Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MARCH 31, 2011
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-13136
HOME PROPERTIES, INC.
(exact name of registrant as specified in its charter)
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MARYLAND
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16-1455126 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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850 Clinton Square, Rochester, New York
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14604 |
(Address of principal executive offices)
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(Zip Code) |
(585) 546-4900
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Common Stock
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Outstanding at April 30, 2011 |
$.01 par value
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39,068,399 |
HOME PROPERTIES, INC.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2011 AND DECEMBER 31, 2010
(Dollars in thousands, except share and per share data)
(Unaudited)
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March 31, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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Real estate: |
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Land |
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$ |
606,026 |
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$ |
589,359 |
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Construction in progress |
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91,299 |
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119,992 |
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Buildings, improvements and equipment |
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3,706,509 |
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3,668,379 |
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4,403,834 |
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4,377,730 |
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Less: accumulated depreciation |
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(875,607 |
) |
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(841,801 |
) |
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Real estate, net |
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3,528,227 |
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3,535,929 |
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Cash and cash equivalents |
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10,887 |
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10,782 |
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Cash in escrows |
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35,475 |
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34,070 |
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Accounts receivable |
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12,702 |
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12,540 |
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Prepaid expenses |
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17,781 |
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17,662 |
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Deferred charges |
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14,511 |
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15,079 |
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Other assets |
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7,464 |
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8,641 |
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Total assets |
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$ |
3,627,047 |
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$ |
3,634,703 |
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LIABILITIES AND EQUITY |
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Mortgage notes payable |
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$ |
2,404,670 |
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$ |
2,424,214 |
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Exchangeable senior notes |
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138,756 |
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138,218 |
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Line of credit |
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42,500 |
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56,500 |
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Accounts payable |
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15,948 |
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20,935 |
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Accrued interest payable |
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12,894 |
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11,389 |
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Accrued expenses and other liabilities |
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26,830 |
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28,730 |
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Security deposits |
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19,596 |
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19,583 |
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Total liabilities |
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2,661,194 |
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2,699,569 |
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Commitments and contingencies |
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Equity: |
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Common stock, $.01 par value; 80,000,000 shares authorized; 38,925,105 and 37,949,229
shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |
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389 |
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379 |
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Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding |
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Additional paid-in capital |
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1,092,133 |
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1,047,325 |
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Distributions in excess of accumulated earnings |
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(343,166 |
) |
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(326,811 |
) |
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Total common stockholders equity |
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749,356 |
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720,893 |
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Noncontrolling interest |
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216,497 |
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214,241 |
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Total equity |
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965,853 |
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935,134 |
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Total liabilities and equity |
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$ |
3,627,047 |
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$ |
3,634,703 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands, except share and per share data)
(Unaudited)
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2011 |
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2010 |
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Revenues: |
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Rental income |
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$ |
127,421 |
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$ |
113,199 |
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Property other income |
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13,924 |
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12,610 |
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Other income |
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53 |
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58 |
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Total revenues |
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141,398 |
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125,867 |
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Expenses: |
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Operating and maintenance |
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58,279 |
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56,028 |
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General and administrative |
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6,236 |
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5,557 |
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Interest |
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33,031 |
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30,185 |
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Depreciation and amortization |
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34,479 |
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30,113 |
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Other expenses |
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10 |
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Total expenses |
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132,035 |
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121,883 |
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Income from continuing operations |
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9,363 |
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3,984 |
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Discontinued operations: |
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Income (loss) from discontinued operations |
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(462 |
) |
Gain (loss) on disposition of property |
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(11 |
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Discontinued operations |
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(473 |
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Net income |
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9,363 |
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3,511 |
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Net income attributable to noncontrolling interest |
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(2,139 |
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(874 |
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Net income attributable to common stockholders |
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$ |
7,224 |
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$ |
2,637 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.19 |
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$ |
0.09 |
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Discontinued operations |
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(0.01 |
) |
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Net income attributable to common stockholders |
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$ |
0.19 |
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$ |
0.08 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.19 |
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$ |
0.08 |
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Discontinued operations |
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(0.01 |
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Net income attributable to common stockholders |
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$ |
0.19 |
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$ |
0.07 |
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Weighted average number of shares outstanding: |
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Basic |
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38,004,185 |
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34,970,442 |
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Diluted |
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38,659,836 |
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35,406,846 |
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Dividends declared per share |
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$ |
0.62 |
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$ |
0.58 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND THE YEAR ENDED DECEMBER 31, 2010
(Dollars in thousands, except share data)
(Unaudited)
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Distributions |
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Additional |
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in Excess of |
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Common Stock |
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Paid-In |
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Accumulated |
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Noncontrolling |
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Shares |
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Amount |
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Capital |
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Earnings |
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Interest |
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Totals |
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Balance, January 1, 2010 |
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34,655,428 |
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$ |
347 |
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$ |
922,078 |
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$ |
(261,313 |
) |
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$ |
226,962 |
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$ |
888,074 |
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Comprehensive income: |
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Net income |
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20,081 |
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6,237 |
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26,318 |
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Issuance of common stock, net |
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2,827,856 |
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28 |
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123,728 |
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123,756 |
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Stock-based compensation |
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6,206 |
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7,647 |
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7,647 |
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Repurchase of common stock |
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(68,265 |
) |
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(1 |
) |
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(3,273 |
) |
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(3,274 |
) |
Conversion of UPREIT Units for
common stock |
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528,004 |
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5 |
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10,229 |
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(10,234 |
) |
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0 |
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Issuance of UPREIT Units associated
with property acquisition |
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4,845 |
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4,845 |
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Adjustment of noncontrolling interest |
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(13,084 |
) |
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13,084 |
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0 |
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Dividends and distributions paid |
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(85,579 |
) |
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(26,653 |
) |
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(112,232 |
) |
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Balance, December 31, 2010 |
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37,949,229 |
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|
$ |
379 |
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$ |
1,047,325 |
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$ |
(326,811 |
) |
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$ |
214,241 |
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$ |
935,134 |
|
Comprehensive income: |
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Net income |
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7,224 |
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|
2,139 |
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|
9,363 |
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Issuance of common stock, net |
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960,884 |
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10 |
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|
51,485 |
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|
51,495 |
|
Stock-based compensation |
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|
3,989 |
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|
1,642 |
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1,642 |
|
Repurchase of common stock |
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(21,251 |
) |
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(1,206 |
) |
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(1,206 |
) |
Conversion of UPREIT Units for
common stock |
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32,254 |
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|
611 |
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(611 |
) |
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0 |
|
Adjustment of noncontrolling interest |
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(7,724 |
) |
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7,724 |
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|
0 |
|
Dividends and distributions paid |
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(23,579 |
) |
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(6,996 |
) |
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(30,575 |
) |
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|
Balance, March 31, 2011 |
|
|
38,925,105 |
|
|
$ |
389 |
|
|
$ |
1,092,133 |
|
|
$ |
(343,166 |
) |
|
$ |
216,497 |
|
|
$ |
965,853 |
|
|
|
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|
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|
The accompanying notes are an integral part of these consolidated financial statements.
5
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands)
(Unaudited)
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2011 |
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2010 |
|
Cash flows from operating activities: |
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|
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Net income |
|
$ |
9,363 |
|
|
$ |
3,511 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
35,489 |
|
|
|
31,894 |
|
Amortization of senior note debt discount |
|
|
538 |
|
|
|
508 |
|
Loss on disposition of property |
|
|
|
|
|
|
11 |
|
Stock-based compensation |
|
|
1,642 |
|
|
|
1,442 |
|
Changes in assets and liabilities: |
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|
|
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|
|
|
|
Cash in escrows, net |
|
|
(1,038 |
) |
|
|
(746 |
) |
Other assets |
|
|
(864 |
) |
|
|
(39 |
) |
Accounts payable and accrued liabilities |
|
|
(1,594 |
) |
|
|
1,767 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
34,173 |
|
|
|
34,837 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
43,536 |
|
|
|
38,348 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
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|
|
|
|
Additions to properties |
|
|
(21,527 |
) |
|
|
(15,531 |
) |
Additions to construction in progress |
|
|
(8,363 |
) |
|
|
(13,614 |
) |
Payments for sale of properties, net |
|
|
|
|
|
|
(11 |
) |
Proceeds from note receivable |
|
|
1,015 |
|
|
|
|
|
Additions to cash in escrows, net |
|
|
(366 |
) |
|
|
(243 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(29,241 |
) |
|
|
(29,399 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net |
|
|
51,495 |
|
|
|
60,280 |
|
Repurchase of common stock |
|
|
(1,206 |
) |
|
|
(522 |
) |
Proceeds from mortgage notes payable |
|
|
|
|
|
|
26,430 |
|
Payments of mortgage notes payable |
|
|
(19,544 |
) |
|
|
(24,943 |
) |
Proceeds from line of credit |
|
|
58,500 |
|
|
|
60,500 |
|
Payments on line of credit |
|
|
(72,500 |
) |
|
|
(103,000 |
) |
Payments of deferred loan costs, net |
|
|
(359 |
) |
|
|
(377 |
) |
Additions to cash in escrows, net |
|
|
(1 |
) |
|
|
(1 |
) |
Dividends and distributions paid |
|
|
(30,575 |
) |
|
|
(27,006 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(14,190 |
) |
|
|
(8,639 |
) |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
105 |
|
|
|
310 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
10,782 |
|
|
|
8,809 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
10,887 |
|
|
$ |
9,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Exchange of UPREIT Units for common stock |
|
$ |
611 |
|
|
$ |
3,586 |
|
Transfers of construction in progress to land and buildings, improvements and equipment |
|
|
36,753 |
|
|
|
|
|
Additions to properties included in accounts payable |
|
|
1,745 |
|
|
|
1,652 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
1. Unaudited Interim Financial Statements
The interim consolidated financial statements of Home Properties, Inc. (the Company) have been
prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and the applicable rules and regulations of the
Securities and Exchange Commission (SEC). Accordingly, certain disclosures that would accompany
annual financial statements prepared in accordance with GAAP are omitted. The year-end balance
sheet data was derived from audited financial statements, but does not include all disclosures
required by GAAP. In the opinion of management, all adjustments, consisting solely of normal
recurring adjustments, necessary for the fair statement of the consolidated financial statements
for the interim periods have been included. The current periods results of operations are not
necessarily indicative of results which ultimately may be achieved for the year. The interim
consolidated financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys Form 10-K for the
year ended December 31, 2010.
2. Organization and Basis of Presentation
Organization
The Company was formed in November 1993, as a Maryland corporation and is engaged primarily in the
ownership, management, acquisition, rehabilitation and development of residential apartment
communities in selected Northeast and Mid-Atlantic regions of the United States. The Company
conducts its business through Home Properties, L.P. (the Operating Partnership), a New York
limited partnership. As of March 31, 2011, the Company owned and operated 115 apartment
communities with 38,861 apartments.
The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal
Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. As a
result, the Company generally is not subject to federal or state income taxation at the corporate
level to the extent it distributes annually at least 90% of its REIT taxable income to its
shareholders and satisfies certain other requirements. For the three months ended March 31, 2011
and 2010, the Company distributed in excess of 100% of its taxable income; accordingly, no
provision has been made for federal income taxes in the accompanying consolidated financial
statements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its
ownership of 77.6% of the limited partnership units in the Operating Partnership (UPREIT Units)
at March 31, 2011 (77.1% at December 31, 2010). The remaining 22.4% is included as noncontrolling
interest in these consolidated financial statements at March 31, 2011 (22.9% at December 31, 2010).
The Company periodically adjusts the carrying value of noncontrolling interest to reflect its
share of the book value of the Operating Partnership. Such adjustments are recorded to additional
paid in capital as a reallocation of noncontrolling interest in the accompanying consolidated
statements of equity. The Company owns a 1.0% general partner interest in the Operating
Partnership and the remainder indirectly as a limited partner through its wholly owned subsidiary,
Home Properties I, LLC, which owns 100% of Home Properties Trust, which is the limited partner.
Home Properties Trust was formed in September 1997, as a Maryland real estate trust and as a
qualified REIT subsidiary (QRS) and owns the Companys share of the limited partner interests in
the Operating Partnership.
The accompanying consolidated financial statements include the accounts of Home Properties Resident
Services, Inc. (HPRS). HPRS is a wholly owned subsidiary of the Company. All significant
inter-company balances and transactions have been eliminated in these consolidated financial
statements.
7
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
3. Recently Adopted Accounting Standards
During the quarter ended March 31, 2011, there were no new accounting pronouncements or updates to
recently issued accounting pronouncements disclosed in the Companys Annual Report on Form 10-K for
the year ended December 31, 2010 that affect the Companys results of operations, financial
condition, liquidity or disclosures.
4. Earnings Per Common Share
Basic earnings per share (EPS) is computed as net income attributable to common stockholders
divided by the weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable through stock-based
compensation including stock options (using the treasury stock method) and the conversion of any
exchangeable senior notes. The exchange of an UPREIT Unit for common stock will have no effect on
diluted EPS as unitholders and common stockholders effectively share equally in the net income of
the Operating Partnership. Income from continuing operations and discontinued operations is the
same for both the basic and diluted calculation.
The calculation of the basic and diluted earnings per share for the three months ended March 31,
2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
9,363 |
|
|
$ |
3,984 |
|
Less: Income from continuing operations attributable to noncontrolling interest |
|
|
(2,139 |
) |
|
|
(992 |
) |
|
|
|
|
|
|
|
Income from continuing operations attributable to common stockholders |
|
$ |
7,224 |
|
|
$ |
2,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
$ |
|
|
|
$ |
(473 |
) |
Less: Discontinued operations attributable to noncontrolling interest |
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
|
Discontinued operations attributable to common stockholders |
|
$ |
|
|
|
$ |
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding |
|
|
38,004,185 |
|
|
|
34,970,442 |
|
Effect of dilutive stock options |
|
|
527,750 |
|
|
|
342,907 |
|
Effect of phantom and restricted shares |
|
|
127,901 |
|
|
|
93,497 |
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding |
|
|
38,659,836 |
|
|
|
35,406,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.09 |
|
Discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.19 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.08 |
|
Discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.19 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
8
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
4. Earnings Per Common Share (continued)
Unexercised stock options to purchase 445,511 and 1,410,388 shares of the Companys common stock
for the three months ended March 31, 2011 and 2010, respectively, were not included in the
computations of diluted EPS because the effects would be antidilutive. Also, in conjunction with
the issuance of the exchangeable senior notes, there were 331,257 potential shares issuable under
certain circumstances, of which all are considered antidilutive as of March 31, 2011 and 2010.
5. Notes Receivable
On September 22, 2010, the Company purchased two non-performing mortgage notes from a community
bank for $1,433 in an arms length transaction. Both notes were in default. They were purchased
at face value plus accrued interest and late fees and were secured by real property. One of the
notes, originally purchased by the Company for $1,015, was repaid in its entirety on January 28,
2011. The remaining note, purchased for $418 is secured by vacant land. In accordance with
authoritative guidance, the Company will recognize impairment to the extent the fair value of the
collateral is less than the carrying amount of the investment in the note receivable. Interest
income, if any, will be recognized on the cost recovery method. As of March 31, 2011, there was no
impairment recognized and no interest income recorded on the remaining note. Interest income in
the amount of $35 received upon settlement of the first note was recorded during the first quarter
of 2011. A note receivable of $422 is included in other assets on the Consolidated Balance Sheet
as of March 31, 2011.
6. Development
During 2008, the Company started construction on a project located in Alexandria, Virginia,
consisting of four, four-story buildings with 421 units (Courts at Huntington Station). As of
March 31, 2011, two buildings with 202 units were completed and there were 189 units rented and
occupied. Construction on the second phase (two buildings with 219 units) is scheduled to be
completed in the second quarter of 2011 and pre-leasing of units has commenced. The construction
in progress for this development was $53,559 as of March 31, 2011.
During the first quarter of 2011, the Company started construction on a project located in
Fredericksburg, Virginia, consisting of eight, four-story buildings and a refurbished rail depot
for a total of 314 apartment units (The Apartments at Cobblestone Square). Construction of the
first apartment building, along with the rail depot renovation and amenities, is expected to be
completed in late 2011 with initial occupancy anticipated to begin in the third quarter of 2011.
The entire project is expected to be completed in the first half of 2012. The construction in
progress for this development was $15,287 as of March 31, 2011.
The Company has one project in pre-construction development. Ripley Street, located in Silver
Spring, Maryland, is an 18-story high rise development with 379 apartment units. The project is on
entitled land that the Company purchased from another developer and is in the final stages of the
design process. The construction in progress for this development, consisting mostly of land
value, was $22,453 as of March 31, 2011.
The Company has one project in the pre-redevelopment phase. Falkland Chase, located in Silver
Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939. The
Company is planning on redeveloping the North parcel consisting of 182 units, which will be renamed
Falkland North. The Company is making progress on the design and obtaining the necessary approvals
to redevelop this parcel into approximately 1,100 units. Construction is expected to start at the
earliest during late 2012 or early 2013, with a total projected cost of $315,000. The cost
associated with this project was $3,225 as of March 31, 2011 and is included in other assets.
9
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
7. Exchangeable Senior Notes
In October 2006, the Company issued $200,000 of exchangeable senior notes under an Indenture
Agreement (the Indenture), with a coupon rate of 4.125% (Senior Notes). In the fourth quarter
of 2008, the Company repurchased $60,000 principal amount of the Senior Notes, leaving $140,000
outstanding. The Senior Notes are exchangeable into cash equal to the principal amount of the
notes and, at the Companys option, cash or common stock for the exchange value, to the extent that
the market price of common stock exceeds the initial exchange price of $73.34 per share, subject to
adjustment. The exchange price is adjusted for payments of dividends in excess of the reference
dividend per the Indenture of $0.64 per share. The notes are not redeemable at the option of the
Company for five years from their issue date, 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 by providing notice within 2 to
20 business days prior to the repurchase dates. The notes will mature on November 1, 2026, unless
previously redeemed, repurchased or exchanged in accordance with their terms prior to that date.
The notes are structurally subordinated to the secured indebtedness of the Company. The Company is
not subject to any financial covenants under the Indenture. In addition, the Indenture will not
restrict the ability to pay distributions, incur debt or issue or repurchase securities.
The following table provides information about the Senior Notes as of March 31, 2011 and December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Principal amount of liability component |
|
$ |
140,000 |
|
|
$ |
140,000 |
|
Unamortized discount |
|
|
(1,244 |
) |
|
|
(1,782 |
) |
|
|
|
|
|
|
|
Carrying amount of liability component |
|
$ |
138,756 |
|
|
$ |
138,218 |
|
|
|
|
|
|
|
|
Carrying amount of equity component |
|
$ |
13,950 |
|
|
$ |
13,950 |
|
|
|
|
|
|
|
|
The following table provides information about the Senior Notes for the three months ended March
31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
Coupon interest |
|
$ |
1,444 |
|
|
$ |
1,444 |
|
Issuance cost amortization |
|
|
137 |
|
|
|
137 |
|
Discount amortization |
|
|
538 |
|
|
|
508 |
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
2,119 |
|
|
$ |
2,089 |
|
|
|
|
|
|
|
|
The effective interest rate was 5.75% and the conversion price per share, as adjusted, was $72.87
for the three months ended March 31, 2011 and 2010.
8. Line of Credit
On February 10, 2011, the Company amended and extended its $175,000 unsecured line of credit
agreement with M&T Bank, as administrative agent and lead bank, which was scheduled to expire
August 31, 2011. The amended line of credit agreement removes the 1.50% LIBOR floor contained in
the earlier agreement and expires August 31, 2012, not including a one-year extension, at the
Companys option. The Company had $42,500 outstanding under the credit facility on March 31, 2011.
Borrowings under the line of credit bear interest at rates ranging from 1.90% to 2.63% over the
one-month LIBOR, increasing at higher levels of indebtedness; and in all cases, without a LIBOR
floor. The one-month LIBOR was 0.24% at March 31, 2011, resulting in an effective rate of 2.61%
for the Company.
10
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
8. Line of Credit (continued)
The credit agreement relating to this line of credit requires the Company to maintain certain
financial ratios and measurements. The Company was in compliance with these financial covenants
for the three months ended March 31, 2011.
The Companys line of credit agreement provides the ability to issue up to $20,000 in letters of
credit. While the issuance of letters of credit does not increase borrowings outstanding under the
line of credit, it does reduce the amount available. At March 31, 2011, the Company had
outstanding letters of credit of $4,461 and the amount available on the credit facility was
$128,039.
9. Fair Value of Financial Instruments
The Company follows the authoritative guidance for fair value measurements (ASC 820-10), when
valuing its financial instruments for disclosure purposes. The valuation of financial instruments
requires the Company to make estimates and judgments that affect the fair value of the instruments.
The Company determined the fair value of its mortgage notes payable and line of credit facility
using a discounted future cash flow technique that incorporates a market interest yield curve with
adjustments for duration, loan to value, and risk profile (level 2 inputs, as defined by ASC
820-10). In determining the market interest yield curve, the Company considered its BBB credit
rating. The Company based the fair value of its Senior Notes using quoted prices (a level 1 input,
as defined by ASC 820-10).
At March 31, 2011 and December 31, 2010, the fair value of the Companys total debt, including the
Senior Notes and line of credit, amounted to a liability of $2,627,793 and $2,678,524,
respectively, compared to its carrying amount of $2,585,926 and $2,618,932, respectively.
10. Interest Capitalized
Capitalized interest associated with communities under development or rehabilitation totaled $1,426
and $2,816 for the three months ended March 31, 2011 and 2010, respectively.
11. Stockholders Equity
At-the-Market Equity Offering Program
On September 17, 2010, the Company initiated its second At-the-Market (ATM) equity offering
program through which it is authorized to sell up to 3.6 million shares of common stock from time
to time in ATM offerings or negotiated transactions. There were no shares issued from this program
during 2010. During the first quarter 2011, the Company issued 841,000 shares. The following
summarizes issuances of common stock from this program since inception through March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Average Sales |
|
Period |
|
Shares Sold |
|
|
Gross Proceeds |
|
|
Net Proceeds |
|
|
Price |
|
First quarter 2011 |
|
|
841,000 |
|
|
$ |
47,524 |
|
|
$ |
46,572 |
|
|
$ |
56.51 |
|
Dividends and Distributions
On March 4, 2011, the Company paid a dividend in the amount of $0.62 per share of common stock to
stockholders and a distribution of $0.62 per UPREIT Unit to unitholders of record as of the close
of business on February 28, 2011.
11
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
12. Segment Reporting
The Company is engaged in the ownership and management of market rate apartment communities. Each
apartment community is considered a separate operating segment. Each segment on a standalone basis
is less than 10% of the revenues, net operating income, and assets of the combined reported
operating segment and meets all of the aggregation criteria under authoritative guidance. The
operating segments are aggregated as Core and Non-core properties.
Non-segment revenue to reconcile to total revenue consists of 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, 2010.
Non-core properties consist of apartment communities acquired or developed during 2010 and 2011,
such that full year comparable operating results are not available.
The Company assesses and measures segment operating results based on a performance measure referred
to as net operating income. Net operating income is defined as total revenues less operating and
maintenance expenses. The accounting policies of the segments are the same as those described in
Notes 1, 2 and 3 to the consolidated financial statements contained in the Companys Form 10-K for
the year ended December 31, 2010.
The revenues and net operating income for each of the operating segments are summarized for the
three months ended March 31, 2011 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
129,753 |
|
|
$ |
125,783 |
|
Non-core properties |
|
|
11,592 |
|
|
|
26 |
|
Reconciling items |
|
|
53 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
141,398 |
|
|
$ |
125,867 |
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
75,993 |
|
|
$ |
69,853 |
|
Non-core properties |
|
|
7,073 |
|
|
|
(72 |
) |
Reconciling items |
|
|
53 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Net operating income, including reconciling items |
|
|
83,119 |
|
|
|
69,839 |
|
General and administrative expenses |
|
|
(6,236 |
) |
|
|
(5,557 |
) |
Interest expense |
|
|
(33,031 |
) |
|
|
(30,185 |
) |
Depreciation and amortization |
|
|
(34,479 |
) |
|
|
(30,113 |
) |
Other expenses |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
9,363 |
|
|
$ |
3,984 |
|
|
|
|
|
|
|
|
The assets for each of the reportable segments are summarized as follows as of March 31, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
Apartments owned |
|
|
|
|
|
|
|
|
Core properties |
|
$ |
2,936,056 |
|
|
$ |
2,950,884 |
|
Non-core properties |
|
|
592,171 |
|
|
|
585,045 |
|
Reconciling items |
|
|
98,820 |
|
|
|
98,774 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,627,047 |
|
|
$ |
3,634,703 |
|
|
|
|
|
|
|
|
12
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
13. Disposition of Property and Discontinued Operations
The Company reports its property dispositions as discontinued operations as prescribed by the
authoritative guidance. Pursuant to the definition of a component of an entity, assuming no
significant continuing involvement by the former owner after the sale, the sale of an apartment
community is considered a discontinued operation. In addition, apartment communities classified as
held for sale are also considered discontinued operations. The Company generally considers assets
to be held for sale when all significant contingencies surrounding the closing have been resolved,
which often corresponds with the actual closing date.
Included in discontinued operations for the three months ended March 31, 2010 are the operating
results of one variable interest entity for which the Companys general partnership interest was
sold in 2010. For purposes of the discontinued operations presentation, the Company only includes
interest expense and losses from early extinguishment of debt associated with specific mortgage
indebtedness of the properties that are sold or held for sale.
The operating results of discontinued operations are summarized for the three months ended March 31, 2011 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
|
|
|
$ |
1,115 |
|
Property other income |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
1,135 |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating and maintenance |
|
|
|
|
|
|
1,066 |
|
Interest expense, including prepayment penalties |
|
|
|
|
|
|
249 |
|
Depreciation and amortization |
|
|
|
|
|
|
282 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
|
|
|
|
1,597 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
|
|
|
$ |
(462 |
) |
|
|
|
|
|
|
|
14. Commitments and Contingencies
Letters of Credit
As of March 31, 2011, the Company had issued $4,461 in letters of credit, which were provided under
the Companys $175,000 unsecured line of credit agreement. The letters of credit were required to
be issued under certain tax escrow agreements, workers compensation and health insurance policies,
and construction projects.
Debt Covenants
The line of credit agreement contains restrictions which, among other things, require maintenance
of certain financial ratios.
Included in the Companys consolidated balance sheets at March 31, 2011 and December 31, 2010 are
assets of Home Properties Fair Oaks, LLC, owner of the Courts at Fair Oaks, Fairfax, VA, that are
pledged as collateral for specific indebtedness and are not available to satisfy any other
obligations of the Company.
13
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
14. Commitments and Contingencies (continued)
Tax Protection Obligations
In connection with certain UPREIT Unit 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 (14% 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 2 months to 6 years.
Limited Partnership
For periods before October 13, 2010, the Company, through its general partnership interest in an
affordable property limited partnership, had guaranteed certain low income housing tax credits to
limited partners in this partnership through 2015 totaling approximately $3,000. As of March 31,
2011, there were no known conditions that would make such payments necessary relating to the tax
credit guarantee; therefore, no liability has been recorded in the financial statements. In
addition, through October 12, 2010, the Company, acting as general partner in this partnership, was
obligated to advance funds to meet partnership operating deficits. As more fully described in Note
4 to the consolidated financial statements contained in the Companys Form 10-K for the year ended
December 31, 2010, the Companys general partner interest in this entity was sold on October 13,
2010, relieving the Company of the operating deficit guarantee and reducing the tax credit
guarantee to a $3,000 secondary guarantee, with the new general partner assuming the operating
guarantee and primary tax credit guarantee positions.
Contingencies
The Company is not a party to any legal proceedings which are expected to have a material adverse
effect on the Companys liquidity, financial position or results of operations. The Company is
subject to a variety of legal actions for personal injury or property damage arising in the
ordinary course of its business, most of which are covered by liability insurance. Various claims
of employment and resident discrimination are also periodically brought, most of which also are
covered by insurance. While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such legal proceedings and claims will not have a
material adverse effect on the Companys liquidity, financial position or results of operations.
15. Subsequent Events
On April 19, 2011, the Company acquired a 108 unit apartment community located in Frederick,
Maryland for a total purchase price of $7,000. In connection with this acquisition, closing costs
of approximately $100 were incurred and will be included in other expenses for the second quarter of
2011.
On May 3, 2011, the Board of Directors declared a dividend of $0.62 per share on the Companys
common stock and approved a distribution of $0.62 per UPREIT Unit for the quarter ended March 31,
2011. This is the equivalent of an annual dividend/distribution of $2.48 per share/unit. The
dividend and distribution is payable May 27, 2011, to stockholders and unitholders of record on May
17, 2011.
14
HOME PROPERTIES, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
The following discussion should be read in conjunction with the accompanying consolidated financial
statements and notes thereto.
Forward-Looking Statements
This discussion contains forward-looking statements. Historical results and percentage
relationships set forth in the consolidated financial statements, including trends which might
appear, should not be taken as indicative of future operations. The Company considers portions of
the information to be forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as
amended, with respect to the Companys expectations for future periods. Some examples of
forward-looking statements include statements related to acquisitions (including any related pro
forma financial information), future capital expenditures, potential development and redevelopment
opportunities, projected costs and rental rates for development and redevelopment projects,
financing sources and availability, and the effects of environmental and other regulations.
Although the Company believes that the expectations reflected in those forward-looking statements
are based upon reasonable assumptions, it can give no assurance that its expectations will be
achieved. Factors that may cause actual results to differ include general economic and local real
estate conditions, the weather and other conditions that might affect operating expenses, the
timely completion of repositioning activities and development within anticipated budgets, the
actual pace of future development, acquisitions and sales, and continued access to capital to fund
growth. For this purpose, any statements contained in this Form 10-Q that are not statements of
historical fact should be considered to be forward-looking statements. Some of the words used to
identify forward-looking statements include believes, anticipates, plans, expects, seeks,
estimates, and any other similar expressions. Readers should exercise caution in interpreting
and relying on forward-looking statements since they involve known and unknown risks, uncertainties
and other factors which are, in some cases, beyond the Companys control and could materially
affect the Companys actual results, performance or achievements.
Liquidity and Capital Resources
General
The Companys principal liquidity demands are expected to be distributions to the common
stockholders and holders of UPREIT Units, capital improvements and repairs and maintenance for its
properties, acquisition and development of additional properties and debt repayments, including any
exchangeable senior notes that may be put to the Company. The Company may also acquire equity
ownership in other public or private companies that own and manage portfolios of apartment
communities.
The Company intends to meet its short-term liquidity requirements through net cash flows provided
by operating activities and its existing bank line of credit, described below. The Company
considers its ability to generate cash to be adequate to meet all operating requirements, including
availability to pay dividends to its stockholders and make distributions to its holders of UPREIT
Units in accordance with the provisions of the Internal Revenue Code, as amended, applicable to
REITs.
In 2000, the Company obtained an investment grade rating from Fitch, Inc. The rating in effect at
March 31, 2011 (no change from initial rating) is a corporate credit rating of BBB (Triple-B).
Cash Flow Summary
The Companys net cash flow from operating activities was $44 million in 2011 compared to $38
million in 2010. The $6 million increase was primarily due to a $10 million increase in cash
provided from more profitable operations, partially offset by timing differences in cash
disbursements between periods which resulted in $4 million higher outgoing cash flow.
15
Liquidity and Capital Resources (continued)
Cash used in investing activities was $29 million during both 2011 and 2010. Cash outflows for
capital improvements were $22 million in 2011 compared to $16 million in 2010. The increased
investment in 2011 reflects managements strategy to continually reposition and perform selective
rehabilitation in markets that are able to support rent increases. Cash outflows for additions to
construction in progress were $8 million in 2011 as compared to $14 million in 2010. The lower
spending on development in 2011 reflects the completion of one major project during 2011 compared
to the active construction of two communities in 2010.
Net cash used in financing activities totaled $14 million in 2011. Cash flows from the sale of
common stock under the ATM offering of $47 million and proceeds from stock option exercises of $4
million were more than offset by net paydown of mortgages of $20 million, net paydown on the line
of credit of $14 million and distributions paid to stockholders and UPREIT unitholders of $31
million. Net cash used in financing activities totaled $9 million in 2010. Cash flows from net
proceeds of the ATM common stock offering of $59 million, proceeds from stock option exercises of
$1 million and net proceeds from mortgage financing of $1 million were more than offset by
distributions paid to shareholders and UPREIT unitholders of $27 million, and a net paydown of $43
million on the line of credit.
Line of Credit
On February 10, 2011, the Company amended and extended its $175 million unsecured line of credit
agreement with M&T Bank, as administrative agent and lead bank, which was scheduled to expire
August 31, 2011. The amended line of credit agreement removes the 1.50% LIBOR floor contained in
the earlier agreement and expires one year later on August 31, 2012, not including a one-year
extension, at the Companys option. The Company had $42.5 million outstanding under the credit
facility on March 31, 2011.
Borrowings under the line of credit bear interest at rates ranging from 1.90% to 2.63% over the
one-month LIBOR, increasing at higher levels of indebtedness; and in all cases, without a LIBOR
floor. The one-month LIBOR was 0.24% at March 31, 2011 resulting in an effective rate of 2.61% for
the Company. Accordingly, increases in the one-month LIBOR will increase the Companys interest
expense and as a result will affect the Companys results of operations and financial condition.
The Companys line of credit agreement provides the ability to issue up to $20 million in letters
of credit. While the issuance of letters of credit does not increase borrowings outstanding under
the line of credit, it does reduce the amount available. At March 31, 2011, the Company had
outstanding letters of credit of $4.5 million and the amount available on the credit facility was
$128 million.
Exchangeable Senior Notes
In October 2006, the Company issued $200 million of exchangeable senior notes with a coupon rate of
4.125% (Senior Notes), which generated net proceeds of $195.8 million. The net proceeds were
used to repurchase 933,000 shares of common stock for a total of $58 million, pay down $70 million
on the line of credit, with the balance used for redemption of the Series F Preferred Shares and
property acquisitions. During the fourth quarter of 2008, the Company repurchased $60 million of
the Senior Notes for $45.4 million. The exchange terms and conditions are more fully described
under Contractual Obligations and Other Commitments, below.
The Company anticipates that it will have to finance the repurchase of some of the $140 million
Senior Notes in the instance that the holders exercise the contractual put option in November 2011.
In this yield starved environment we believe that not all, and most likely less than half, will be
put to us. The Company will finance any puts with proceeds from the line of credit, additional
secured or unsecured financings and/or proceeds from the sale of stock under the ATM program.
16
Liquidity and Capital Resources (continued)
Indebtedness
As of March 31, 2011, the weighted average interest rate on the Companys total indebtedness of
$2.6 billion was 5.15% with staggered maturities averaging approximately seven years.
Approximately 90% of total indebtedness is at fixed rates. This limits the exposure to changes in
interest rates, minimizing the effect of interest rate fluctuations on the Companys results of
operations and cash flows.
Unencumbered Assets
The Companys percentage of unencumbered assets of the total property pool remained stable at 21.4%
and 21.7% as of March 31, 2011 and December 31, 2010, respectively. These levels of unsecured
assets add borrowing flexibility because more capacity is available for unsecured debt under the
terms of the Companys unsecured line of credit agreement.
UPREIT Units
The Company believes that the issuance of UPREIT Units for property acquisitions will continue to
be a potential source of capital for the Company. During 2010, the Company issued $4.8 million in
98,728 UPREIT Units as consideration for one acquired property.
Universal Shelf Registration
On March 3, 2010, the Company filed a Form S-3 universal shelf registration statement with the SEC
that registers the issuance, from time to time, of common stock, preferred stock or debt
securities. The Company may offer and sell securities issued pursuant to the universal shelf
registration statement after a prospectus supplement, describing the type of security and amount
being offered, is filed with the SEC. Sales of common stock under the Companys ATM offering in
the three months ended March 31, 2011 described below were made under this registration statement.
At-the-Market Equity Offering Program
On September 17, 2010, the Company initiated its second At-the-Market (ATM) equity offering
program through which it is authorized to sell up to 3.6 million shares of common stock from time
to time in ATM offerings or negotiated transactions. There were no shares issued from this program
during 2010. During the first quarter 2011, the Company issued 841,000 shares of common stock at
an average price per share of $56.51, for aggregate gross proceeds of $47.5 million and aggregate
net proceeds of $46.6 million after deducting commissions and other transaction costs of
approximately $0.9 million. The Company used the net proceeds from the offering for general
corporate purposes, which included the repayment of debt, working capital, capital expenditures,
acquisitions, development and redevelopment of apartment communities.
Dividend Reinvestment and Direct Stock Purchase Plan (DRIP)
The Companys DRIP provides the stockholders of the Company an opportunity to automatically invest
their cash dividends in additional shares of common stock. In addition, eligible participants may
make monthly payments or other voluntary cash investments in shares of common stock. The maximum
monthly investment permitted without prior Company approval is currently $10,000. The Company
currently meets share demand under the DRIP through stock repurchases by the transfer agent in the
open market on the Companys behalf or new stock issuances. Management monitors the relationship
between the Companys stock price and its estimated net asset value (NAV). During times when the
difference between these two values is small, resulting in little dilution of NAV by common stock
issuances, the Company can choose to issue new shares. At times when the gap between NAV and stock
price is greater, the Company has the flexibility to satisfy the demand for DRIP shares with stock
repurchased by the transfer agent in the open market. In addition, the Company can issue waivers
to DRIP participants to provide for investments in excess of the $10,000 maximum monthly
investment. No such waivers were granted during 2010 or 2011.
17
Liquidity and Capital Resources (continued)
Stock Repurchase Program
In 1997, the Companys Board of Directors (the Board) approved a stock repurchase program under
which the Company may repurchase shares of its common stock or UPREIT Units (Company Program).
The shares and units may be repurchased through open market or privately negotiated transactions at
the discretion of Company management. The Boards action did not establish a target stock price or
a specific timetable for repurchase. There were no repurchases under the Company Program during
2010 and through March 31, 2011. The remaining authorization level as of March 31, 2011 is
2,291,160 shares and UPREIT Units, collectively. The Company will continue to monitor stock prices
relative to the NAV to determine the current best use of capital among our major uses of capital:
stock buybacks, debt paydown to increase the unencumbered pool, acquisitions, rehabilitation and/or
redevelopment of owned properties and development of new properties. At the present time, the
Company has no intention of buying back any stock or UPREIT Units during the remainder of 2011.
Acquisitions and Development
Acquisitions
After the close of the first quarter, on April 19, 2011, the Company acquired a 108 unit apartment
community located in Frederick, Maryland, for a total purchase price of $7.0 million. In
connection with this acquisition, closing costs of approximately $0.1 million were incurred and
will be included in other expenses for the second quarter of 2011. The property was built in 1984
and consists of six garden style buildings. The weighted average first year capitalization rate
projected by the Company on this acquisition was 7.2%.
Development
As of March 31, 2011, 93.6% of the Courts at Huntington Station Phase One units were occupied.
Construction on Phase Two, consisting of 219 units, has commenced and is scheduled to be completed
in the second quarter of 2011. Pre-leasing has started and the Company expects to reach stabilized
occupancy in approximately one year.
During the first quarter of 2011, the Company started construction on a project located in
Fredericksburg, Virginia, consisting of eight, four-story buildings and a refurbished rail depot
for a total of 314 apartment units (The Apartments at Cobblestone Square). Construction of the
first apartment building, along with the rail depot renovation and amenities, is slated for
completion in late 2011 with initial occupancy anticipated to begin in the third quarter of 2011.
The entire project is expected to be completed in the first half of 2012 for a total cost of $49
million.
The Company has one project in pre-construction development. Ripley Street, located in Silver
Spring, Maryland, is an 18-story high rise development with 379 apartment units. The project is on
entitled land that the Company purchased from another developer and is in the final stages of the
design process. Construction is expected to begin in the second half of 2011 with initial
occupancy by the end of 2012 and project completion in the second half of 2013 for a total cost of
$111 million.
The Company has one project in the pre-redevelopment phase. Falkland Chase, located in Silver
Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939. The
Company is planning on redeveloping the North parcel consisting of 182 units, which will be renamed
Falkland North. The Company is making progress on the design and obtaining the necessary approvals
to redevelop this parcel into approximately 1,100 units. Construction is expected to start at the
earliest during late 2012 or early 2013, with a total projected cost of $315 million.
The Company has one project under contract: Courts at Spring Mill Station, located in
Conshohocken, Pennsylvania, a suburb of Philadelphia, consisting of approximately 385 apartment
units. The project is on land that the Company holds a purchase option on and is in the middle
stages of the entitlement process, with all approvals expected by the end of 2011. Construction is
expected to begin in the first half of 2012 and total estimated costs are approximately $79
million.
18
Contractual Obligations and Other Commitments
The primary obligations of the Company relate to its borrowings under the line of credit, Senior
Notes and mortgage notes payable. The Companys line of credit matures in August 2012 (not
including a one-year optional extension) and had $42.5 million in loans, and letters of credit
totaling $4.5 million, outstanding at March 31, 2011. The $2.4 billion in mortgage notes payable
have varying maturities ranging from 1 month to 23 years. The weighted average interest rate of
the Companys secured debt was 5.16% at March 31, 2011. The weighted average rate of interest on
the Companys total indebtedness of $2.6 billion at March 31, 2011 was 5.15%.
In October 2006, the Company issued $200 million of Senior Notes with a coupon rate of 4.125%.
During 2008, the Company repurchased and retired $60 million principal amount of its Senior Notes
and $140 million remain outstanding at March 31, 2011. The notes are exchangeable into cash equal
to the principal amount of the notes and, at the Companys option, cash or common stock for the
exchange value, to the extent that the market price of common stock exceeds the initial exchange
price of $73.34 per share, subject to adjustment. The exchange price is adjusted for payments of
dividends in excess of the reference dividend set in the indenture of $0.64 per share. The
adjusted exchange price at March 31, 2011 was $72.87 per share. Upon an exchange of the notes, the
Company will settle any amounts up to the principal amount of the notes in cash and the remaining
exchange value, if any, will be settled, at the Companys option, in cash, common stock or a
combination of both. The notes are not redeemable at the option of the Company for five years from
their issue date, 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 by providing notice within 2 to 20 business days prior to the
repurchase dates. The notes will mature on November 1, 2026, unless previously redeemed,
repurchased or exchanged in accordance with their terms prior to that date.
The Company leases its corporate office space from an affiliate and the office space for its
regional offices from non-affiliated third parties. The rent for the corporate office space is a
gross rent that includes real estate taxes and common area maintenance. The regional office leases
are net leases which require an annual base rent plus a pro-rata portion of real estate taxes.
The Company, through its former general partnership interest in an affordable property limited
partnership, has a secondary guarantee through 2015 on certain low income housing tax credits to
limited partners in this partnership totaling approximately $3 million. With respect to the
guarantee of the low income housing tax credits, the new unrelated general partner assumed
operating deficit guarantee and primary tax credit guarantee positions. The Company believes the
propertys operations conform to the applicable requirements and does not anticipate any payment on
the guarantee; therefore, no liability has been recorded in the financial statements.
19
Capital Improvements (dollars in thousands, except unit and per unit data)
The Companys policy is to capitalize costs related to the acquisition, development,
rehabilitation, construction and improvement of properties. Capital improvements are costs that
increase the value and extend the useful life of an asset. Ordinary repair and maintenance costs
that do not extend the useful life of the asset are expensed as incurred. Costs incurred on a
lease turnover due to normal wear and tear by the resident are expensed on the turn. Recurring
capital improvements typically include appliances, carpeting and flooring, HVAC equipment, kitchen
and bath cabinets, new roofs, site improvements and various exterior building improvements.
Non-recurring revenue generating upgrades include community centers, new windows, and kitchen and
bath apartment upgrades. Revenue generating capital improvements are expected to directly result
in increased rental earnings or expense savings. The Company capitalizes interest and certain
internal personnel costs related to the communities under rehabilitation and construction.
The Company estimates, that on an annual basis, $800 per unit is spent on recurring capital
expenditures in 2011 and 2010. During the three months ended March 31, 2011 and 2010,
approximately $200 per unit was spent on recurring capital expenditures.
The table below summarizes the actual total capital improvements incurred by major categories for
the three months ended March 31, 2011 and 2010 and an estimate of the breakdown of total capital
improvements by major categories between recurring, and non-recurring revenue generating, capital
improvements for the three months ended March 31, 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
111 |
|
|
$ |
3 |
|
|
$ |
111 |
|
|
$ |
3 |
|
|
$ |
49 |
|
|
$ |
1 |
|
Major building improvements |
|
|
1,191 |
|
|
|
31 |
|
|
|
1,946 |
|
|
|
51 |
|
|
|
3,137 |
|
|
|
82 |
|
|
|
1,313 |
|
|
|
37 |
|
Roof replacements |
|
|
200 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
5 |
|
|
|
195 |
|
|
|
5 |
|
Site improvements |
|
|
432 |
|
|
|
11 |
|
|
|
610 |
|
|
|
16 |
|
|
|
1,042 |
|
|
|
27 |
|
|
|
1,223 |
|
|
|
34 |
|
Apartment upgrades |
|
|
1,667 |
|
|
|
44 |
|
|
|
4,814 |
|
|
|
125 |
|
|
|
6,481 |
|
|
|
169 |
|
|
|
5,051 |
|
|
|
142 |
|
Appliances |
|
|
1,186 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
1,186 |
|
|
|
31 |
|
|
|
1,012 |
|
|
|
28 |
|
Carpeting/flooring |
|
|
2,122 |
|
|
|
55 |
|
|
|
297 |
|
|
|
8 |
|
|
|
2,419 |
|
|
|
63 |
|
|
|
1,986 |
|
|
|
55 |
|
HVAC/mechanicals |
|
|
691 |
|
|
|
18 |
|
|
|
1,075 |
|
|
|
28 |
|
|
|
1,766 |
|
|
|
46 |
|
|
|
2,774 |
|
|
|
78 |
|
Miscellaneous |
|
|
192 |
|
|
|
5 |
|
|
|
1,030 |
|
|
|
27 |
|
|
|
1,222 |
|
|
|
32 |
|
|
|
354 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
7,681 |
|
|
$ |
200 |
|
|
$ |
9,883 |
|
|
$ |
258 |
|
|
$ |
17,564 |
|
|
$ |
458 |
|
|
$ |
13,957 |
|
|
$ |
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Calculated using the weighted average number of units owned, including 35,798
core units and 2010 acquisition units of 2,614 for the three months ended March 31, 2011; and
35,798 core units for the three months ended March 31, 2010. |
20
Capital Improvements (continued)
The schedule below summarizes the breakdown of total capital improvements between core and non-core
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Recurring |
|
|
Per |
|
|
Recurring |
|
|
Per |
|
|
Capital |
|
|
Per |
|
|
Capital |
|
|
Per |
|
|
|
Cap Ex |
|
|
Unit(a) |
|
|
Cap Ex |
|
|
Unit(a) |
|
|
Improvements |
|
|
Unit(a) |
|
|
Improvements |
|
|
Unit(a) |
|
Core Communities |
|
$ |
7,159 |
|
|
$ |
200 |
|
|
$ |
8,486 |
|
|
$ |
238 |
|
|
$ |
15,645 |
|
|
$ |
438 |
|
|
$ |
13,957 |
|
|
$ |
390 |
|
2010 Acquisition Communities |
|
|
522 |
|
|
|
200 |
|
|
|
1,397 |
|
|
|
534 |
|
|
|
1,919 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
7,681 |
|
|
|
200 |
|
|
|
9,883 |
|
|
|
258 |
|
|
|
17,564 |
|
|
|
458 |
|
|
|
13,957 |
|
|
|
390 |
|
Corporate office expenditures(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678 |
|
|
|
|
|
|
|
911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
7,681 |
|
|
$ |
200 |
|
|
$ |
9,883 |
|
|
$ |
258 |
|
|
$ |
18,242 |
|
|
$ |
458 |
|
|
$ |
14,868 |
|
|
$ |
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Calculated using the weighted average number of units owned, including 35,798
core units and 2010 acquisition units of 2,614 for the three months ended March 31, 2011; and
35,798 core units for the three months ended March 31, 2010. |
|
(b) |
|
No distinction is made between recurring and non-recurring expenditures for
corporate office. Corporate office expenditures include principally computer hardware, software,
office furniture, fixtures and leasehold improvements. |
Results of Operations (dollars in thousands, except unit and per unit data)
Net operating income (NOI) may fall within the definition of non-GAAP financial measure set
forth in Item 10(e) of Regulation S-K and, as a result, the Company may be required to include in
this report a statement disclosing the reasons why management believes that presentation of this
measure provides useful information to investors. The Company believes that NOI is helpful to
investors as a supplemental measure of the operating performance of a real estate company because
it is a direct measure of the actual operating results of the Companys apartment communities. In
addition, the apartment communities are valued and sold in the market by using a multiple of NOI.
The Company uses this measure to compare its performance to that of its peer group. For a
reconciliation of NOI to income from continuing operations, please refer to Note 12 to the
Consolidated Financial Statements of this Form 10-Q.
Comparison of three months ended March 31, 2011 to the same period in 2010
The Company had 104 apartment communities with 35,798 units which were owned during the three
months ended March 31, 2011 and 2010 (the Core Properties). The Company acquired nine apartment
communities with 2,614 units and placed into service another 449 units at two development
communities during 2010 (the Acquisition Communities). The inclusion of these acquired and
developed communities generally accounted for the significant changes in operating results for the
three months ended March 31, 2011.
On October 13, 2010, the Company sold its general partnership interest in one investment where the
Company was the managing general partner and was determined to be a variable interest entity. The
result of this sale is classified as discontinued operations and is not included in the table
below.
21
Results of Operations (continued)
A summary of the net operating income for Core Properties is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
|
$ Change |
|
|
% Change |
|
Rent |
|
$ |
116,399 |
|
|
$ |
113,185 |
|
|
$ |
3,214 |
|
|
|
2.8 |
% |
Utility recovery revenue |
|
|
7,917 |
|
|
|
7,684 |
|
|
|
233 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent including recoveries |
|
|
124,316 |
|
|
|
120,869 |
|
|
|
3,447 |
|
|
|
2.9 |
% |
Property other income |
|
|
5,437 |
|
|
|
4,914 |
|
|
|
523 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
129,753 |
|
|
|
125,783 |
|
|
|
3,970 |
|
|
|
3.2 |
% |
Operating and maintenance |
|
|
(53,760 |
) |
|
|
(55,930 |
) |
|
|
2,170 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
75,993 |
|
|
$ |
69,853 |
|
|
$ |
6,140 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the net operating income for the Company as a whole is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
|
$ Change |
|
|
% Change |
|
Rent |
|
$ |
127,421 |
|
|
$ |
113,199 |
|
|
$ |
14,222 |
|
|
|
12.6 |
% |
Utility recovery revenue |
|
|
8,057 |
|
|
|
7,684 |
|
|
|
373 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent including recoveries |
|
|
135,478 |
|
|
|
120,883 |
|
|
|
14,595 |
|
|
|
12.1 |
% |
Property other income |
|
|
5,867 |
|
|
|
4,926 |
|
|
|
941 |
|
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
141,345 |
|
|
|
125,809 |
|
|
|
15,536 |
|
|
|
12.3 |
% |
Operating and maintenance |
|
|
(58,279 |
) |
|
|
(56,028 |
) |
|
|
(2,251 |
) |
|
|
(4.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
83,066 |
|
|
$ |
69,781 |
|
|
$ |
13,285 |
|
|
|
19.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $14,222 increase in rental income, $11,008 is attributable to the Acquisition Communities.
The balance, an increase of $3,214, relates to a 2.8% increase from the Core Properties as the
result of an increase of 2.2% in weighted average rental rates from $1,126 to $1,151 per apartment
unit, and by a 0.6% increase in economic occupancy from 93.6% to 94.2%. Economic occupancy is
defined as total possible rental income, net of vacancy and bad debt expense, as a percentage of
total possible rental income. Total possible rental income is determined by valuing occupied units
at contract rents and vacant units at market rents. Of the $373 increase in utility recovery
revenue, $233 is attributable to the Core Properties, and $140 is attributable to the Acquisition
Communities.
Property other income, which consists primarily of income from operation of laundry facilities,
late charges, administrative fees, garage and carport rentals, revenue from corporate apartments,
cable revenue, pet charges, and miscellaneous charges to residents, increased by $941. Of this
increase, $418 is attributable to the Acquisition Communities, and $523 is attributable to the Core
Properties due mainly to volume purchasing discounts received in the current period as well as
increases in renters insurance door fees and pet charges.
Of the $2,251 increase in operating and maintenance expenses, $4,421 is attributable to the
Acquisition Communities; offset by a $2,170 decrease attributable to the Core Properties. The
decrease in Core Properties is primarily due to decreases in property insurance, snow removal
costs, and natural gas heating costs; partially offset by increases in water & sewer costs.
Property insurance decreased by $1,307, or 44.2%, due in part to a favorable change of $721 in the
self-insurance reserves as a result of a $349 increase last year compared to a $372 decrease this
year. The current period reserve decrease is a direct result of the Companys focus on settling
older claims where the number of open claims has dropped approximately 33% from the prior year.
The lower number of open claims has had a favorable impact on the estimated required reserves in
2011. The decrease before reserve adjustments of $586, or 19.8%, is reflective of the increased
emphasis on preventing losses at the communities through safety training programs and the
installation of in-unit fire extinguishers for every apartment unit.
Snow removal costs were down $493, or 26.0%, as most of our Mid-Atlantic region properties suffered
from record storms in the first quarter 2010.
22
Results of Operations (continued)
Natural gas heating costs were down $473, or 6.0%, from a year ago due to lower commodity rates and
consumption. For the first quarter 2011, our natural gas weighted average cost, including
transportation of $3.00 per decatherm, was $9.06 per decatherm, compared to $9.54 per decatherm for
the 2010 period, a 5.0% decrease.
Water & sewer costs increased $301, or 7.9%, primarily due to municipalities increasing rates. The
water & sewer recovery program enabled the Company to recapture much of these rate increases from
our residents.
General and administrative expenses increased in 2011 by $679, or 12.2%. General and
administrative expenses as a percentage of total revenues were 4.4% for both 2011 and 2010. The
cost of the incentive bonus was up $272, or 69.2%, as compared to 2010, reflecting the Companys
favorable operating performance versus its peers. Stock-based compensation costs were up $216
primarily due to the impact of employees nearing retirement age vesting over one less year. Also
included in 2011 are $89 of abandoned pursuit costs.
Interest expense increased by $2,846, or 9.4%, in 2011 primarily as a result of interest expense on
the new debt of the Acquisition Communities. The average line of credit borrowing in 2011 was
$51,216 compared to $35,224 in 2010; however, the interest expense was $560 in both periods, due to
the impact of the lower effective interest rate in 2011 resulting from the line of credit amendment
in February 2011, which removed the previous LIBOR floor of 1.50%.
Depreciation and amortization expense increased $4,366, or 14.5%, due to the depreciation on the
Acquisition Communities and the capital additions to the Core Properties.
Other expenses of $10 are additional property acquisition costs from the Acquisition Communities.
Funds From Operations
Pursuant to the revised definition of Funds From Operations (FFO) adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts (NAREIT), FFO is defined
as net income (computed in accordance with accounting principles generally accepted in the United
States of America (GAAP)) excluding gains or losses from sales of property, noncontrolling
interest, extraordinary items and cumulative effect of change in accounting principle plus
depreciation from real property including adjustments for unconsolidated partnerships and joint
ventures less dividends from non-convertible preferred shares. Because of the limitations of the
FFO definition as published by NAREIT as set forth above, the Company has made certain
interpretations in applying the definition. The Company believes all adjustments not specifically
provided for are consistent with the definition.
FFO should not be considered as an alternative to net income (determined in accordance with GAAP)
as an indication of our performance. FFO does not represent cash generated from operating
activities determined in accordance with GAAP, and is not a measure of liquidity or an indicator of
our ability to make cash distributions. We believe that to further understand our performance, FFO
should be compared with our reported net income and considered in addition to cash flows in
accordance with GAAP, as presented in our consolidated financial statements.
FFO falls within the definition of non-GAAP financial measure set forth in Item 10(e) of
Regulation S-K and as a result the Company is required to include in this report a statement
disclosing the reasons why management believes that presentation of this measure provides useful
information to investors. Management believes that in order to facilitate a clear understanding of
the consolidated 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 companys real estate between periods or as compared to
different companies. The Company also uses these measures to compare its performance to that of
its peer group.
23
Funds From Operations (continued)
The calculation of FFO and reconciliation to GAAP net income attributable to common
stockholders for the three months ended March 31, 2011 and 2010 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
2011 |
|
|
2010 |
|
Net income attributable to common stockholders |
|
$ |
7,224 |
|
|
$ |
2,637 |
|
Real property depreciation and amortization |
|
|
33,815 |
|
|
|
29,723 |
|
Noncontrolling interest |
|
|
2,139 |
|
|
|
874 |
|
Loss (gain) on disposition of property |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
FFO Basic and Diluted, as defined by NAREIT |
|
$ |
43,178 |
|
|
$ |
33,245 |
|
|
|
|
|
|
|
|
Weighted average common shares/units outstanding (1): |
|
|
|
|
|
|
|
|
Basic |
|
|
49,292.6 |
|
|
|
46,595.9 |
|
|
|
|
|
|
|
|
Diluted |
|
|
49,948.2 |
|
|
|
47,032.3 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Basic includes common stock outstanding plus UPREIT Units which can be
converted into shares of common stock. Diluted includes additional common stock equivalents. |
All REITs may not be using the same definition for FFO. Accordingly, the above presentation may
not be comparable to other similarly titled measures of FFO of other REITs.
Covenants
The credit agreement relating to the Companys line of credit provides for the Company to maintain
certain financial covenants. The Company was in compliance with these financial covenants for all
periods presented. The line of credit has not been used for long-term financing but adds a certain
amount of flexibility, especially in meeting the Companys acquisition goals. Many times it is
easier to temporarily finance an acquisition, development 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.
24
Economic Conditions
Substantially all of the leases at the Companys apartment communities are for a term of one year
or less, which enables the Company to seek increased rents upon renewal of existing leases or
commencement of new leases. These short-term leases minimize the potential adverse effect of
inflation or deflation on rental income, although residents may leave without penalty at the end of
their lease terms and may do so if rents are increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic conditions, which
affect various real estate sectors and geographic regions with differing intensities and at
different times. In the fourth quarter of 2007, throughout 2008, 2009 and continuing into 2010,
the sub-prime issue put significant pressure on the mortgage lending industry. This led to
problems in the financial system which developed into the worst recession since the Great
Depression. The credit markets tightened, consumer confidence plunged and unemployment soared.
Despite this, the Company continued to receive favorable financing at market rates of interest,
including the amendment and extension of the line of credit in 2011 at rates 40% lower than the
prior agreement. Its average physical occupancy of 95.0% in 2008, 94.9% in 2009, 95.2% in 2010 and
95.3% in the first quarter of 2011 were the highest since 2000. Financial performance continued
strong, leading the public multifamily sector in same-store NOI growth in 2009 and 2010, reflecting
the stability of our geographic markets and business model. Beginning in 2011, we see an improving
economic climate leading to job growth which typically results in household formations. At the
same time the supply of new multi-family units is somewhat constrained, which could further boost
our occupancy and enhance the Companys ability to raise rents and deliver upgraded units into a
more favorable rental climate. In light of this, we will continue to review our business strategy
throughout the year.
Dividends and Distributions
On May 3, 2011, the Board of Directors declared a dividend of $0.62 per share on the Companys
common stock and approved a distribution of $0.62 per UPREIT Unit for the quarter ended March 31,
2011. This is the equivalent of an annual dividend/distribution of $2.48 per share/unit. The
dividend and distribution is payable May 27, 2011, to stockholders and unitholders of record on May
17, 2011.
Contingencies
The Company is not a party to any legal proceedings which are expected to have a material adverse
effect on the Companys liquidity, financial position or results of operations. The Company is
subject to a variety of legal actions for personal injury or property damage arising in the
ordinary course of its business, most of which are covered by liability and property insurance.
Various claims of employment and resident discrimination are also periodically brought, most of
which also are covered by insurance. While the resolution of these matters cannot be predicted
with certainty, management believes that the final outcome of such legal proceedings and claims
will not have a material adverse effect on the Companys liquidity, financial position or results
of operations.
Recently Adopted and Recently Issued Accounting Standards
Disclosure of recently adopted and recently issued accounting standards is incorporated herein by
reference to the discussion under Part I, Item 1, Notes to the Consolidated Financial Statements,
Note 3.
25
HOME PROPERTIES, INC.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Companys primary market risk exposure is interest rate risk. At March 31, 2011 and December
31, 2010, approximately 90% of the Companys secured and unsecured debt bore interest at fixed
rates, and approximately 85% and 84%, respectively, of the Companys debt was secured and bore
interest at fixed rates. The secured fixed rate debt had weighted average maturities of
approximately 6.28 years and 6.52 years and a weighted average interest rate of approximately 5.36%
at March 31, 2011 and December 31, 2010, respectively. The remainder of the Companys secured debt
bore interest at variable rates with a weighted average maturity of approximately 7.17 and 7.05
years and a weighted average interest rate of 3.00% at March 31, 2011 and December 31, 2010,
respectively. 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, development or stock repurchase with the intention to
refinance at a later date. The Company believes that increases in interest expense as a result of
inflation would not significantly impact the Companys distributable cash flow.
At March 31, 2011 and December 31, 2010, the fair value of the Companys fixed and variable rate
secured debt amounted to a liability of $2.44 billion and $2.48 billion, respectively, compared to
its carrying amount of $2.40 billion and $2.42 billion. The Company estimates that a 100 basis
point increase in market interest rates at March 31, 2011 would have changed the fair value of the
Companys fixed and variable rate secured debt to a liability of $2.33 billion and would result in
$2.0 million higher interest expense on the variable rate secured debt on an annualized basis. At
March 31, 2011 and December 31, 2010, the fair value of the Companys total debt, including the
Senior Notes and line of credit, amounted to a liability of $2.63 billion and $2.68 billion,
respectively, compared to its carrying amount of $2.59 billion and $2.62 billion.
The Company intends to continuously monitor and actively manage interest costs on its variable rate
debt portfolio and may enter into swap positions based upon market fluctuations. Accordingly, the
cost of obtaining such interest rate protection agreements in relation to the Companys access to
capital markets will continue to be evaluated. The Company has not, and does not plan to, enter
into any derivative financial instruments for trading or speculative purposes. In addition, the
Company believes that it has the ability to obtain funds through additional debt and/or equity
offerings and/or the issuance of UPREIT Units. As of March 31, 2011, the Company had no other
material exposure to market risk.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports filed or submitted by the Company under the
Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and communicated to the officers who certify
the Companys financial reports and to the other members of senior management and the Board of
Directors.
The principal executive officer and principal financial officer evaluated, as of March 31, 2011,
the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15-d-15(e) under the Exchange Act) and have determined that such disclosure controls and procedures
are effective.
There have been no changes in the internal controls over financial reporting identified in
connection with that evaluation, or that occurred during the first quarter of the year ended
December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
26
HOME PROPERTIES, INC.
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
None.
Refer to the Risk Factors disclosure in the Companys Form 10-K for the year ended December 31,
2010. There have been no material changes in these risk factors during the three months ended
March 31, 2011 and through the date of this report.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES |
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
In 1997, the Companys Board of Directors (the Board) approved a stock repurchase program under
which the Company may repurchase shares of its outstanding common stock and UPREIT Units (Company
Program). The shares and units may be repurchased through open market or privately negotiated
transactions at the discretion of Company management. The Boards action did not establish a
specific target stock price or a specific timetable for share repurchase. At March 31, 2011, the
Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the
Company Program and during the three months ended March 31, 2011, the Company did not repurchase
any shares under the Company Program.
In addition, participants in the Companys Stock Benefit Plan can use common stock of the Company
that they already own to pay all or a portion of the exercise price payable to the Company upon the
exercise of an option. In such event, the common stock used to pay the exercise price is returned
to authorized but unissued status, and for purposes of this table is deemed to have been
repurchased by the Company, but does not represent repurchases under the Company Program.
During the quarter ended March 31, 2011, and as permitted by the Companys Stock Benefit Plan,
11,466 shares of common stock already owned by option holders were used by those holders to pay the
exercise price associated with their option exercise. These shares were returned to the status of
authorized but unissued shares.
The following table summarizes the total number of shares (units) repurchased by the Company during
the quarter ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
shares/units |
|
|
|
Total |
|
|
Average |
|
|
available under |
|
|
|
shares/units |
|
|
price per |
|
|
the Company |
|
Period |
|
purchased |
|
|
share/unit |
|
|
Program |
|
Balance January 1, 2011: |
|
|
|
|
|
|
|
|
|
|
2,291,160 |
|
January 2011 |
|
|
|
|
|
$ |
|
|
|
|
2,291,160 |
|
February 2011 |
|
|
7,090 |
|
|
|
57.41 |
|
|
|
2,291,160 |
|
March 2011 |
|
|
4,376 |
|
|
|
56.84 |
|
|
|
2,291,160 |
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2011: |
|
|
11,466 |
|
|
$ |
57.19 |
|
|
|
2,291,160 |
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None.
|
|
|
ITEM 4. |
|
(REMOVED AND RESERVED) |
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
None.
|
|
|
|
|
|
10.1 |
|
|
First Amendment to Credit Agreement, dated as of February 10, 2011
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed by
Home Properties, Inc. on February 16, 2011 (the February 16, 2011
8-K)) |
|
|
|
|
|
|
10.2 |
|
|
Amended and Restated Executive Retention Plan*** (incorporated by
reference to Exhibit 10.2 to the February 16, 2011 8-K) |
|
|
|
|
|
|
10.3 |
|
|
Executive Stock Ownership Guidelines, adopted February 12, 2011
(incorporated by reference to Exhibit 99.1 of the February 16, 2011
8-K) |
|
|
|
|
|
|
10.4 |
|
|
Changes to Compensation Arrangements for Named Executive Officers***
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed by
Home Properties, Inc. on May 5, 2011 (the May 5, 2011 8-K)) |
|
|
|
|
|
|
10.5 |
|
|
Changes to Compensation Arrangements for Non-Employee Directors***
(incorporated by reference to Exhibit 10.2 to the May 5, 2011 8-K) |
|
|
|
|
|
|
10.6 |
|
|
Home Properties, Inc. Incentive Compensation Plan*** (incorporated by
reference to Exhibit 10.3 to the May 5, 2011 8-K) |
|
|
|
|
|
|
31.1 |
|
|
Section 302 Certification of Chief Executive Officer* |
|
|
|
|
|
|
31.2 |
|
|
Section 302 Certification of Chief Financial Officer* |
|
|
|
|
|
|
32.1 |
|
|
Section 906 Certification of Chief Executive Officer** |
|
|
|
|
|
|
32.2 |
|
|
Section 906 Certification of Chief Financial Officer** |
|
|
|
|
|
|
101 |
|
|
XBRL (eXtensible Business Reporting Language). The following
materials from the Home Properties, Inc. Quarterly Report on Form
10-Q for the period ended March 31, 2011, formatted in XBRL: (i)
consolidated balance sheets, (ii) consolidated statements of
operations, (iii) consolidated statements of equity, (iv)
consolidated statements of cash flows and (v) notes to consolidated
financial statements. As provided in Rule 406T of Regulation S-T,
this information is furnished and not filed for purposes of Sections
11 and 12 of the Securities Act of 1933 and Section 18 of the
Securities Exchange Act of 1934. ** |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
*** |
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this Form 10-Q pursuant to Item 6 of Form 10-Q. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
HOME PROPERTIES, INC.
(Registrant)
|
|
|
Date: May 6, 2011 |
|
|
|
By: |
/s/ Edward J. Pettinella
|
|
|
|
Edward J. Pettinella |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: May 6, 2011 |
|
|
|
By: |
/s/ David P. Gardner
|
|
|
|
David P. Gardner |
|
|
|
Executive Vice President and
Chief Financial Officer |
|
29