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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 JUNE 30, 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.
(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
(Address of principal executive offices)(Zip Code)
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(585) 546-4900
(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 _____
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 July 31, 2007
$.01 par value 33,565,557
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
4
Consolidated Balance Sheets -
June 30, 2007 and December 31, 2006
5
Consolidated Statements of Operations -
Three months ended June 30, 2007 and 2006
6
Consolidated Statements of Operations -
Six months ended June 30, 2007 and 2006
7
Consolidated Statement of Stockholders' Equity
and Comprehensive Income -
Six months ended June 30, 2007
8
Consolidated Statements of Cash Flow -
Six months ended June 30, 2007 and 2006
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 4. Submission of Matter to a Vote of Security Holders 32
Item 6. Exhibits 32
Signatures 33
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND DECEMBER 31, 2006
(Dollars in thousands, except share and per share data)
2007 2006
---- ----
(Unaudited) (Note 1)
ASSETS
Real estate:
Land $ 518,298 $ 493,017
Construction in progress, including land 51,950 1,409
Buildings, improvements and equipment 3,114,789 2,957,336
----------- -----------
3,685,037 3,451,762
Less: accumulated depreciation (504,327) (450,129)
----------- -----------
Real estate, net 3,180,710 3,001,633
Cash and cash equivalents 5,350 118,212
Cash in escrows 32,723 74,069
Accounts receivable 10,802 9,287
Prepaid expenses 11,250 15,059
Deferred charges 13,003 13,619
Other assets 5,847 8,539
----------- -----------
Total assets $ 3,259,685 $ 3,240,418
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 1,963,368 $ 1,924,313
Exchangeable senior notes 200,000 200,000
Line of credit 39,000 -
Accounts payable 18,346 20,797
Accrued interest payable 10,815 10,473
Accrued expenses and other liabilities 24,689 24,697
Security deposits 23,555 21,979
----------- -----------
Total liabilities 2,279,773 2,202,259
----------- -----------
Commitments and contingencies
Minority interest 281,585 282,542
----------- -----------
Stockholders' equity:
Cumulative redeemable preferred stock,
$.01 par value; 2,400,000 shares issued and
outstanding at December 31, 2006 - 60,000
Common stock, $.01 par value; 80,000,000
shares authorized; 33,528,222 and
33,103,247 shares issued and
outstanding at June 30, 2007 and
December 31, 2006, respectively 335 331
Excess stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding - -
Additional paid-in capital 884,459 852,036
Accumulated other comprehensive income - 171
Distributions in excess of accumulated earnings (186,467) (156,921)
----------- -----------
Total stockholders' equity 698,327 755,617
----------- -----------
Total liabilities and stockholders' equity $ 3,259,685 $ 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 JUNE 30, 2007 AND 2006
(Unaudited, dollars in thousands, except share and per share data)
2007 2006
---- ----
Revenues:
Rental income $ 119,884 $ 103,879
Property other income 9,796 6,698
Interest income 83 119
Other income 58 504
--------- ---------
Total revenues 129,821 111,200
--------- ---------
Expenses:
Operating and maintenance 52,668 43,610
General and administrative 5,953 6,057
Interest 30,716 26,432
Depreciation and amortization 28,365 23,227
--------- ---------
Total expenses 117,702 99,326
--------- ---------
Income from operations 12,119 11,874
Minority interest in operating partnerships (3,480) (3,271)
--------- ---------
Income from continuing operations 8,639 8,603
--------- ---------
Discontinued operations:
Income from operations, net of $72 and
$625 in 2007 and 2006, respectively,
allocated to minority interest 178 1,389
Gain (loss) on disposition of property,
net of ($46) and $1,064 in 2007 and
2006, respectively,
allocated to minority interest (115) 2,361
--------- ---------
Discontinued operations 63 3,750
--------- ---------
Net income 8,702 12,353
Preferred dividends - (1,350)
--------- ---------
Net income available to common shareholders $ 8,702 $ 11,003
========= =========
Basic earnings per share data:
Income from continuing operations $ 0.26 $ 0.22
Discontinued operations - 0.11
--------- ---------
Net income available to common shareholders $ 0.26 $ 0.33
========= =========
Diluted earnings per share data:
Income from continuing operations $ 0.26 $ 0.22
Discontinued operations - 0.11
--------- ---------
Net income available to common shareholders $ 0.26 $ 0.33
========= =========
Weighted average number of shares outstanding:
Basic 33,255,898 32,936,880
========== ==========
Diluted 33,985,283 33,598,725
========== ==========
Dividends declared per share $ 0.65 $ 0.64
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Unaudited, dollars in thousands, except share and per share data)
2007 2006
---- ----
Revenues:
Rental income $ 235,622 $ 205,981
Property other income 20,582 12,777
Interest income 1,290 210
Other income 833 1,021
---------- ----------
Total revenues 258,327 219,989
---------- ----------
Expenses:
Operating and maintenance 108,530 95,414
General and administrative 11,471 11,096
Interest 59,845 52,336
Depreciation and amortization 55,962 45,930
---------- ----------
Total expenses 235,808 204,776
---------- ----------
Income from operations 22,519 15,213
Minority interest in operating partnerships (5,550) (3,963)
---------- ----------
Income from continuing operations 16,969 11,250
---------- ----------
Discontinued operations:
Income from operations, net of $102 and
$2,140 in 2007 and 2006, respectively,
allocated to minority interest 251 4,230
Gain (loss) on disposition of property,
net of ($100) and $1,064 in
2007 and 2006, respectively,
allocated to minority interest (248) 2,361
---------- ----------
Discontinued operations 3 6,591
---------- ----------
Net income 16,972 17,841
Preferred dividends (1,290) (2,700)
Preferred stock issuance costs write-off (1,902) -
---------- ----------
Net income available to common shareholders $ 13,780 $ 15,141
========== ==========
Basic earnings per share data:
Income from continuing operations $ 0.42 $ 0.27
Discontinued operations - 0.20
---------- ----------
Net income available to common shareholders $ 0.42 $ 0.47
========== ==========
Diluted earnings per share data:
Income from continuing operations $ 0.41 $ 0.26
Discontinued operations - 0.20
---------- ----------
Net income available to common shareholders $ 0.41 $ 0.46
========== ==========
Weighted average number of shares outstanding:
Basic 33,161,446 32,101,587
========== ==========
Diluted 33,958,962 32,722,174
========== ==========
Dividends declared per share $ 1.30 $ 1.28
========== ==========
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 SIX MONTHS ENDED JUNE 30, 2007
(Unaudited, dollars 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
Comprehensive income:
Net income - - - - 16,972 - 16,972
Change in fair value of hedge
instruments, net of minority interest - - - - - (171) (171)
Comprehensive income 16,801
Issuance of common stock, net - 178,784 2 7,654 - - 7,656
Repurchase of common stock - (135,091) (1) (7,578) - - (7,579)
Redemption of preferred stock (60,000) - - 1,902 (1,902) - (60,000)
Conversion of UPREIT Units for stock - 381,282 3 21,611 - - 21,614
Adjustment of minority interest - - - 8,834 - - 8,834
Preferred dividends - - - - (1,290) - (1,290)
Dividends paid ($1.30 per share) - - - - (43,326) - (43,326)
------ ---------- ---- -------- --------- --- --------
Balance, June 30, 2007 $ - 33,528,222 $335 $884,459 $(186,467) $ - $698,327
======= ========== ==== ======== ========= ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Unaudited, dollars in thousands)
2007 2006
---- ----
Cash flows from operating activities:
Net income $16,972 $17,841
-------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to minority interest 5,552 7,167
Depreciation and amortization 55,877 51,144
Loss (gain) on disposition of property from discontinued operations 348 (3,425)
Issuance of restricted stock, compensation cost of stock options and deferred
compensation 2,456 2,287
Changes in assets and liabilities:
Cash held in escrows 380 17
Other assets 4,996 8,093
Accounts payable and accrued liabilities (6,058) (375)
-------- -------
Total adjustments 63,551 64,908
-------- -------
Net cash provided by operating activities 80,523 82,749
-------- -------
Cash flows from investing activities:
Purchase of properties and other assets, net (144,163) (20,164)
Additions to properties (39,356) (50,825)
Proceeds (loss) from sale of properties (348) 235,145
Withdrawals from (additions to) funds held in escrow, net 40,636 (40,309)
-------- -------
Net cash provided by (used in) investing activities (143,231) 123,847
-------- -------
Cash flows from financing activities:
Proceeds from sale of common stock, net 5,200 13,806
Repurchase of Series F preferred stock (60,000) -
Repurchase of common stock (7,579) (86,356)
Proceeds from mortgage notes payable 100,515 122,980
Payments of mortgage notes payable (65,051) (155,515)
Proceeds from line of credit 166,500 210,800
Payments on line of credit (127,500) (245,800)
Payments of deferred loan costs (878) (1,369)
Withdrawals from cash escrows, net 366 193
Dividends and distributions paid (61,727) (63,546)
-------- -------
Net cash used in financing activities (50,154) (204,807)
-------- -------
Net increase (decrease) in cash and cash equivalents (112,862) 1,789
Cash and cash equivalents:
Beginning of year 118,212 5,391
End of period $ 5,350 $ 7,180
======== =======
Supplemental disclosure of non-cash operating, investing and financing activities:
Mortgage loans assumed associated with property acquisitions $ 3,742 $13,151
Issuance of UPREIT Units associated with property and other acquisitions 27,475 -
Increase in real estate associated with the exchange of UPREIT Units 13,611 99,559
Exchange of UPREIT Units for common shares 8,003 59,173
Additions to properties included in accounts payable 4,058 -
Fair value of hedge instruments (206) 357
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 June 30, 2007, the Company
operated 130 apartment communities with 39,671 apartments. Of this total, the
Company owned 127 communities, consisting of 38,209 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 71.6% (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 28.4% (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, if any, 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 and
six months ended June 30, 2007 and 2006 follows:
Three Months Six Months
------------ ----------
2007 2006 2007 2006
---- ---- ---- ----
Income from continuing operations $ 8,639 $ 8,603 $ 16,969 $ 11,250
Less: Preferred dividends - (1,350) (1,290) (2,700)
Less: Preferred stock issuance costs write-off - - (1,902) -
---------- ---------- ---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 8,639 7,253 13,777 8,550
Discontinued operations 63 3,750 3 6,591
---------- ---------- ---------- ----------
Net income available to common shareholders $ 8,702 $ 11,003 $ 13,780 $ 15,141
========== ========== ========== ==========
Basic weighted average number of shares outstanding 33,255,898 32,936,880 33,161,446 32,101,587
Effect of dilutive stock options 586,098 598,898 650,830 556,685
Effect of phantom and restricted shares 143,287 62,947 146,686 63,902
---------- ---------- ---------- ----------
Diluted weighted average number of shares outstanding 33,985,283 33,598,725 33,958,962 32,722,174
========== ========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ 0.26 $ 0.22 $ 0.42 $ 0.27
Discontinued operations - 0.11 - 0.20
------- ------- ------- -------
Net income available to common shareholders $ 0.26 $ 0.33 $ 0.42 $ 0.47
======= ======= ======= =======
Diluted earnings per share data:
Income from continuing operations $ 0.26 $ 0.22 $ 0.41 $ 0.26
Discontinued operations - 0.11 - 0.20
------- ------- ------- -------
Net income available to common shareholders $ 0.26 $ 0.33 $ 0.41 $ 0.46
======= ======= ======= =======
Unexercised stock options to purchase shares of the Company's common stock of
547,515 and 531,930 for the three months ended June 30, 2007 and 2006, and
12,000 and 531,930 for the six months ended June 30, 2007 and 2006,
respectively, 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.
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 13). 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 June 30, 2007 is an increase
in "Total assets" of $19,555, an increase in "Total liabilities" of $17,489, and
an increase in "Minority interest" of $2,066. Of the $17,489 increase in "Total
liabilities," $16,645 represents non-recourse mortgage debt.
6. Interest Capitalized
Capitalized interest associated with communities under development or
rehabilitation totaled $895 and $346 for the three months ended June 30, 2007
and 2006, and $1,499 and $659 for the six months ended June 30, 2007 and 2006,
respectively.
7. Line of Credit
As of June 30, 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 June 30, 2007, was $39,000. 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 June 30,
2007. Borrowings under the line of credit bear interest at 0.75% over the
one-month LIBOR rate of 5.32% at June 30, 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 six months ended June 30, 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 for the three and six months ended June 30, 2007 and 2006 are
summarized as follows:
Three Months Six Months
------------ ----------
2007 2006 2007 2006
---- ---- ---- ----
Revenues
Apartments owned
Core properties $ 113,087 $ 108,775 $226,034 $ 215,526
Non-core properties 16,593 1,802 30,170 3,232
Reconciling items 141 623 2,123 1,231
---------- ---------- -------- ---------
Total revenues $ 129,821 $ 111,200 $258,327 $ 219,989
========== ========== ======== =========
Net operating income
Apartments owned
Core properties $ 67,296 $ 66,133 $130,278 $122,497
Non-core properties 9,716 834 17,396 847
Reconciling items 141 623 2,123 1,231
---------- ---------- -------- ---------
Net operating income, including reconciling items 77,153 67,590 149,797 124,575
General and administrative expenses (5,953) (6,057) (11,471) (11,096)
Interest expense (30,716) (26,432) (59,845) (52,336)
Depreciation and amortization (28,365) (23,227) (55,962) (45,930)
Minority interest in operating partnership (3,480) (3,271) (5,550) (3,963)
---------- ---------- -------- ---------
Income from continuing operations $ 8,639 $ 8,603 $ 16,969 $ 11,250
========== ========== ======== =========
Assets - As of June 30, 2007 and December 31, 2006
Apartments owned
Core properties $2,577,996 $2,580,032
Non-core properties 602,714 421,601
Reconciling items 78,975 238,785
---------- ----------
Total assets $3,259,685 $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 had four interest rate swaps that effectively converted variable
rate debt to fixed rate debt. On May 29, 2007, these interest rate swaps were
terminated and the Company received a termination fee of $27. The accumulated
other comprehensive income of $84 was reclassified into earnings. The related
variable rate debt was repaid on June 13, 2007. For the entire term of these
interest rate swap agreements, 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.
11. Acquisitions
On April 30, 2007, the Company acquired Westwoods, a 35 unit apartment community
located in Randolph, MA, for $3,995, including closing costs. Consideration for
the purchase was the assumption of an existing $3,919 fixed rate mortgage at an
interest rate of 5.6% maturing on June 1, 2034 (fair market value of $3,742)
with the balance paid in cash.
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 and six months ended June 30,
2006 are the operating results, net of minority interest, of 39 apartment
communities sold during the year ended December 31, 2006 ("2006 Disposed
Communities"). Included in discontinued operations for the three and six months
ended June 30, 2007 are the operating results, net of minority interest, of the
2006 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.
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 for the three and six months
ended June 30, 2007 and 2006 are summarized as follows:
Three Months Six Months
------------ ----------
2007 2006 2007 2006
---- ---- ---- ----
Revenues:
Rental income $ 49 $ 19,411 $ 88 $ 39,383
Property other income 3 1,769 44 3,663
----- ------ ----- ------
Total revenues 52 21,180 132 43,046
----- ------ ----- ------
Operating and maintenance (198) 11,270 (221) 23,823
Interest expense - 5,531 - 8,108
Depreciation and amortization - 2,365 - 4,745
Total expenses (198) 19,166 (221) 36,676
----- ------ ----- ------
Income from discontinued operations before
minority interest and loss on
disposition of property 250 2,014 353 6,370
Minority interest in operating partnerships (72) (625) (102) (2,140)
----- ------ ----- ------
Income from discontinued operations $ 178 $1,389 $ 251 $4,230
===== ====== ===== ======
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 and property 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 June 30, 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 June 30, 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 July 12, 2007, the Company sold Brittany Place Apartments, with a total of
591 units, in Greenbelt, Maryland for $74,102. A gain on sale of approximately
$21,000 (before the allocation of minority interest) will be recorded in the
third quarter related to this sale.
On August 2, 2007, the Board of Directors approved a dividend of $0.65 per share
on the Company's common stock for the quarter ended June 30, 2007. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
August 24, 2007 to shareholders of record on August 13, 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, $129 million
of which were closed during the first half 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, including availability to pay
dividends to its stockholders and make distributions to its Unitholders in
accordance with the provisions of the Internal Revenue Code, as amended,
applicable to REITs.
As of June 30, 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 June 30, 2007. The Company's outstanding balance as of June 30, 2007, was
$39.0 million. Borrowings under the line of credit bear interest at 0.75% over
the one-month LIBOR rate of 5.32% at June 30, 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 June
30, 2007, the Company owned 24 properties with 5,387 apartment units which were
unencumbered by debt.
During the first quarter of 2007, the Company repaid debt on two mortgages in
the amount of $20.5 million. The retired debt included a $17.0 million mortgage
which bore an interest rate of 8.7% and a $3.5 million mortgage with a rate of
6.125%. During the second quarter of 2007, the Company repaid one mortgage of
$4.6 million which bore an interest rate of 7.88%. In addition, the Company
repaid four loans on a single property totaling $27.3 million. The loans were
part of a swap transaction that mitigated credit risk by effectively converting
the variable rate mortgages to fixed rates. A new eleven-year mortgage in the
amount of $53.5 million was placed on the property with interest only payments
for the first ten years at a fixed rate of 5.49% and a variable rate thereafter.
Finally, the Company entered into a new mortgage for a previously unencumbered
property for $47.0 million with interest only payments for ten years at an
interest rate of 5.61%.
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. 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.
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 $100 million in 2007, $74 million of which were
closed during the first seven months of 2007, although there can be no assurance
that additional dispositions will actually occur.
The issuance of UPREIT Units for property acquisitions continues to be a source
of capital for the Company. During the first quarter of 2007, the Company issued
$27.5 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. As of December 27, 2006, the Company
switched back to meeting demand by issuing new shares.
Management monitors the relationship between the Company's 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 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 six months ended June 30, 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 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 $58.1 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 $1.9 million 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 six months ended June 30, 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 ("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 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. There were no
share repurchases under the Company Program during the three months ended June
30, 2007. At June 30, 2007, the Company had authorization to repurchase an
additional 2,497,448 shares/units. The Company will continue to monitor stock
prices, the published net asset value, and acquisition/development alternatives
to determine the current best use of capital between the two major uses of
capital - stock buybacks and acquisitions/development.
As of June 30, 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 97% 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 $81 million for the six
months ended June 30, 2007 compared to $83 million for the same period in 2006.
The change is primarily due to higher income from continuing operations 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 $143 million for the six months ended June
30, 2007 compared to $124 million provided by investing activities for the same
period in 2006. The change of $267 million is primarily due to the sale of an 19
property portfolio in the 2006 period resulting in proceeds of $230 million, an
increase of $124 million used for purchase of properties in 2007; partially
offset by $12 million lower normal capital expenditures on owned properties in
2007 and an $81 million change in the funds held in escrow account between
periods.
Cash used in financing activities was $50 million for the six months ended June
30, 2007 compared to $205 million for the same period in 2006. The $155 million
decrease between periods is primarily due to $79 million lower stock buybacks,
proceeds from net mortgage activity that were $69 million higher, a $74 million
increase in the net draw down on the line of credit; partially offset by
$60 million of cash used to repurchase the Series F Preferred Shares and a $9
million decrease in cash provided by the exercise of stock options in 2007.
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 June 30, 2007 is an increase in "Total assets"
of $19.6 million, an increase in "Total liabilities" of $17.5 million, and an
increase in "Minority interest" of $2.1 million. Of the $17.5 million increase
in "Total liabilities," $16.6 million 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 totaling
approximately $3 million. With respect to the low income housing credits, the
Company believes the property's operations conform to the applicable
requirements and does not anticipate any payment on the guarantee.
Acquisitions and Dispositions
On April 30, 2007, the Company acquired Westwoods, a 35 unit apartment community
located in Randolph, MA, for $4.0 million, including closing costs.
Consideration for the purchase was the assumption of an existing $3.9 million
fixed rate mortgage at an interest rate of 5.6% maturing on June 1, 2034 (fair
market value of $3.7 million) with the balance paid in cash.
There were no dispositions during the second 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 $39.0 million outstanding at
June 30, 2007. The $2.0 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% both at June 30, 2007 and December
31, 2006, respectively. The weighted average interest rate of the Company's
variable rate notes and credit facility was 5.60% and 4.95% at June 30, 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, 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 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 June 30, 2007 and 2006, approximately $190 per unit and $131 per
unit, respectively, was estimated to be spent on recurring capital expenditures.
For the six months ended June 30, 2007 and 2006, approximately $380 per unit and
$263 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 and six months ended June 30, 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 and six months ended June 30, 2007 as follows:
For the three months ended June 30,
(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 $ - $ - $ 712 $ 19 $ 712 $19 $ 109 $ 3
Major building improvements 1,046 28 4,242 112 5,288 140 4,832 143
Roof replacements 397 10 1,056 28 1,453 38 712 21
Site improvements 408 11 1,421 37 1,829 48 2,572 76
Apartment upgrades 1,248 33 3,530 93 4,778 126 3,389 100
Appliances 897 24 - - 897 24 882 26
Carpeting/flooring 2,335 61 393 10 2,728 71 1,985 59
HVAC/mechanicals 655 17 2,216 58 2,871 75 2,119 63
Miscellaneous 228 6 651 17 879 23 852 25
------ ---- -------- ----- -------- ---- -------- ----
Totals $7,214 $190 $ 14,221 $ 374 $ 21,435 $564 $ 17,452 $516
====== ==== ======== ===== ======== ==== ======== ====
(a) Calculated using the weighted average number of units owned, including
33,685 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 1,218 for the three months ended June 30, 2007; and 33,685 core
units and 2006 acquisition units of 89 for the three months ended June 30,
2006.
For the six months ended June 30,
(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)
------ ------- ------ ------- ------------ ------- ------------ -------
New buildings $ - $ - $ 1,122 $ 30 $ 1,122 $ 30 $ 1,528 $ 45
Major building improvements 2,231 60 5,649 151 7,880 211 9,125 271
Roof replacements 619 17 1,057 28 1,676 45 1,455 43
Site improvements 806 21 2,063 55 2,869 76 3,509 104
Apartment upgrades 2,461 66 6,025 161 8,486 227 7,122 211
Appliances 1,775 47 2 - 1,777 47 1,817 54
Carpeting/flooring 4,611 123 402 11 5,013 134 3,966 118
HVAC/mechanicals 1,293 34 3,579 95 4,872 129 4,949 147
Miscellaneous 450 12 1,357 36 1,807 48 1,661 49
------- ---- ------- ---- ------- ---- ------- ------
Totals $14,246 $380 $21,256 $567 $35,502 $947 $35,132 $1,042
======= ==== ======= ==== ======= ==== ======= ======
(b) Calculated using the weighted average number of units owned, including
33,685 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 739 for the six months ended June 30, 2007; and 33,685 core units
and 2006 acquisition units of 45 for the six months ended June 30, 2006.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the three months ended June 30,
(in thousands, except per unit data)
2007 2006
-------------------------------------------------------------------- -----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(c) Cap Ex Unit(c) Improvements Unit(c) Improvements Unit(c)
------ ------- ------ ------- ------------ ------- ------------ -------
Core Communities $ 6,400 $ 190 $ 12,484 $ 371 $ 18,884 $561 $ 17,367 $ 516
2007 Acquisition Communities 231 190 19 16 250 205 - -
2006 Acquisition Communities 583 190 1,718 560 2,301 750 85 955
------- ----- -------- ----- -------- ---- -------- -----
Sub-total 7,214 190 14,221 374 21,435 564 17,452 516
2007 Disposed Communities - - - - - - - -
2006 Disposed Communities - - - - - - 2,738 288
Corporate office expenditures(1) - - - - 677 - 893 -
------- ----- -------- ----- -------- ---- -------- -----
Totals $ 7,214 $ 190 $ 14,221 $ 374 $ 22,112 $564 $ 21,083 $ 466
======= ===== ======== ===== ======== ==== ======== =====
(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.
(c) Calculated using the weighted average number of units owned, including
33,685 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 1,218 for the three months ended June 30, 2007; and 33,685 core
units, 2006 acquisition units of 89 and 2006 disposed units of 9,506 for
the three months ended June 30, 2006.
For the six months ended June 30,
(in thousands, except per unit data)
2007 2006
----------------------------------------------------------------- -----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(d) Cap Ex Unit(d) Improvements Unit(d) Improvements Unit(d)
------ ------- ------ ------- ------------ ------- ------------ -------
Core Communities $12,800 $ 380 $ 18,922 $ 562 $ 31,722 $ 942 $ 35,047 $1,040
2007 Acquisition Communities 281 380 1 1 282 381 - -
2006 Acquisition Communities 1,165 380 2,333 761 3,498 1,141 85 1,910
------- ----- -------- ----- -------- ----- -------- ------
Sub-total 14,246 380 21,256 567 35,502 947 35,132 1,042
2007 Disposed Communities - - - - - - - -
2006 Disposed Communities - - - - - - 5,444 567
Corporate office expenditures(1) - - - - 1,712 - 1,963 -
------- ----- -------- ----- -------- ----- -------- ------
Totals $14,246 $ 380 $ 21,256 $ 567 $ 37,214 $ 947 $ 42,539 $ 936
======= ===== ======== ===== ======== ===== ======== ======
(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.
(d) Calculated using the weighted average number of units owned, including
33,685 core units, 2006 acquisition units of 3,067 and 2007 acquisition
units of 739 for the six months ended June 30, 2007; and 33,685 core units,
2006 acquisition units of 45 and 2006 disposed units of 9,605 for the six
months ended June 30, 2006.
Results of Operations
Summary of Core Properties
The Company had 113 apartment communities with 33,685 units which were owned
during the three and six months being presented (the "Core Properties"). The
Company has acquired/developed an additional 14 apartment communities with 4,524
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
Disposed 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 and six months ended June
30, 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 Six Months
-------------------------------------- ----------------------------------------
2007 2006 $ Change % Change 2007 2006 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Rent $104,305 $102,127 $2,178 2.1% $207,263 $202,817 $4,446 2.2%
Utility recovery revenue 4,290 1,965 2,325 118.3% 9,824 3,786 6,038 159.5%
-------- -------- ------ --- -------- -------- ------ ---
Rent including recoveries 108,595 104,092 4,503 4.3% 217,087 206,603 10,484 5.1%
Property other income 4,492 4,683 (191) (4.1%) 8,947 8,923 24 0.3%
-------- -------- ------ --- -------- -------- ------ ---
Total revenue 113,087 108,775 4,312 4.0% 226,034 215,526 10,508 4.9%
Operating and maintenance (45,791) (42,642) (3,149) (7.4%) (95,756) (93,029) (2,727) (2.9%)
-------- -------- ------ --- -------- -------- ------ ---
Net operating income $ 67,296 $ 66,133 $1,163 1.8% $130,278 $122,497 $7,781 6.4%
======== ======== ====== === ======== ======== ====== ===
A summary of the net operating income from continuing operations is as follows
(in thousands):
Three Months Six Months
-------------------------------------- ----------------------------------------
2007 2006 $ Change % Change 2007 2006 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Rent $119,884 $103,879 $16,005 15.4% $235,622 $205,981 $29,641 14.4%
Utility recovery revenue 4,685 1,967 2,718 138.2% 10,643 3,791 6,852 180.7%
-------- -------- ------- ---- -------- -------- ------- ----
Rent including recoveries 124,569 105,846 18,723 17.7% 246,265 209,772 36,493 17.4%
Property other income 5,111 4,731 380 8.0% 9,939 8,986 953 10.6%
-------- -------- ------- ---- -------- -------- ------- ----
Total revenue 129,680 110,577 19,103 17.3% 256,204 218,758 37,446 17.1%
Operating and maintenance (52,668) (43,610) (9,058) (20.8%) (108,530) (95,414) (13,116) (13.7%)
-------- -------- ------- ---- -------- -------- ------- ----
Net operating income $ 77,012 $ 66,967 $10,045 15.0% $147,674 $123,344 $24,330 19.7%
======== ======== ======= ==== ======== ======== ======= ====
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 June 30, 2007 to the same period in 2006
Of the $18,723 increase in rental income including utility recoveries, $14,220
is attributable to the Acquired Communities; and $4,503 is from the Core
Properties, as the result of an increase of 4.3% in weighted average rental
rates (including utility reimbursements), with no variation in occupancy which
was 95.0% for both periods. 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 $2,325 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 $380. Of this increase, $571
is attributable to the Acquired Communities and partially offset by a $191
decrease in Core Properties. The decrease in Core Properties is due primarily to
a reduction of corporate apartments in the Long Island region.
Interest income decreased $36 due to a lower level of interest-bearing deposits
compared to 2006.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased by $446. This is primarily due to a
reduction in management fee income resulting from the acquisition of Mount
Vernon Square at the end of 2006, which was previously being managed by the
Company.
Of the $9,058 increase in operating and maintenance expenses, $5,909 is
attributable to the Acquired Communities and $3,149 is attributable to the Core
Properties. The Core Properties increase is driven by increases in property
insurance, personnel costs, real estate taxes, repairs & maintenance, and
natural gas heating costs partially offset by a reduction to water & sewer
costs. Property insurance had a negative variance of $892, or 56.4%. The current
quarter included an additional charge from increasing the self-insurance
reserves by $287, with no reserve adjustments a year ago. Therefore the normal
increase was still 38.2%, consistent with the 40% experienced in the first
quarter before any reserve adjustments. Personnel costs are up $787, or 8.8%.
The increase was due in part to health insurance and workers compensation
self-insurance reserves which were decreased a net $26 in 2007. In 2006, we were
able to decrease our health insurance reserve by $483, netting out to a $457
difference between periods. Before reserve adjustments, personnel costs were up
only 3.5%. Real estate taxes were up $729, or 7.4%. The contributing factor was
$555 in refunds received in the second quarter of 2006 from successful tax
assessment appeals which did not repeat in the 2007 period. Without the impact
of refunds, taxes would have been up only $174, or 1.7%, which reflects
continued efforts in 2007 to reduce assessments. Repairs & maintenance is up
$470, or 6.6%, over the prior year period due in part to timing differences in
the current year whereby the first quarter was slightly below the prior period
and the second quarter spending was slightly higher than the same period of
2006. When taken together, the year to date spending is very similar between
2007 and 2006. Natural gas heating costs were up $223, or 7.4%, from a year ago,
due mostly from increases in natural gas pricing and overall consumption due to
the 2006 second quarter experiencing above normal temperatures compared to the
2007 quarter's more normal weather; partially offset by a $267 refund of sales
and use tax recognized during the 2007 quarter. For the second quarter 2007 our
natural gas weighted average cost was $9.18 per decatherm compared to $8.71 for
the 2006 period, a 5.4% increase. Water & sewer costs were down $212, or 7.0%,
from a year ago due to two properties realizing refunds of $223 during the
second quarter of 2007 relating to metering issues corrected in the current
period.
General and administrative expense decreased in 2007 by $104, or 1.7%. General
and administrative expenses as a percentage of total revenues were 4.6% for both
2007 and 2006. The overall cost decrease included a $117, or 32.6%, decrease in
the external costs incurred for auditing, tax and consultation expense,
including costs to comply with Section 404 of Sarbanes-Oxley. In addition, the
Company experienced a $70 net decrease in charges for stock-based compensation
in 2007. Finally, in support of the Company's growing investment in constructing
new apartment communities, the ramp-up of the development department accounted
for a $68 increase between periods.
Interest expense increased by $4,284 in 2007 primarily as a result of interest
expense on the exchangeable senior notes as well as new debt on the Acquisition
Communities.
Depreciation and amortization expense increased $5,138 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 June 30, 2007 are
the residual operating results, net of minority interest, of the 2006 Disposed
Communities that were sold in December 2006. Included in discontinued operations
for the three months ended June 30, 2006 are the operating results, net of
minority interest, of the 2006 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.
Comparison of six months ended June 30, 2007 to the same period in 2006
Of the $36,493 increase in rental income including utility recoveries, $26,009
is attributable to the Acquired Communities; and $10,484 is from the Core
Properties, as the result of an increase of 5.3% in weighted average rental
rates (including utility reimbursements), partially offset by a decrease in
occupancy from 94.9% to 94.7%. Included in the Core increase is $6,038 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 $953. Of this increase, $929
is attributable to the Acquired Communities and a $24 increase in Core
Properties.
Interest income increased $1,080 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, both occurring in the first quarter of 2007.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased by $188. This is primarily due to a
reduction in management fee income resulting from the acquisition of Mount
Vernon Square at the end of 2006, which was previously being managed by the
Company.
Of the $13,116 increase in operating and maintenance expenses, $10,747 is
attributable to the Acquired Communities and $2,727 is attributable to the Core
Properties; partially offset by a $358 decrease attributable to the
consolidation of the VIE reflecting a one-time property tax adjustment that
occurred in the first quarter of 2006. The Core Properties increase is driven by
increases in personnel costs, real estate taxes, property insurance and snow
removal costs. Personnel costs are up $1,720, or 9.4%. The increase was due in
part to health insurance and workers compensation reserves which were increased
by $711 in 2007 over 2006 levels. Before reserve adjustments, personnel costs
were up 5.5%, of which 3.1% represents the overall increase in salary and wage
rates between periods. Real estate taxes were up $661, or 3.2%. The contributing
factor was $555 in refunds received all in the second quarter of 2006 from
successful tax assessment appeals which did not occur in the 2007 period.
Without the impact of refunds, taxes would have been up only $106, or 0.5%,
which reflects continued efforts in 2007 to reduce assessments. Property
insurance had a negative variance of $541, or 14.7%. The current period included
an overall decrease in self-insurance reserves of $168 as compared to a $522
increase to the reserves a year ago. Therefore the normal increase was $1,231,
or 39.1%, which is consistent with the 40% experienced in the first quarter
before any reserve adjustments. Snow removal costs were up $196, or 41.1%. The
first six months of 2007 produced normal to above normal snowfalls compared to
below normal snowfalls in 2006.
General and administrative expense increased in 2007 by $375, or 3.4%. General
and administrative expenses as a percentage of total revenues were 4.5% for
2007, compared to 4.3% for 2006. Stock-based compensation was down a net of $115
in 2007 as compared to 2006. Additionally, the ramp-up of the development
department accounted for a $187 increase. A decrease of $211, or 25.1%, was
realized in the external costs incurred for auditing, tax and consultation
expense, including costs to comply with Section 404 of Sarbanes-Oxley.
Interest expense increased by $7,509 in 2007 primarily a result of new debt on
the Acquisition Communities as well as interest expense on the exchangeable
senior notes.
Depreciation and amortization expense increased $10,032 due to the depreciation
on the Acquisition Communities and the capital additions to the Core Properties.
Included in discontinued operations for the six months ended June 30, 2007 are
the residual operating results, net of minority interest, of the 2006 Disposed
Communities that were sold in December 2006. Included in discontinued operations
for the six months ended June 30, 2006 are the operating results, net of
minority interest, of the 2006 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, 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 and six months ended June 30, 2007 and 2006 are
presented below (in thousands):
Three Months Six Months
------------ ----------
2007 2006 2007 2006
---- ---- ---- ----
Net income available to common shareholders $ 8,702 $ 11,003 $13,780 $15,141
Real property depreciation and amortization 28,094 25,041 55,170 49,539
Minority interest 3,480 3,271 5,550 3,963
Minority interest - income from discontinued operations 72 625 102 2,140
Loss (gain) on disposition of discontinued operations 115 (2,361) 248 (2,361)
-------- -------- -------- --------
FFO - Basic as defined above 40,463 37,579 74,850 68,422
Loss from early extinguishment of debt in connection
with sale of real estate - 2,970 - 2,970
-------- -------- -------- --------
FFO - Basic as adjusted by the Company 40,463 40,549 74,850 71,392
Convertible preferred dividends (2) - - - -
-------- -------- -------- --------
FFO - Diluted $ 40,463 $ 40,549 $74,850 $71,392
======== ======== ======== ========
Weighted average common shares/units outstanding (1):
Basic 46,713.0 47,788.1 46,581.8 47,853.3
======== ======== ======== ========
Diluted (2) 47,442.4 48,450.0 47,379.3 48,473.9
======== ======== ======== ========
(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 periods
presented.
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 June 30, 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 of 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 August 2, 2007, the Board of Directors approved a dividend of $0.65 per share
on the Company's common stock for the quarter ended June 30, 2007. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
August 24, 2007 to shareholders of record on August 13, 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 and property 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, if any, 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 June 30,
2007 and December 31, 2006, approximately 97% and 99%, respectively, of the
Company's debt bore interest at fixed rates. At June 30, 2007 and December 31,
2006, approximately 88% 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 $28 million of secured debt which was
swapped to a fixed rate at December 31, 2006. 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 4.95% 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 in no event would increases in
interest expense as a result of inflation significantly impact the Company's
distributable cash flow.
At June 30, 2007 and December 31, 2006, the fair value of the Company's fixed
and variable rate secured debt, including the $28 million of secured debt which
was swapped to a fixed rate at December 31, 2006, amounted to a liability of
$1.94 billion and $1.93 billion, respectively, compared to its carrying amount
of $1.95 billion and $1.92 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at June 30, 2007 would have
changed the fair value of the Company's fixed and variable rate secured debt to
a liability of $1.86 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 June 30, 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
June 30, 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
second 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 six months ended June 30, 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 Company 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 June, 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 April 1, 2007: 2,497,448
April 2007 - - - 2,497,448
May 2007 3,777 $55.50 - 2,497,448
June 2007 - - - 2,497,448
----- ------ ------ ---------
Total Second Quarter 2007 3,777 $55.50 - 2,497,448
===== ====== ====== =========
(1) During the three months ended June 30, 2007, and as permitted by the
Company's stock option plans, 3,777 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 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's stockholders was held on May 1, 2007. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, withheld or against, abstentions and the number of
broker non-votes, as applicable, with respect to each matter.
The eleven directors proposed by the Company for re-election were elected to one
year terms by the following vote:
DIRECTOR NAME SHARES FOR SHARES WITHHELD
------------- ---------- ---------------
Josh E. Fidler 15,683,186 13,446,213
Alan L. Gosule 28,672,753 456,646
Leonard F. Helbig, III 28,699,992 429,407
Roger W. Kober 28,666,114 463,285
Norman P. Leenhouts 28,592,377 537,022
Nelson B. Leenhouts 28,592,620 536,779
Edward J. Pettinella 28,679,027 450,372
Clifford W. Smith, Jr. 28,696,841 432,558
Paul L. Smith 28,666,496 462,903
Thomas S. Summer 28,840,630 288,769
Amy L. Tait 26,583,750 2,545,649
The stockholders ratified the appointment of PricewaterhouseCoopers, LLP as the
Company's independent registered public accounting firm for 2007.
Shares Voted For: 28,885,763
Shares Voted Against: 190,844
Shares Abstaining: 52,791
ITEM 6. EXHIBITS
Exhibit 10.1 Amendment No. Ninety 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: August 9, 2007
By: /s/ Edward J. Pettinella
-------------------------------------
Edward J. Pettinella
President and Chief Executive Officer
Date: August 9, 2007
By: /s/ David P. Gardner
-------------------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer