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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
( ) 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
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HOME PROPERTIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 16-1455126
(State of incorporation) (I.R.S. Employer Identification No.)
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850 Clinton Square, Rochester, New York 14604
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(Address of principal executive offices)(Zip Code)
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(585) 546-4900
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(Registrant's telephone number, including area code)
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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 the
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
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 30, 2007
------------ -----------------------------
$.01 par value 33,243,407
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HOME PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2007 (Unaudited) and December 31, 2006 4
Consolidated Statements of Operations (Unaudited) -
Three months ended March 31, 2007 and 2006 5
Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Unaudited) -
Three months ended March 31, 2007 6
Consolidated Statements of Cash Flow (Unaudited) -
Three months ended March 31, 2007 and 2006 7
Notes to Consolidated Financial Statements (Unaudited) 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 6. Exhibits 28
Signatures 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2007 2006
---- ----
Unaudited) (Note 1)
ASSETS
Real estate:
Land $ 516,201 $ 493,017
Construction in progress, including land 48,334 1,409
Buildings, improvements and equipment 3,082,050 2,957,336
---------- -----------
3,646,585 3,451,762
Less: accumulated depreciation (476,850) (450,129)
---------- -----------
Real estate, net 3,169,735 3,001,633
Cash and cash equivalents 6,191 118,212
Cash in escrows 32,480 74,069
Accounts receivable 11,391 9,287
Prepaid expenses 14,108 15,059
Deferred charges 13,020 13,619
Other assets 7,298 8,539
---------- -----------
Total assets $3,254,223 $3,240,418
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,897,283 $1,924,313
Exchangeable senior notes 200,000 200,000
Line of credit 92,500 -
Accounts payable 18,990 20,797
Accrued interest payable 12,664 10,473
Accrued expenses and other liabilities 23,361 24,697
Security deposits 22,981 21,979
---------- -----------
Total liabilities 2,267,779 2,202,259
---------- -----------
Commitments and contingencies
Minority interest 288,770 282,542
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value;
0 and 2,400,000 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively. - 60,000
Common stock, $.01 par value; 80,000,000 shares authorized;
33,198,569 and 33,103,247 shares issued and
outstanding at March 31, 2007 and December 31, 2006, respectively 332 331
Excess stock, $.01 par value; 10,000,000 shares authorized;
no shares issued or outstanding - -
Additional paid-in capital 870,651 852,036
Accumulated other comprehensive income 119 171
Distributions in excess of accumulated earnings (173,428) (156,921)
---------- -----------
Total stockholders' equity 697,674 755,617
---------- -----------
Total liabilities and stockholders' equity $3,254,223 $3,240,418
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2007 2006
---- ----
Revenues:
Rental income $115,738 $102,102
Property other income 10,786 6,079
Interest income 1,207 91
Other income 775 517
-------- --------
Total revenues 128,506 108,789
-------- --------
Expenses:
Operating and maintenance 55,862 51,804
General and administrative 5,518 5,039
Interest 29,129 25,904
Depreciation and amortization 27,597 22,703
-------- --------
Total expenses 118,106 105,450
-------- --------
Income from operations 10,400 3,339
Minority interest in operating partnerships (2,070) (692)
-------- --------
Income from continuing operations 8,330 2,647
Discontinued operations:
Income from operations, net of $30 and $1,515 in 2007
and 2006, respectively, allocated to minority interest 73 2,841
Loss on disposition of property, net of $54 in 2007
allocated to minority interest (133) -
-------- --------
Discontinued operations (60) 2,841
-------- --------
Net income 8,270 5,488
Preferred dividends (1,290) (1,350)
Preferred stock issuance costs write-off (1,902) -
-------- --------
Net income available to common shareholders $ 5,078 $ 4,138
======== ========
Basic earnings per share data:
Income from continuing operations $0.15 $0.04
Discontinued operations - 0.09
----- -----
Net income available to common shareholders $0.15 $0.13
===== =====
Diluted earnings per share data:
Income from continuing operations $0.15 $0.04
Discontinued operations - 0.09
----- -----
Net income available to common shareholders $0.15 $0.13
===== =====
Weighted average number of shares outstanding:
Basic 33,199,345 31,250,002
========== ==========
Diluted 33,973,336 31,810,301
========== ==========
Dividends declared per share $0.65 $0.64
===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Preferred Distributions Accumulated
Stock at Common Stock Additional in Excess of Other
Liquidation ---------------- Paid-In Accumulated Comprehensive
Preference Shares Amount Capital Earnings Income Totals
---------- ------ ------ ------- -------- ------ ------
Balance, December 31, 2006 $60,000 33,103,247 $331 $852,036 $(156,921) $171 $755,617
Issuance of common stock, net - 71,365 1 3,405 - - 3,406
Repurchase of common stock - (131,342) (1) (7,375) - - (7,376)
Redemption of preferred stock (60,000) - - 1,902 (1,902) - (60,000)
Net income - - - - 8,270 - 8,270
Change in fair value of hedge
instruments, net of
minority interest - - - - - (52) (52)
Conversion of UPREIT Units for
stock - 155,299 1 9,241 - - 9,242
Adjustment of minority interest - - - 11,442 - - 11,442
Preferred dividends - - - - (1,290) - (1,290)
Dividends paid ($0.65 per
share) - - - - (21,585) - (21,585)
------- ---------- ---- -------- --------- ---- --------
Balance, March 31, 2007 $ - 33,198,569 $332 $870,651 $(173,428) $119 $697,674
======= ========== ==== ======== ========= ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED, IN THOUSANDS)
2007 2006
---- ----
Cash flows from operating activities:
Net income $ 8,270 $ 5,488
-------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to minority interest 2,046 2,207
Depreciation and amortization 27,694 25,010
Loss on disposition of property and business 187 -
Issuance of restricted stock, compensation cost of stock options and deferred compensation 784 700
Changes in assets and liabilities:
Cash held in escrows 1,073 579
Other assets 314 3,260
Accounts payable and accrued liabilities (2,712) 1,587
-------- --------
Total adjustments 29,386 33,343
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Net cash provided by operating activities 37,656 38,831
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Cash flows from investing activities:
Purchase of properties and other assets, net (143,951) -
Additions to properties (15,346) (25,620)
Loss from sale of properties (187) -
Withdrawals from (additions to) funds held in escrow, net 40,166 (115)
-------- --------
Net cash used in investing activities (119,318) (25,735)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 2,622 11,359
Repurchase of Series F preferred stock (60,000) -
Repurchase of common stock (7,376) (5,680)
Proceeds from mortgage notes payable - 102,963
Payments of mortgage notes payable (26,885) (70,288)
Proceeds from line of credit 92,500 59,500
Payments on line of credit - (76,500)
Payments of deferred loan costs (159) (1,202)
Withdrawals from cash escrows, net 385 138
Dividends and distributions paid (31,446) (31,351)
-------- --------
Net cash used in financing activities (30,359) (11,061)
-------- --------
Net increase (decrease) in cash and cash equivalents (112,021) 2,035
Cash and cash equivalents:
Beginning of year 118,212 5,391
-------- --------
End of period $ 6,191 $ 7,426
======== ========
Supplemental disclosure of non-cash operating, investing and financing activities:
----------------------------------------------------------------------------------
Issuance of UPREIT Units associated with property and other acquisitions $27,475 $ -
Increase in real estate associated with the purchase of UPREIT Units 5,983 3,419
Additions to properties included in accounts payable 2,053 -
Exchange of UPREIT Units for common shares 3,259 2,350
Fair value of hedge instruments (73) 127
Preferred stock issuance costs write-off 1,902 -
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 for interim financial information and
the applicable rules and regulations of the Securities and Exchange Commission.
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 period's 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 Company's
Form 10-K for the year ended December 31, 2006.
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 primarily 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, 2007, the Company
operated 129 apartment communities with 39,622 apartments. Of this total, the
Company owned 126 communities, consisting of 38,160 apartments, managed as
general partner one partnership that owned 868 apartments, and fee managed two
communities, consisting of 594 apartments, for third parties.
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 71.0% (71.4% at December 31, 2006) interest in the Operating
Partnership. Such interest has been calculated as the percentage of outstanding
common shares divided by the total outstanding common shares and Operating
Partnership Units ("UPREIT Units") outstanding. The remaining 29.0% (28.6% at
December 31, 2006) is reflected as Minority Interest in these consolidated
financial statements. The Company owns a 1.0% general partner interest in the
Operating Partnership and the remainder of its interest as a limited partner
indirectly through its wholly owned subsidiary, Home Properties I, LLC, which
owns 100% of the limited partner, Home Properties Trust. 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. For financing purposes, the Company has
formed a limited liability company (the "LLC") and a partnership (the "Financing
Partnership"), which beneficially own certain apartment communities encumbered
by mortgage indebtedness. The LLC is wholly owned by the Operating Partnership.
The Financing Partnership is owned 99.9% by the Operating Partnership and 0.1%
by the QRS.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. Organization and Basis of Presentation (continued)
-- --------------------------------------------------
The accompanying consolidated financial statements include the accounts of Home
Properties Resident Services, Inc. (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 FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 - Consolidated Financial Statements ("FIN 46R").
All significant inter-company balances and transactions have been eliminated in
these consolidated financial statements.
Reclassifications
-----------------
Certain reclassifications have been made to the 2006 consolidated financial
statements to conform to the 2007 presentation.
3. Recent Accounting Pronouncements
-- --------------------------------
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and
measurement of assets and liabilities associated with tax positions taken or
expected to be taken in a tax return. The Company reviewed its current tax
positions for any potential uncertain tax positions that would qualify under FIN
48. The adoption of FIN 48 did not have a material impact on the Company's
results of operations, financial position or liquidity.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements; the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is required to adopt SFAS 157 in the first quarter of 2008.
Management is currently evaluating the impact that SFAS 157 will have on the
Company's results of operations, financial position or liquidity.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Under SFAS 159,
entities are now permitted to measure many financial instruments and certain
other assets and liabilities at fair value on an instrument-by-instrument basis
under a fair value option granted in SFAS 159. Excluded from the scope of SFAS
159 are real estate assets and interests in VIE's. Management is currently
evaluating the impact, if any; this pronouncement will have on the Company's
results of operations, financial position or liquidity.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share
-- -------------------------
Basic earnings per share ("EPS") is computed as net income available 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), restricted stock and phantom shares
under the Company's incentive compensation plan. 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 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, 2007 and 2006 follows:
Three Months
2007 2006
---- ----
Income from continuing operations $8,330 $2,647
Less: Preferred dividends (1,290) (1,350)
Less: Preferred stock issuance costs write-off (1,902) -
------ ------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 5,138 1,297
Discontinued operations (60) 2,841
------ ------
Net income available to common shareholders $5,078 $4,138
====== ======
Basic weighted average number of shares outstanding 33,199,345 31,250,002
Effect of dilutive stock options 736,264 536,474
Effect of phantom and restricted shares 37,727 23,825
---------- ----------
Diluted weighted average number of shares outstanding 33,973,336 31,810,301
========== ==========
Basic earnings per share data:
Income from continuing operations $0.15 $0.04
Discontinued operations - 0.09
----- -----
Net income available to common shareholders $0.15 $0.13
===== =====
Diluted earnings per share data:
Income from continuing operations $0.15 $0.04
Discontinued operations - 0.09
----- -----
Net income available to common shareholders $0.15 $0.13
===== =====
For the three months ended March 31, 2007, unexercised stock options to purchase
12,000 shares of the Company's common stock were excluded in the computation of
diluted EPS as the options' exercise prices were greater than the average market
price of the Company's stock during each period, respectively. For the three
months ended March 31, 2006, no unexercised stock options to purchase shares of
the Company's common stock were excluded in the computations of diluted EPS as
the options' exercise prices were less than the average market price of the
Company's stock during each period.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. Variable Interest Entities
-- --------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R -
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements ("FIN 46R"). The interpretation addresses
consolidation by businesses of special purpose entities (variable interest
entities, "VIE").
The Company is the general partner in one 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 its limited partners (as discussed in Note 12). The
Company is responsible to fund operating deficits to the extent there are any
and can receive operating incentive awards when cash flows reach certain levels.
The effect on the consolidated balance sheet as of March 31, 2007 is an increase
in "Total assets" of $19,861, an increase in "Total liabilities" of $17,783, and
an increase in "Minority interest" of $2,078. Of the $17,783 increase in "Total
liabilities," $16,705 represents non-recourse mortgage debt.
6. Interest Capitalized
-- --------------------
Capitalized interest associated with communities under development or
rehabilitation totaled $604 and $313 for the three months ended March 31, 2007
and 2006, respectively.
7. Line of Credit
-- --------------
As of March 31, 2007, the Company had an unsecured line of credit agreement with
M&T Bank for $140,000 which expires September 1, 2008. The Company's outstanding
balance as of March 31, 2007, was $92,500. Provided that no event of default
under this agreement has occurred, the Company may request on or before
September 1, 2007 that the lender increase the line of credit to an amount not
to exceed $190,000. The Company has had no occurrences of default as of March
31, 2007. Borrowings under the line of credit bear interest at .75% over the
one-month LIBOR rate of 5.32% at March 31, 2007. Accordingly, increases in
interest rates will increase the Company's interest expense and as a result will
affect the Company's results of operations and financial condition.
8. Preferred Stock
-- ---------------
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58,098. Each Series F Preferred share received an annual dividend
equal to 9.00% of the liquidation preference per share (equivalent to a fixed
annual amount of $2.25 per share). The Series F Preferred Shares were redeemed
by the Company on March 26, 2007 at a redemption price of $25.00 per share, plus
accrued and unpaid dividends of $390. In accordance with the SEC's clarification
of EITF Abstracts, Topic No. D-42, The Effect on the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred Stock, the initial
offering costs of $1,902 associated with the issuance of the Series F Preferred
Shares were written-off in the first quarter of 2007, and are reflected as a
reduction of net income available to common stockholders in determining earnings
per share for the three months ended March 31, 2007.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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 Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). 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, 2006. Non-core properties consist of
apartment communities acquired during 2006 and 2007, 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
and 2 of the Company's Form 10-K for the year ended December 31, 2006.
The revenues, net operating income and assets for each of the reportable
segments are summarized for the three months ended March 31, 2007 and 2006 as
follows:
Three Months
2007 2006
---- ----
Revenues
Apartments owned
Core properties $ 112,947 $ 106,750
Non-core properties 13,577 1,431
Reconciling items 1,982 608
---------- ----------
Total revenues $ 128,506 $ 108,789
========== =========
Net operating income
Apartments owned
Core properties $ 62,982 $ 56,365
Non-core properties 7,680 12
Reconciling items 1,982 608
---------- ----------
Net operating income, including reconciling items 72,644 56,985
General & administrative expenses (5,518) (5,039)
Interest expense (29,129) (25,904)
Depreciation and amortization (27,597) (22,703)
Minority interest in operating partnership (2,070) (692)
---------- ----------
Income from continuing operations $ 8,330 $ 2,647
========== ==========
Assets - As of March 31, 2007 and December 31, 2006
Apartments owned
Core properties $2,575,482 $2,580,032
Non-core properties 594,253 421,601
Reconciling items 84,488 238,785
---------- ----------
Total assets $3,254,223 $3,240,418
========== ==========
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. Derivative Financial Instruments
--- --------------------------------
The Company enters into financial derivative instruments only for the purpose of
minimizing risk and, thereby, protecting income. Derivative instruments utilized
as part of the Company's risk management strategy may include interest rate
swaps and caps. All derivatives are recognized on the balance sheet at fair
value. The Company does not employ leveraged derivative instruments, nor does it
enter into derivative instruments for trading or speculative purposes.
The Company has four interest rate swaps that effectively convert variable rate
debt to fixed rate debt. As of March 31, 2007, the aggregate fair value of the
Company's interest rate swaps was $76 prior to the allocation of minority
interest and is included in the consolidated balance sheets. For the three
months ended March 31, 2007 and 2006, as the critical terms of the interest rate
swaps and the hedged items are the same, no ineffectiveness was recorded in the
consolidated statements of operations. All components of the interest rate swaps
were included in the assessment of hedge effectiveness. The fair value of the
interest rate swaps is based upon the estimate of amounts the Company would
receive or pay to terminate the contract at the reporting date and is estimated
using interest rate market pricing models.
11. Acquisitions
--- ------------
On February 2, 2007, the Company acquired two land parcels located in Silver
Spring, MD and Alexandria, VA from a single seller for total consideration of
$46,500. The transaction was funded in cash. Both parcels are entitled for
development. The projects are fully designed and have obtained all discretionary
approvals. While several administrative approvals are still required to be
obtained, construction on both projects should start in 2007, with initial
occupancy anticipated in 2009.
On February 15, 2007, the Company acquired two communities in unrelated
transactions: The Townhomes of Beverly (204 units) in Beverly, MA for $36,400
and Jacob Ford Village (270 units) in Morristown, NJ for $26,700. Consideration
for Jacob Ford Village included $22,300 consisting of 358,476 UPREIT Units with
the balance paid in cash. The Townhomes of Beverly was purchased with cash.
On March 28, 2007, the Company purchased Fox Hall Apartments (720 units) in
Baltimore, MD for a total purchase price of $62,200. The transaction was funded
through the Company's line of credit in the amount of $57,100 and $5,100 in
94,835 UPREIT Units.
12. Disposition of Property and Discontinued Operations
--- ---------------------------------------------------
The Company reports its property dispositions as discontinued operations as
prescribed by the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). Pursuant to the definition of a
component of an entity in SFAS 144, 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, 2006
are the operating results, net of minority interest, of 39 apartment communities
sold during the year ended December 31, 2006 ("2006 Disposition Communities").
Included in discontinued operations for the three months ended March 31, 2007
are the operating results, net of minority interest, resulting from the wind-up
activities of the 2006 Disposition 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. Disposition of Property and Discontinued Operations (continued)
--- ---------------------------------------------------------------
The operating results of discontinued operations are summarized for the three
months ended March 31, 2007 and 2006 as follows:
Three Months
------------
2007 2006
---- ----
Revenues:
Rental income $ 39 $19,972
Property other income 41 1,894
---- -------
Total revenues 80 21,866
---- -------
Operating and maintenance (23) 12,553
Interest expense - 2,577
Depreciation and amortization - 2,380
---- -------
Total expenses (23) 17,510
---- -------
Income from discontinued operations before
minority interest and loss on disposition of property 103 4,356
Minority interest in operating partnerships (30) (1,515)
---- -------
Income from discontinued operations $ 73 $ 2,841
==== =======
13. Commitments and Contingencies
--- -----------------------------
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 liability 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.
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 (52% 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 9 years.
Guarantees
----------
As of March 31, 2007, the Company, through its general partnership interest in
an affordable property limited partnership, has guaranteed the Low Income
Housing Tax Credits to limited partners for a remaining period of seven years
totaling approximately $3,000. As of March 31, 2007, 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. Subsequent Events
--- -----------------
On April 4, 2007, 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. This registration statement replaces
the Company's shelf registration statement filed in May 1998. 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.
On April 30, 2007, the Company acquired a 35 unit community in Randolph, MA for
$4,100. Consideration consisted of assumption of a $3,900 fixed rate mortgage at
an interest rate of 5.60% maturing on June 1, 2034 with the balance funded in
cash.
On May 1, 2007, the Board of Directors approved a dividend of $0.65 per share on
the Company's common stock for the quarter ended March 31, 2007. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
May 24, 2007 to shareholders of record on May 14, 2007.
HOME PROPERTIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 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 report 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
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
-------------------------------
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 the properties, acquisition and development of
additional properties, stock repurchases and debt repayments. The Company may
also acquire equity ownership in other public or private companies that own and
manage portfolios of apartment communities. Management anticipates the
acquisition of communities of approximately $300 million in 2007, $125 million
of which were closed during the first quarter of 2007, although there can be no
assurance that additional acquisitions will actually occur.
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 and make distributions to its
stockholders in accordance with the provisions of the Internal Revenue Code, as
amended, applicable to REITs.
As of March 31, 2007, the Company had an unsecured line of credit agreement with
M&T Bank of $140 million which expires September 1, 2008. Provided that no event
of default under this agreement has occurred, the Company may request on or
before September 1, 2007 that the lenders increase the line of credit to an
amount not to exceed $190 million. The Company has had no occurrences of default
as of March 31, 2007. The Company's outstanding balance as of March 31, 2007,
was $92.5 million. Borrowings under the line of credit bear interest at .75%
over the one-month LIBOR rate of 5.32% at March 31, 2007. Accordingly, increases
in interest rates will increase the Company's interest expense and as a result
will affect the Company's results of operations and financial condition.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and its
unsecured credit facility, it intends to satisfy such requirements through
property debt financing, proceeds from the sale of properties, the issuance of
UPREIT Units, proceeds from its Dividend Reinvestment and Stock Purchase Plan
("DRIP"), or the issuance of additional debt and equity securities. As of March
31, 2007, the Company owned 23 properties with 5,771 apartment units which were
unencumbered by debt.
During the three months ended March 31, 2007, the Company repaid debt on two
mortgages in the amount of $20.5 million. The retired debt included a $17
million mortgage which bore an interest rate of 8.7% and a $3.5 million mortgage
with a rate of 6.125%.
During 2006, the Company sold 39 communities for a total sales price of $495.3
million. The Company was able to sell these properties at an average
capitalization rate of 7.6% and reinvest in the acquisition of properties with
more growth potential at an expected first year cap rate of 6.4%. Management has
included in its operating plan that the Company will strategically dispose of
assets totaling approximately $50 million in 2007, although there can be no
assurance that such dispositions will actually occur.
The issuance of UPREIT Units for property acquisitions continues to be a source
of capital for the Company. During the three months ended March 31, 2007, the
Company issued $27.4 million in 453,311 UPREIT Units as consideration for two
acquired properties. During 2006, the Company issued $20.4 million in 343,393
UPREIT Units as consideration for two acquired properties.
The Company's 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. In the fourth
quarter of 2004, the Company began meeting share demand under the DRIP through
share repurchases by the transfer agent in the open market on the Company's
behalf instead of new share issuance. This removes essentially 100% of the
dilution caused by issuing new shares at a price less than the net asset value
("NAV") in an economic and efficient manner.
Management monitors the relationship between the Company's stock price and its
estimated 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 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 the three months ended March 31, 2007 or the year ended December 31,
2006.
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. The exchange terms and conditions are more fully described under
"Contractual Obligations and Other Commitments," below.
In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. The available balance on the shelf
registration statement at March 31, 2007 was $144.4 million. On April 4, 2007,
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. This registration statement replaces the Company's shelf
registration statement filed in May 1998. 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.
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million. The net proceeds were used to fund the Series B
preferred stock repurchase, property acquisitions, and property upgrades. Each
Series F Preferred share received an annual dividend equal to 9.00% of the
liquidation preference per share (equivalent to a fixed annual amount of $2.25
per share). The Series F Preferred Shares were redeemed by the Company on March
26, 2007 at a redemption price of $25.00 per share, plus accrued and unpaid
dividends of $390. In accordance with the SEC's clarification of EITF Abstracts,
Topic No. D-42, The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock, the initial offering costs
of $1,902 associated with the issuance of the Series F Preferred Shares were
written-off in the first quarter of 2007, and are reflected as a reduction of
net income available to common stockholders in determining earnings per share
for the three months ended March 31, 2007.
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its common stock or UPREIT
Units. The shares/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. During the three months ended March 31, 2007, 109,000 shares were
repurchased for $6 million by the Company. At March 31, 2007, the Company had
authorization to repurchase an additional 2,497,448 shares. The Company will
continue to monitor stock prices, the published net asset value, and acquisition
alternatives to determine the current best use of capital between the two major
uses of capital - stock buybacks and acquisitions.
As of March 31, 2007, the weighted average rate of interest on the Company's
total indebtedness of $2.2 billion was 5.6% with staggered maturities averaging
approximately seven years. Approximately 94% 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 Company's results of operations and
cash flows.
The Company's cash provided by operating activities was $38 million for the
three months ended March 31, 2007 compared to $39 million for the same period in
2006. The change is primarily due to higher net income in the 2007 period, more
than offset by reductions in accounts payable and accrued expenses resulting
from the timing differences in cash disbursements between periods.
Cash used in investing activities was $119 million for the three months ended
March 31, 2007 compared to $26 million for the same period in 2006. The change
is primarily due to the two land parcels and three properties acquired in the
first quarter of 2007, as described below in Acquisitions and Dispositions.
During the three months ended March 31, 2006, investing activities were
primarily comprised of normal capital expenditures on owned properties.
Cash used in financing activities was $30 million for the three months ended
March 31, 2007 compared to $11 million for the same period in 2006. The $19
million increase between periods is primarily due to the $60 million of cash
used to repurchase the Series F Preferred Shares, a $9 million decrease in cash
provided by the exercise of stock options, proceeds in net mortgage activity
that were $60 million lower, partially offset by a $109 million increase in the
net draw down on the line of credit.
Variable Interest Entities
--------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements ("FIN 46R"). The interpretation addresses
consolidation by businesses of special purpose entities (variable interest
entities, "VIE").
The Company is the general partner in one 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 its limited partner. The Company is responsible to fund
operating deficits to the extent there are any and can receive operating
incentive awards when cash flows reach certain levels. The effect on the
consolidated balance sheet as of March 31, 2007 is an increase in "Total assets"
of $19,861, an increase in "Total liabilities" of $17,783, and an increase in
"Minority interest" of $2,078. Of the $17,783 increase in "Total liabilities,"
$16,705 represents non-recourse mortgage debt.
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 seven years totaling approximately $3,000. Such guarantee requires the
Company to operate the property in compliance with Internal Revenue Code Section
42 for 15 years. In addition, acting as the general partner in this partnership,
the Company is obligated to advance funds to meet partnership operating
deficits. The Company believes the property's operations conform to the
applicable requirements as set forth above.
Acquisitions and Dispositions
-----------------------------
On February 2, 2007, the Company acquired two land parcels located in Silver
Spring, MD and Alexandria, VA from a single seller for total consideration of
$46,500. The transaction was funded in cash. Both parcels are entitled for
development. The projects are fully designed and have obtained all discretionary
approvals. While several administrative approvals are still required to be
obtained, construction on both projects should start in 2007, with initial
occupancy anticipated in 2009.
On February 15, 2007, the Company acquired two communities in unrelated
transactions: The Townhomes of Beverly (204 units) in Beverly, MA for $36,400
and Jacob Ford Village (270 units) in Morristown, NJ for $26,700. Consideration
for Jacob Ford Village included $22,300 consisting of 358,476 UPREIT Units with
the balance paid in cash. The Townhomes of Beverly was purchased with cash. For
purposes of determining the number of UPREIT Units issued, a value of $58.74 per
unit was set when the transaction was negotiated in the summer of 2006.
On March 28, 2007, the Company purchased Fox Hall Apartments (720 units) in
Baltimore, MD for a total purchase price of $62,200. The transaction was funded
through the Company's line of credit in the amount of $57,100 and $5,100 in
94,835 UPREIT Units. For purposes of determining the number of UPREIT Units
issued, a value of $62.17 per unit was set.
There were no dispositions during the first quarter of 2007.
Contractual Obligations and Other Commitments
---------------------------------------------
The primary obligations of the Company relate to its borrowings under the line
of credit, exchangeable senior notes and mortgage notes payable. The Company's
line of credit matures in September 2008 and had $92.5 million outstanding at
March 31, 2007. The $1.9 billion in mortgage notes payable have varying
maturities ranging from 1 to 35 years. The weighted average interest rate of the
Company's secured fixed rate notes was 5.77% at March 31, 2007 and December 31,
2006. The weighted average interest rate of the Company's variable rate notes
and credit facility was 5.79% and 4.95% at March 31, 2007 and December 31, 2006,
respectively.
In October 2006, the Company issued $200 million of exchangeable senior notes
with a coupon rate of 4.125%. The notes are exchangeable into cash equal to the
principal amount of the notes and, at the Company's 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.
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 Company's 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, 2011, 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 corporate
office space requires an annual base rent plus a pro-rata portion of property
improvements, real estate taxes, and common area maintenance. The regional
office leases require an annual base rent plus a pro-rata portion of real estate
taxes.
As discussed in the section entitled "Variable Interest Entities," the Company,
through its general partnership interest in an affordable property limited
partnership, has guaranteed low income housing tax credits to limited partners
totaling approximately $3 million. With respect to the guarantee of the low
income housing tax credits, the Company believes the property's operations
conform to the applicable requirements and does not anticipate any payment on
the guarantees. In addition, the Company, acting as general partner in this
partnership, is obligated to advance funds to meet partnership operating
deficits.
Capital Improvements
--------------------
Effective January 1, 2007, the Company has updated its estimate of the amount of
recurring, non-revenue enhancing capital expenditures incurred on an annual
basis for a standard garden style apartment. The Company now estimates that the
annual amount is $760 per apartment unit compared to $525 in the prior year.
This new amount better reflects current actual costs and the effects of
inflation since the last update.
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/bath cabinets, new roofs, site improvements and various
exterior building improvements. Non-recurring, revenue generating capital
improvements include, among other items: community centers, new windows, and
kitchen/bath apartment upgrades. Revenue generating capital improvements will
directly result in 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 $760 and $525 per unit is spent on
recurring capital expenditures in 2007 and 2006, respectively. During the three
months ended March 31, 2007 and 2006, approximately $190 and $131 per unit,
respectively, 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, 2007 and 2006 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, 2007 as follows:
For the three months ended March 31,
(in thousands, except per unit data)
2007 2006
----------------------------------------------------------------- ----------------------
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 $ - $ - $ 410 $11 $ 410 $ 11 $ 1,430 $ 42
Major building improvements 1,189 31 1,400 38 2,589 69 4,193 124
Roof replacements 222 6 - - 222 6 749 22
Site improvements 399 11 641 17 1,040 28 944 28
Apartment upgrades 1,216 33 2,492 67 3,708 100 3,761 112
Appliances 882 24 - - 882 24 942 28
Carpeting/flooring 2,284 62 4 - 2,288 62 1,996 59
HVAC/mechanicals 640 17 1,359 37 1,999 54 2,850 85
Miscellaneous 223 6 707 19 930 25 816 24
------ ---- ------ ---- ------- ---- ------- ----
Totals $7,055 $190 $7,013 $189 $14,068 $379 $17,681 $524
====== ==== ====== ==== ======= ==== ======= ====
(a) Calculated using the weighted average number of units owned, including
33,683 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 380 for the three months ended March 31, 2007; and 33,683 core
units for the three months ended March 31, 2006.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the three months ended March 31,
(in thousands, except per unit data)
2007 2006
---------------------------------------------------------------- ----------------------
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 $6,439 $190 $6,399 $190 $12,838 $381 $17,681 $524
2007 Acquisition Communities 33 87 - - 33 87 - -
2006 Acquisition Communities 583 190 614 200 1,197 390 - -
------ ---- ------ ---- ------- ---- ------- ----
Sub-total 7,055 190 7,013 189 14,068 379 17,681 524
2007 Disposed Communities - - - - - - - -
2006 Disposed Communities - - - - - - 2,705 279
Corporate office
expenditures(1) - - - - 1,034 - 1,070 -
------ ---- ------ ---- ------- ---- ------- ----
Totals $7,055 $190 $7,013 $189 $15,102 $379 $21,456 $470
====== ==== ====== ==== ======= ==== ======= ====
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office. Corporate office expenditures includes principally
computer hardware, software and office furniture and fixtures.
(b) Calculated using the weighted average number of units owned, including
33,683 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 380 for the three months ended March 31, 2007; and 33,683 core
units and 2006 disposed units of 9,705 for the three months ended March 31,
2006.
Results of Operations
---------------------
Summary of Core Properties
--------------------------
The Company had 113 apartment communities with 33,683 units which were owned
during the three months being presented (the "Core Properties"). The Company has
acquired/developed an additional 13 apartment communities with 4,477 units
during 2007 and 2006 (the "Acquisition Communities"). The Company disposed of 39
apartment communities with a total of 9,705 units during 2006 (the "2006
Disposition Communities"). The results of these disposed properties have been
classified as discontinued operations and are not included in the table below.
The inclusion of the Acquisition Communities generally accounted for the
significant changes in operating results for the three months ended March 31,
2007. In addition, the reported income from operations include 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 from Core Properties is as follows (in
thousands):
Three Months
------------
2007 2006 $ Change % Change
---- ---- -------- --------
Rent $102,958 $100,690 $ 2,268 2.3%
Utility recovery revenue 5,534 1,821 3,713 203.9%
-------- -------- -------- ---
Rent including recoveries 108,492 102,511 5,981 5.8%
Property other income 4,455 4,239 216 5.1%
-------- -------- -------- ---
Total revenue 112,947 106,750 6,197 5.8%
Operating and maintenance (49,965) (50,385) 420 0.8%
-------- -------- -------- ---
Net operating income $ 62,982 $ 56,365 $ 6,617 11.7%
======== ======== ======== ====
A summary of the net operating income from continuing operations is as follows
(in thousands):
Three Months
------------
2007 2006 $ Change % Change
---- ---- -------- --------
Rent $115,738 $102,102 $ 13,636 13.4%
Utility recovery revenue 5,958 1,824 4,134 226.6%
-------- -------- -------- ----
Rent including recoveries 121,696 103,926 17,770 17.1%
Property other income 4,828 4,255 573 13.5%
-------- -------- -------- ----
Total revenue 126,524 108,181 18,343 17.0%
Operating and maintenance (55,862) (51,804) (4,058) (7.8)%
-------- -------- -------- ----
Net operating income $ 70,662 $ 56,377 $ 14,285 25.3%
======== ======== ======== ====
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 Company's apartment properties. 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.
Comparison of three months ended March 31, 2007 to the same period in 2006
--------------------------------------------------------------------------
Of the $17,770 increase in rental income including recoveries, $11,789 is
attributable to the Acquired Communities; and $5,981 is from the Core
Properties, as the result of an increase of 6.2% in weighted average rental
rates (including utility reimbursements), partially offset by a decrease in
occupancy from 94.7% to 94.4%. Occupancy is defined as total possible rental
income, net of vacancy, as a percentage of total possible rental income. Total
possible rental income is determined by valuing occupied units at contract rates
and vacant units at market rents. Included in the Core increase is $3,713 which
represents increased utility recovery charges compared to 2006 attributable to
the Company's water & sewer and heat & electric recovery programs, which were
initiated in the second quarter of 2005 and are being phased in through the
second quarter of 2007.
The remaining property other income, which consists primarily of income from
operation of laundry facilities, late charges, administrative fees, garage and
carport charges, revenue from corporate apartments, cable revenue, pet charges,
and miscellaneous charges to residents increased by $573. Of this increase, $357
is attributable to the Acquired Communities and a $216 increase in Core
Properties resulting from increased emphasis on charging late fees and early
termination fees and an increase in damages charged compared to 2006.
Interest income increased $1,116 due to a higher level of invested excess cash
on hand available from sale proceeds of the 2006 Disposed Communities and
proceeds from exchangeable senior notes awaiting reinvestment into replacement
property.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, increased by $258. This is primarily due to post
closing consultation fees earned in connection with fourth quarter property
dispositions of $667, partially offset by a reduction in management fee income
of $312 resulting from the acquisition of Mount Vernon Square at the end of
2006, which was previously being managed by the Company.
Of the $4,058 increase in operating and maintenance expenses, $4,837 is
attributable to the Acquired Communities, partially offset by a $359 decrease
attributable to the consolidation of the VIE reflecting a one-time property tax
adjustment that occurred in the 2006 quarter. The balance, a $420 decrease, is
attributable to the Core Properties and is primarily due to decreases in repairs
& maintenance, property insurance and natural gas heating costs partially offset
by increases in water & sewer, personnel costs and snow removal expenses.
Repairs & maintenance is down $508 or 9.2% over the prior year period due in
part to two large properties that were acquired in late 2005 that required
significant work in the early part of 2006 to bring them up to Company standards
that was not repeated in the 2007 quarter. Property insurance decreased $351, or
16.8% due to lower losses being projected using actuarial assumptions partially
offset by increases in the general liability insurance premiums. Natural gas
heating costs were down $349 or 3.5% from a year ago, resulting from a warmer
January than normal in addition to savings realized from the conservation
measures implemented during 2006. The decrease was also the result of having
fixed contracts for our natural gas usage at a cost lower than last year. For
the first quarter 2007 we had fixed contracts for 95% of our natural gas usage
at a weighted average cost of $9.42 per decatherm. The cost for the first
quarter 2006 heating season was $9.65 per decatherm, or 2.4% higher than
experienced this year. Water & sewer costs were up $236 or 8.2% from a year ago
due to general costs increases being assessed by local municipalities; however,
the water & sewer recovery program, which became fully phased in during the
second quarter of 2006, enables the Company to recapture much of these cost
increases from our residents. Personnel costs are up $883 or 8.9%. The increase
was due in part to unfavorable workers compensation insurance reserve
adjustments in the 2007 quarter compared to favorable adjustments in the 2006
quarter contributing to a $596 increase between periods. Before reserve
adjustments, personnel costs were up only 4.3%. Snow removal costs were up $120
or 25.8%. The first quarter 2007 produced normal to above normal snowfalls
compared to below normal snowfalls in 2006.
General and administrative expense increased in 2007 by $479. General and
administrative expenses as a percentage of total revenues were 4.3% for 2007 as
compared to 3.9% for 2006. Incentive bonus and stock-based compensation expenses
were up $349 in 2007 as compared to 2006, which are driven by the increases in
the Company's operating and share price performance as compared to prior year.
The ramp-up of the development department accounted for $89 of the increase.
This is partially offset by an $82 or 17.4% reduction in external costs incurred
for auditing, tax and consultation expense, including costs to comply with
Section 404 of Sarbanes-Oxley.
Interest expense increased by $3,225 in 2007 primarily as a result of interest
expense on the exchangeable senior notes as well as new debt on the Acquisition
Communities, partially offset by lower interest incurred on the line of credit
which is a direct result of lower borrowing levels in the first quarter of 2007
as compared to 2006.
Depreciation and amortization expense increased $4,894 due to the depreciation
on the Acquisition Communities and the capital additions to the Core Properties.
Included in discontinued operations for the three months ended March 31, 2007
are the residual operating results, net of minority interest, of the 2006
Disposition Communities that were sold in December 2006. Included in
discontinued operations for the three months ended March 31, 2006 are the
operating results, net of minority interest, of the 2006 Disposition
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, minority 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.
Management believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO 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 can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs. FFO does not include the cost incurred for
capital improvements (including capitalized interest) reflected as an increase
to real estate assets. The Company's total capital improvements include an
annual reserve for anticipated recurring, non-revenue generating capitalized
costs of $760 and $525 per apartment unit for 2007 and 2006, respectively.
Please refer to the "Capital Improvements" section above. FFO should not be
considered as an alternative to net income as an indication of the Company's
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, 2007 and 2006 are presented
below (in thousands):
Three Months
------------
2007 2006
---- ----
Net income available to common shareholders $ 5,078 $ 4,138
Real property depreciation and amortization 27,075 24,498
Minority interest 2,070 692
Minority interest - income from discontinued operations 30 1,515
Loss on disposition of discontinued operations 133 -
-------- -------
FFO - Basic as defined above 34,386 30,843
Convertible preferred dividends (2) - -
-------- -------
FFO - Diluted $ 34,386 $30,843
======== =======
Weighted average common shares/units outstanding (1):
- Basic 46,582.5 47,912.2
======== ========
- Diluted (2) 47,356.5 48,472.5
======== ========
(1) The calculation assumes the conversion of dilutive common stock equivalents
including convertible preferred stock and the conversion of all UPREIT
Units to common shares.
(2) There was no convertible preferred stock outstanding during the three
months ended March 31, 2007 and 2006.
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.
Covenants
---------
The Credit Agreement relating to the Company's line of credit provides for the
Company to maintain certain financial ratios and measurements. The Company was
in compliance with these financial covenants for the period ended March 31,
2007. The 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 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 Company's 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. 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.
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. Starting in 2001 and continuing
into 2004 many regions of the United States had experienced varying degrees of
economic recession and certain recessionary trends, such as a temporary
reduction in occupancy and reduced pricing power limiting the ability to
aggressively raise rents. Starting in the second half on 2004 and continuing
into 2007, we have seen a reversal of these recessionary trends. In light of
this, we will continue to review our business strategy; however, we believe that
given our property type and the geographic regions in which we are located, we
do not anticipate any changes in our strategy or material effects on financial
performance.
Declaration of Dividend
-----------------------
On May 1, 2007, the Board of Directors approved a dividend of $0.65 per share on
the Company's common stock for the quarter ended March 31, 2007. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
May 24, 2007 to shareholders of record on May 14, 2007.
Contingency
-----------
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 liability 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.
Recent Accounting Pronouncements
--------------------------------
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and
measurement of assets and liabilities associated with tax positions taken or
expected to be taken in a tax return. The Company reviewed its current tax
positions for any potential uncertain tax positions that would qualify under FIN
48. The adoption of FIN 48 did not have a material impact on the Company's
results of operations, financial position or liquidity.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements; the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is required to adopt SFAS 157 in the first quarter of 2008.
Management is currently evaluating the impact that SFAS 157 will have on the
Company's results of operations, financial position or liquidity.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Under SFAS 159,
entities are now permitted to measure many financial instruments and certain
other assets and liabilities at fair value on an instrument-by-instrument basis
under a fair value option granted in SFAS 159. Excluded from the scope of SFAS
159 are real estate assets and interests in VIE's. Management is currently
evaluating the impact, if any; this pronouncement will have on the Company's
results of operations, financial position or liquidity.
HOME PROPERTIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At March 31,
2007 and December 31, 2006, approximately 94% and 99%, respectively, of the
Company's debt bore interest at fixed rates. At March 31, 2007 and December 31,
2006, approximately 85% and 89%, respectively, of the Company's debt was secured
and bore interest at fixed rates with a weighted average maturity of
approximately 6 years and a weighted average interest rate of approximately
5.77%, for both periods, including the $27 million and $28 million,
respectively, of secured debt which has been swapped to a fixed rate. The
remainder of the Company's secured debt bears interest at variable rates with a
weighted average maturity of approximately 20 and 21 years, respectively, and a
weighted average interest rate of 4.89% and 4.95%, respectively, at March 31,
2007 and December 31, 2006. 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 in no event would increases in interest
expense as a result of inflation significantly impact the Company's
distributable cash flow.
At March 31, 2007 and December 31, 2006, the interest rate risk on $27 million
and $28 million, respectively, of such variable rate debt has been mitigated
through the use of interest rate swap agreements (the "Swaps") with major
financial institutions. The Company is exposed to credit risk in the event of
non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.
At March 31, 2007 and December 31, 2006, the fair value of the Company's fixed
and variable rate secured debt, including the $27 million and $28 million,
respectively, which was swapped to a fixed rate, amounted to a liability of
$1.91 billion and $1.93 billion, respectively, compared to its carrying amount
of $1.90 billion and $1.92 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at March 31, 2007 would have
changed the fair value of the Company's fixed and variable rate secured debt to
a liability of $1.83 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. 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. 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.
As of March 31, 2007, the Company had no other material exposure to market risk.
HOME PROPERTIES, INC.
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 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 of
Directors.
The principal executive officer and principal financial officer evaluated, as of
March 31, 2007, 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, 2007 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. The Company has not identified any material weaknesses in
its internal controls.
HOME PROPERTIES, INC.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
---------------------
Refer to the Risk Factors disclosure in the Company's Form 10-K for the year
ended December 31, 2006. There have been no material changes in these risk
factors during the three months ended March 31, 2007 and through the date of
this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES; USE OF PROCEEDS FROM REGISTERED
--------------------------------------------------------------------------------
SECURITIES
----------
In 1997, the Company's Board of Directors 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 Board's action does not establish a specific target
stock price or a specific timetable for share repurchase. In addition,
participants in the Company's 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 and applicable withholding
tax. In such event, the common stock used to pay the exercise price and tax
withholding is returned to authorized but unissued status, and for purposes of
this table is deemed to have been repurchased by the Company. At December 31,
2006, the Company had authorization to repurchase 2,606,448 shares of common
stock and UPREIT Units under the stock repurchase program. During 2007, the
Company repurchased 109,000 shares at a cost of $5,996,199. The following table
summarizes the total number of shares/units repurchased by the Company during
the three months ended March 31, 2007:
Maximum
Total Average Total shares/units shares/units
shares/units price per purchased as part of available under
Period purchased(1) share/unit Company Program Company Program
------ ------------ ---------- --------------- ---------------
Balance January 1, 2007: 2,606,448
January 2007 - - - 2,606,448
February 2007 - - - 2,606,448
March 2007 113,372 $55.11 109,000 2,497,448
---- ------- ------ ------- ---------
Total First Quarter 2007 113,372 $55.11 109,000 2,497,448
======= ====== ======= =========
(1) During the three months ended March 31, 2007, and as permitted by the
Company's stock option plans, 4,372 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 tax withholding. These shares
were returned to the status of authorized but unissued shares.
ITEM 6. EXHIBITS
------- --------
Exhibit 10.1 Amendments Nos. Eighty-Eight and Eighty-Nine to the Second
Amended and Restated Limited Partnership Agreement*
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
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 8, 2007
By: /s/ Edward J. Pettinella
-------------------------------------
Edward J. Pettinella
President and Chief Executive Officer
Date: May 8, 2007
By: /s/ David P. Gardner
-------------------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer