.7% as a result of increasing the reserve in 2010 by
$349 compared to a reserve decrease adjustment in 2009 of $230. The $579 reserve swing is
attributable to the flooding that occurred due to severe rain and wind storms late in the first
quarter 2010 that caused damage at many locations, particularly in the Boston region. Almost 100
apartments at one of our Boston properties flooded, requiring some residents to evacuate. In
addition, the 2009 period realized the benefit of $408 in subrogation counterclaims settled for two
2007 fire losses. Without these unusual items, insurance would have decreased $460, or 15%.
Snow removal costs were up $1,190, or 169.3% as most of our Mid-Atlantic regions suffered from
record storms. In addition, storm-related personnel costs for overtime and temporary labor of $252
and costs for our own snow removal fleet of $67 were incurred in the first quarter of 2010 and were
recorded in personnel expense and repairs & maintenance, respectively.
General and administrative expenses decreased in 2010 by $330, or 5.6%. General and administrative
expenses as a percentage of total revenues were 4.4% for 2010 as compared to 4.6% for 2009. The
incentive bonus is up $46, or 13.3%, as compared to 2009, which reflects the relative increase in
the Companys operating performance versus its peers as compared to the prior year. Stock based
compensation expenses were up $123, or 11.2%, in 2010 as compared to 2009, due to the impact of the
prescribed changes in vesting period determination of retirement eligibility that took effect in
2006. These costs are primarily offset by staff reductions and other efficiency measures taken by
the Company during the last year.
Interest expense decreased by $119, or 0.4% in 2010 primarily as a result of higher level of
variable interest rate borrowings in 2010 as compared to 2009, which yielded lower effective rates
than the fixed rate debt.
Depreciation and amortization expense increased $741, or 2.5% due to the depreciation on the
capital additions to the Core Properties.
Included in discontinued operations for the three months ended March 31, 2010 are the residual
operating results of the 2009 Disposed Communities. 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.
Funds From Operations
Pursuant to the revised definition of Funds From Operations (FFO) adopted 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, 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. 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 costs prior to the debts 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.
21
Although our FFO as adjusted clearly differs from NAREITs 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 elsewhere 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 companys
real estate between periods or as compared to different companies. In addition, FFO as adjusted by
the Company 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. FFO, and FFO as adjusted, do not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash
needs. Neither FFO, nor FFO as adjusted, should be considered as an alternative to net income as
an indication of the Companys performance or to cash flow as a measure of liquidity.
The calculation of FFO and reconciliation to GAAP net income available to common shareholders for
the three months ended March 31, 2010 and 2009 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2010 |
|
|
2009 |
|
Net income attributable to common shareholders |
|
$ |
2,637 |
|
|
$ |
10,902 |
|
Real property depreciation and amortization |
|
|
29,723 |
|
|
|
29,420 |
|
Noncontrolling interest |
|
|
874 |
|
|
|
4,157 |
|
Loss (gain) on disposition of property |
|
|
11 |
|
|
|
(13,508 |
) |
|
|
|
|
|
|
|
FFO Basic and Diluted, as defined by NAREIT |
|
|
33,245 |
|
|
|
30,971 |
|
Loss from early extinguishment of debt in connection with sale
of real estate |
|
|
|
|
|
|
4,927 |
|
|
|
|
|
|
|
|
FFO Basic and Diluted, as adjusted by the Company |
|
$ |
33,245 |
|
|
$ |
35,898 |
|
|
|
|
|
|
|
|
Weighted average common shares/units outstanding (1): |
|
|
|
|
|
|
|
|
Basic |
|
|
46,595.9 |
|
|
|
45,180.0 |
|
|
|
|
|
|
|
|
Diluted |
|
|
47,032.3 |
|
|
|
45,211.1 |
|
|
|
|
|
|
|
|
|
|
|
(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.
22
Covenants
The credit agreement relating to the Companys line of credit provides for the Company to maintain
certain financial
covenants. The Company was in compliance with these financial covenants for all periods presented.
The line of credit has not been used for long-term financing but adds a certain amount of
flexibility, especially in meeting the Companys acquisition goals. Many times it is easier to
temporarily finance an acquisition or stock repurchases by short-term use of the line of credit,
with long-term secured financing or other sources of capital replenishing the line of credit
availability.
Economic Conditions
Substantially all of the leases at the Companys apartment 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. In response to the current economic climate, the Company may also
elect to hold or slightly reduce rents in order to remain competitive and retain occupancy in
certain markets. These short-term leases minimize the potential adverse effect of inflation or
deflation 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.
Historically, real estate has been subject to a wide range of cyclical economic conditions, which
affect various real estate sectors and geographic regions with differing intensities and at
different times. In the fourth quarter of 2007, throughout 2008, 2009 and continuing into 2010,
the sub-prime issue put significant pressure on the mortgage lending industry. This led to
problems in the financial system which developed into the worst recession since the Great
Depression. The credit markets tightened, consumer confidence plunged and unemployment soared.
The Company has continued to receive favorable financing at market rates of interest. Its
occupancy at 95.0% in 2008, 94.9% in 2009 and 94.8% during the first quarter of 2010 remain the
highest it has been since 2000 and financial performance continued strong. However, a recessionary
economy and increasing job losses typically slow household formations which could affect occupancy
and decrease the Companys ability to raise rents. In light of this, we will continue to review
our business strategy throughout the year. However, we believe that given our B-class property
type and the geographic regions in which we are located, the Companys financial performance will
be affected less negatively than its peers.
Declaration of Dividend
On May 4, 2010, the Board of Directors approved a dividend of $0.58 per share on the Companys
common stock for the quarter ended March 31, 2010. This is the equivalent of an annual
distribution of $2.32 per share. The dividend is payable May 27, 2010 to shareholders of record on
May 17, 2010.
Contingencies
The Company is not a party to any legal proceedings which are expected to have a material adverse
effect on the Companys 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 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 Companys liquidity, financial position or results
of operations.
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
3.
23
HOME PROPERTIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys primary market risk exposure is interest rate risk. At March 31, 2010 and
December 31, 2009, approximately 89% of the Companys debt bore interest at fixed rates. At
March 31, 2010 and December 31, 2009, approximately 83% of the Companys debt was secured and bore
interest at fixed rates. The secured fixed rate debt had weighted average maturities of
approximately 5.17 and 5.35 years and a weighted average interest rate of approximately 5.87% and
5.86% at March 31, 2010 and December 31, 2009, respectively. The remainder of the Companys
secured debt bore interest at variable rates with a weighted average maturity of approximately 7.15
and 7.75 years and a weighted average interest rate of 2.92% for both periods. The Company does
not intend to utilize a significant amount of permanent variable rate debt to acquire properties in
the future. On occasion, the Company may use its line of credit in connection with a property
acquisition or stock repurchase with the intention to refinance at a later date. The Company
believes, however, that increases in interest expense as a result of inflation would not
significantly impact the Companys distributable cash flow.
At March 31, 2010 and December 31, 2009, the fair value of the Companys fixed and variable rate
secured debt amounted to a liability of $2.17 billion and $2.15 billion, respectively, compared to
its carrying amount of $2.11 billion and $2.11 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at March 31, 2010 would have changed the fair
value of the Companys fixed and variable rate secured debt to a liability of $2.08 billion and
would result in $2.4 million higher interest expense on the variable rate secured debt. At
March 31, 2010 and December 31, 2009, the fair value of the Companys total debt, including the
exchangeable senior notes and line of credit, amounted to a liability of $2.32 billion and $2.34
billion, respectively, compared to its carrying amount of $2.26 billion and $2.30 billion.
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 Companys 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/or equity
offerings and/or the issuance of UPREIT Units. As of March 31, 2010, the Company had no other
material exposure to market risk.
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 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the officers who certify the Companys financial
reports and to the other members of senior management and the Board of Directors.
The principal executive officer and principal financial officer evaluated, as of March 31, 2010,
the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15-d-15(e) under the Securities Exchange Act of 1934, as amended (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 ended
December 31, 2010 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
24
HOME PROPERTIES, INC.
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
Refer to the Risk Factors disclosure in the Companys Form 10-K for the year ended December 31,
2009. There have been no material changes in these risk factors during the three months ended
March 31, 2010 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
In 1997, the Companys Board of Directors (the Board) approved a stock repurchase program under
which the Company may repurchase shares of its outstanding common stock and UPREIT Units (Company
Program). The shares/units may be repurchased through open market or privately negotiated
transactions at the discretion of Company management. The Boards action does not establish a
specific target stock price or a specific timetable for share repurchase. In addition,
participants in the Companys Stock Benefit Plan can use common stock of the Company that they
already own to pay all or a portion of the exercise price payable to the Company upon the exercise
of an option. In such event, the common stock used to pay the exercise price is returned to
authorized but unissued status, and for purposes of this table is deemed to have been repurchased
by the Company. At March 31, 2010, the Company had authorization to repurchase 2,291,160 shares of
common stock and UPREIT Units under the Company Program.
The following table summarizes the total number of shares (units) repurchased by the Company during
the quarter ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
shares/units |
|
|
|
Total |
|
|
Average |
|
|
available under |
|
|
|
shares/units |
|
|
price per |
|
|
the Company |
|
Period |
|
purchased (1) |
|
|
share/unit |
|
|
Program(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2010: |
|
|
|
|
|
|
|
|
|
|
2,291,160 |
|
January, 2010 |
|
|
1,113 |
|
|
$ |
47.71 |
|
|
|
2,291,160 |
|
February, 2010 |
|
|
|
|
|
|
|
|
|
|
2,291,160 |
|
March, 2010 |
|
|
|
|
|
|
|
|
|
|
2,291,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2010: |
|
|
1,113 |
|
|
$ |
47.71 |
|
|
|
2,291,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the quarter ended March 31, 2010, and as permitted by the Companys Stock
Benefit Plan, 1,113 shares of common stock already owned by option holders were used by
those holders to pay the exercise price associated with their option exercise. These
shares were returned to the status of authorized but unissued shares. |
|
(2) |
|
During the quarter ended March 31, 2010, there were no shares (units) repurchased and
no Board approved increases under the Company Program. |
25
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
At a meeting duly called and held on May 3, 2010, the independent directors constituting the
Companys Compensation Committee approved changes to compensation arrangements for the executive
officers who were named in the Summary Compensation Table of the Companys Proxy Statement issued
in connection with the 2010 Annual Meeting other than the Chief Executive Officer. At a meeting
duly called and held on May 4, 2010, the Board of Directors of the Company approved changes to the
compensation arrangements for the Chief Executive Officer. The changes to all of those
arrangements are described on Exhibit 10.1 to this 10-Q. Also on May 4, 2010, the Board of
Directors approved a grant of stock options and restricted stock to each of the non-employee
directors as described on Exhibit 10.2 to this 10-Q.
ITEM 6. EXHIBITS
|
|
|
Exhibit 10.1
|
|
Changes to Compensation Arrangements for Named Executive Officers* |
|
|
|
Exhibit 10.2
|
|
Equity Grant for Non-Employee Directors* |
|
|
|
Exhibit 10.3
|
|
Amendment No. 104 to Second Amended and Restated Agreement of Limited Partnership |
|
|
|
Exhibit 31.1
|
|
Section 302 Certification of Chief Executive Officer* |
|
|
|
Exhibit 31.2
|
|
Section 302 Certification of Chief Financial Officer* |
|
|
|
Exhibit 32.1
|
|
Section 906 Certification of Chief Executive Officer** |
|
|
|
Exhibit 32.2
|
|
Section 906 Certification of Chief Financial Officer** |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
26
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 7, 2010
|
|
|
By: |
/s/ Edward J. Pettinella
|
|
|
|
Edward J. Pettinella |
|
|
|
President and Chief Executive Officer |
|
|
|
Date: May 7, 2010
|
|
|
By: |
/s/ David P. Gardner
|
|
|
|
David P. Gardner |
|
|
|
Executive Vice President and
Chief Financial Officer |
|
27