SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
--------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13136
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HOME PROPERTIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
MARYLAND 16-1455126
-------- ----------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
850 Clinton Square, Rochester, New York 14604
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(585) 546-4900
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former
year, if changed since last report)
Indicate by check mark whether 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 X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class of Common Stock Outstanding at July 29, 2005
$.01 par value 32,535,193
HOME PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2005 (Unaudited) and December 31, 2004 3
Consolidated Statements of Operations (Unaudited) -
Six months ended June 30, 2005 and 2004 4
Consolidated Statements of Operations (Unaudited) -
Three months ended June 30, 2005 and 2004 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Six months ended June 30, 2005 and 2004 6
Consolidated Statements of Comprehensive Income (Unaudited) -
Three months ended June 30, 2005 and 2004 7
Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 30, 2005 and 2004 8
Notes to Consolidated Financial Statements (Unaudited) 9-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 4. Submission of Matter to a Vote of Security Holders 39
Item 6. Exhibits 39
Signatures 40
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2005 2004
---- ----
(Unaudited) (Note 1)
ASSETS
Real estate:
Land $ 408,231 $ 402,620
Construction in progress 4,687 1,627
Buildings, improvements and equipment 2,717,544 2,640,943
Real estate held for sale or disposal, net 41,072 78,711
---------- ----------
3,171,534 3,123,901
Less: accumulated depreciation ( 454,179) ( 405,919)
---------- ----------
Real estate, net 2,717,355 2,717,982
Cash and cash equivalents 10,073 7,925
Cash in escrows 42,308 43,883
Accounts receivable 4,385 6,664
Prepaid expenses 13,665 18,224
Deferred charges 13,086 13,778
Other assets 9,559 8,340
---------- ----------
Total assets $2,810,431 $2,816,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,716,595 $1,644,722
Line of credit 78,000 58,000
Accounts payable 15,488 24,600
Accrued interest payable 7,945 8,876
Accrued expenses and other liabilities 22,749 26,750
Security deposits 23,365 22,651
---------- ----------
Total liabilities 1,864,142 1,785,599
---------- ----------
Commitments and contingencies
Minority interest 292,208 310,775
---------- ----------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares
issued and outstanding at June 30, 2005 and December 31, 2004 60,000 60,000
Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares
authorized; 250,000 shares issued and outstanding at December 31, 2004 - 25,000
Common stock, $.01 par value; 80,000,000 shares authorized; 32,471,502 and
32,625,413 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively 325 326
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 798,591 807,212
Accumulated other comprehensive income (loss) ( 91) ( 362)
Distributions in excess of accumulated earnings ( 204,744) ( 171,754)
---------- ----------
Total stockholders' equity 654,081 720,422
---------- ----------
Total liabilities and stockholders' equity $2,810,431 $2,816,796
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2005 2004
---- ----
Revenues:
Rental income $227,990 $213,585
Property other income 11,265 9,877
Interest and dividend income 141 299
Other income 1,027 1,163
---------- ----------
Total revenues 240,423 224,924
---------- ----------
Expenses:
Operating and maintenance 111,134 102,377
General and administrative 9,549 9,617
Interest 50,116 43,599
Depreciation and amortization 48,716 43,157
Impairment of assets held as general partner - 1,116
---------- ----------
Total expenses 219,515 199,866
---------- ----------
Income from operations 20,908 25,058
Equity in earnings (losses) of unconsolidated affiliates
- ( 563)
---------- ----------
Income before minority interest and discontinued operations 20,908 24,495
Minority interest ( 5,749) ( 6,712)
---------- ----------
Income from continuing operations 15,159 17,783
---------- ----------
Discontinued operations
Income (loss) from operations, net of ($2,635) in 2005 and ($284) in 2004
allocated to minority interest ( 5,335) ( 787)
Gain (loss) on disposition of property, net of ($39) in 2005 and $246 in
2004 allocated to minority interest ( 77) 511
---------- ----------
Discontinued operations ( 5,412) ( 276)
---------- ----------
Income before loss on disposition of property and business and cumulative
effect of change in accounting principle 9,747 17,507
Loss on disposition of property and business, net of ($33) in 2004 allocated
to minority interest - ( 67)
---------- ----------
Income before cumulative effect of change in accounting principle 9,747 17,440
Cumulative effect of change in accounting principle, net of ($159) in 2004
allocated to minority interest - ( 321)
---------- ----------
Net income 9,747 17,119
Preferred dividends ( 3,579) ( 3,797)
---------- ----------
Net income available to common shareholders $ 6,168 $13,322
=========== =======
Basic earnings per share data:
Income from continuing operations $ .36 $ .43
Discontinued operations ( .17) ( .01)
Cumulative effect of change in accounting principle - ( .01)
---------- ----------
Net income available to common shareholders $ .19 $ .41
====== ======
Diluted earnings per share data:
Income from continuing operations $ .36 $ .42
Discontinued operations ( .17) ( .01)
Cumulative effect of change in accounting principle - ( .01)
Net income available to common shareholders $ .19 $ .40
====== ======
Weighted average number of shares outstanding:
Basic 31,831,604 32,600,754
========== ==========
Diluted 32,252,276 33,088,059
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2005 2004
---- ----
Revenues:
Rental income $115,032 $108,524
Property other income 6,092 5,284
Interest and dividend income 73 147
Other income 439 698
---------- ----------
Total revenues 121,636 114,653
---------- ----------
Expenses:
Operating and maintenance 53,623 49,267
General and administrative 4,144 4,892
Interest 25,173 22,674
Depreciation and amortization 24,520 22,107
---------- ----------
Total expenses 107,460 98,940
---------- ----------
Income from operations 14,176 15,713
Equity in earnings (losses) of unconsolidated affiliates - ( 25)
---------- ----------
Income before minority interest and discontinued operations 14,176 15,688
Minority interest in operating partnership ( 4,151) ( 4,423)
---------- ----------
Income from continuing operations 10,025 11,265
---------- ----------
Discontinued operations
Income (loss) from operations, net of ($114) in 2005 and ($463) in 2004
allocated to minority interest ( 229) ( 1,148)
Gain (loss) on disposition of property, net of ($39) in 2005 and $252 in
2004 allocated to minority interest ( 77) 524
---------- ----------
Discontinued operations ( 306) ( 624)
---------- ----------
Net income 9,719 10,641
Preferred dividends ( 1,681) ( 1,899)
---------- ----------
Net income available to common shareholders $ 8,038 $ 8,742
=========== ==========
Basic earnings per share data:
Income from continuing operations $ .26 $ .29
Discontinued operations ( .01) ( .02)
---------- ----------
Net income available to common shareholders $ .25 $ .27
====== ======
Diluted earnings per share data:
Income from continuing operations $ .26 $ .28
Discontinued operations ( .01) ( .02)
---------- ----------
Net income available to common shareholders $ .25 $ .26
====== ======
Weighted average number of shares outstanding:
- Basic 31,843,551 32,876,882
========== ==========
- Diluted 32,279,115 33,317,967
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED, IN THOUSANDS)
2005 2004
---- ----
Net income $ 9,747 $17,119
Other comprehensive income (net of minority interest):
Change in fair value of hedge instruments 271 223
------- -------
Comprehensive income $10,018 $17,342
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED, IN THOUSANDS)
2005 2004
---- ----
Net income $9,719 $10,641
Other comprehensive income (net of minority interest):
Change in fair value of hedge instruments ( 82) 151
------- -------
Comprehensive income $9,637 $10,792
====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED, IN THOUSANDS)
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 9,747 $ 17,119
-------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in losses of unconsolidated affiliates - 563
Income allocated to minority interest 3,075 6,482
Depreciation and amortization 49,720 48,250
Impairment of assets held as General Partner 400 1,116
Impairment of real property 7,325 1,100
Loss (Gain) on disposition of property and business 115 ( 657)
Loss from early extinguishment of debt - 102
Issuance of restricted stock, compensation cost of stock options and deferred
compensation 1,350 1,354
Cumulative effect of change in accounting principle - 480
Changes in assets and liabilities:
Other assets 5,277 4,232
Accounts payable and accrued liabilities (13,005) 5,019
-------- ---------
Total adjustments 54,257 68,041
-------- ---------
Net cash provided by operating activities 64,004 85,160
-------- ---------
Cash flows used in investing activities:
Purchase of properties and other assets, net of mortgage notes assumed and UPREIT Units
issued (19,561) ( 64,376)
Additions to properties (42,226) ( 48,733)
Proceeds from sale of properties and business, net - 8,861
Proceeds from sale of affordable properties, net - 137
Advances to affiliates - ( 820)
Payments on advances to affiliates - 124
-------- ---------
Net cash used in investing activities (61,787) (104,807)
-------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock, net 4,263 19,494
Repurchase of common stock (53,320) -
Proceeds from mortgage notes payable 150,207 70,674
Payments of mortgage notes payable (54,741) ( 27,510)
Payment of prepayment penalty in connection with the early extinguishment of debt - ( 102)
Proceeds from line of credit 152,200 129,000
Payments on line of credit (132,200) (103,000)
Payments of deferred loan costs (1,641) ( 1,346)
Additions to cash escrows, net (1,909) ( 3,338)
Repayment of officer loans - 236
Dividends and distributions paid (62,928) ( 63,726)
-------- ---------
Net cash provided by (used in) financing activities
(69) 20,382
-------- ---------
Net increase in cash and cash equivalents 2,148 735
Cash and cash equivalents:
Beginning of year 7,925 5,103
Cash assumed in connection with FIN 46R consolidation
- 850
-------- ---------
End of year $ 10,073 $ 6,688
======== =========
Supplemental disclosure of non-cash operating, investing and financing activities:
Mortgage loans assumed associated with property acquisitions $ 7,916 $ 69,782
Exchange of UPREIT Units/partnership interest for common shares 2,136 13,843
Fair value of hedge instruments 253 682
Issuance of UPREIT Units associated with property and other acquisitions 12,611 12,105
Increase in real estate associated with the purchase of UPREIT Units 2,856 12,470
Compensation cost of stock options issued 455 439
Net real estate disposed in connection with FIN 46R consolidation (30,651) -
Other assets disposed in connection with FIN 46R consolidation (4,403) -
Mortgage debt disposed in connection with FIN 46R consolidation (30,021) -
Other liabilities disposed in connection with FIN 46R consolidation (827) -
Net real estate assumed in connection with FIN 46R consolidation - 152,319
Other assets assumed in connection with FIN 46R consolidation - 11,916
Mortgage debt assumed in connection with FIN 46R consolidation - 129,149
Other liabilities assumed in connection with FIN 46R consolidation - 5,363
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Unaudited Interim Financial Statements
-- --------------------------------------
The interim consolidated financial statements of Home Properties, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the applicable rules and regulations of the Securities and Exchange Commission.
Accordingly, certain disclosures that would accompany annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America are omitted. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary for the fair presentation of the
consolidated financial statements for the interim periods have been included.
The current period's results of operations are not necessarily indicative of
results which ultimately may be achieved for the year. The interim consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 2004.
2. Organization and Basis of Presentation
-- --------------------------------------
Organization
The Company is engaged primarily in the ownership, management, acquisition, and
rehabilitation of residential apartment communities in the Northeastern,
Mid-Atlantic, Midwestern and Southeast Florida regions of the United States. As
of June 30, 2005, the Company operated 160 apartment communities with 47,054
apartment units. Of this total, the Company owned 152 communities, consisting of
42,320 apartment units ("Owned Communities"), managed as general partner 1,925
apartment units and fee managed 2,809 apartments for affiliates and third
parties.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its 67.3% (68.1% at June 30, 2004) partnership interest in Home
Properties, L.P. (the "Operating Partnership"). Such interest has been
calculated as the percentage of outstanding common shares divided by the total
outstanding common shares and Operating Partnership Units ("UPREIT Units")
outstanding. The remaining 32.7% (31.9% at June 30, 2004) is reflected as
Minority Interest in these consolidated financial statements. The Company owns a
1.0% general partner interest in the Operating Partnership and the remainder as
a limited partner through its wholly owned subsidiary, Home Properties I, LLC,
which owns 100% of the limited partner, Home Properties Trust. Home Properties
Trust was formed in September 1997, as a Maryland real estate trust and as a
qualified REIT subsidiary ("QRS") and owns the Company's share of the limited
partner interests in the Operating Partnership. For financing purposes, the
Company has formed a limited liability company (the "LLC") and a partnership
(the "Financing Partnership"), which beneficially own certain apartment
communities encumbered by mortgage indebtedness. The LLC is wholly owned by the
Operating Partnership. The Financing Partnership is owned 99.9% by the Operating
Partnership and 0.1% by the QRS.
The accompanying consolidated financial statements include the accounts of two
wholly owned subsidiaries, Home Properties Management, Inc. and Home Properties
Resident Services, Inc. (the "Management Companies"). All significant
inter-company balances and transactions have been eliminated in these
consolidated financial statements.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. Organization and Basis of Presentation (continued)
-- --------------------------------------------------
Through March 30, 2004, the Company accounted for its investment as managing
general partner ("GP") in unconsolidated affordable housing limited partnerships
("LP") using the equity method of accounting. Effective March 31, 2004, the
Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"). This interpretation addresses consolidation by business
enterprises of variable interest entities in which the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or in which the
equity investors do not have the characteristics of a controlling financial
interest. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The interpretation also
requires disclosures about variable interest entities that the company is not
required to consolidate but in which it has a significant variable interest.
As of March 31, 2004, the Company was the general partner in 41 limited
partnerships in Upstate New York, Pennsylvania, Ohio and Maryland. The Company
had made a determination that all 41 limited partnerships were Variable Interest
Entities ("VIEs"). The Company had further determined that it was the primary
beneficiary in 34 of the VIEs and therefore consolidated these entities
effective March 31, 2004. Beginning with the second quarter of 2004, the Company
consolidated the results of operations of the VIEs. During 2004, the Company
sold most of these consolidated VIEs such that three partnerships (two
properties) remain as of June 30, 2005. The results of operations for the VIEs
for the three- and six-month periods ending June 30, 2005, are included in
discontinued operations. These properties are classified as held for sale
because as of June 30, 2005, the Company is under a letter of intent to sell one
of the partnerships for which due diligence is in process and the remaining two
partnerships are being disposed of through a default on the non-recourse
financing.
As of March 31, 2004, Home Properties determined that it was not the primary
beneficiary in seven partnerships syndicated under U.S. Department of Housing
and Urban Development subsidy programs, none of which remained as of June 30,
2005. These investments were accounted for under the equity method through their
sale. The Company recorded its allocable share of the respective partnership's
income or loss based on the terms of the agreements. To the extent it was
determined that the LPs could not absorb their share of the losses, if any, the
GP recorded the LPs share of such losses. The Company absorbed such losses to
the extent the Company had outstanding loans or advances and the limited partner
had no remaining capital account. All seven partnerships have been sold as of
June 30, 2005.
Reclassifications
Certain reclassifications have been made to the 2004 consolidated financial
statements to conform to the 2005 presentation.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Adoption of New Accounting Policies
-- -----------------------------------
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R Share Based Payment (SFAS No. 123R). The statement is a revision of
SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No 123R supersedes
APB Opinion No. 25 Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123R, requires that entities recognize the cost of
employee services received in exchange for awards of equity instruments (i.e.
stock options) based on the grant-date fair value of those awards. The Statement
is effective for the first fiscal periods beginning after June 15, 2005. On
January 1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting
for Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS
No. 123. Effective on that date, the Company began recognizing compensation cost
related to stock option grants. Based upon the Company's adoption of SFAS No.
148, the Company does not expect the issuance of SFAS No. 123R to have a
material impact on the Company's results of operations, financial position or
liquidity.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share
-- -------------------------
Basic earnings per share ("EPS") is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock-based compensation including stock
options, restricted stock, phantom shares under the Company's incentive
compensation plan, warrants and the conversion of any cumulative convertible
preferred stock. The exchange of an Operating Partnership Unit for common stock
will have no effect on diluted EPS as Unitholders and stockholders effectively
share equally in the net income of the Operating Partnership. Income from
continuing operations is the same for both the basic and diluted calculation.
The reconciliation of the basic and diluted earnings per share for the
three-months ended June 30, 2005 and 2004 is as follows:
Six Months Three Months
---------- ------------
2005 2004 2005 2004
---- ---- ---- ----
Income from continuing operations $15,159 $17,783 $10,025 $11,265
Add: Loss on disposal of property - (67) - -
Less: Preferred dividends (3,579) (3,797) (1,681) (1,899)
---------- ---------- ---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 11,580 13,919 8,344 9,366
Less: Cumulative effect of change in accounting
principle - (321) - -
Discontinued operations (5,412) (276) (306) (624)
---------- ---------- ---------- ----------
Net income available to common shareholders $6,168 $13,322 $8,038 $8,742
====== ======= ====== ======
Basic weighted average number of shares outstanding 31,831,604 32,600,754 31,843,551 32,876,882
Effect of dilutive stock options 349,365 396,361 367,606 353,998
Effect of restricted shares 71,307 90,944 67,958 87,087
---------- ---------- ---------- ----------
Diluted weighted average number of shares
outstanding 32,252,276 33,088,059 32,279,115 33,317,967
========== ========== ========== ==========
Basic earnings per share
Income from continuing operations $.36 $.43 $.26 $.29
Discontinued operations (.17) (.01) (.01) (.02)
Cumulative effect of change in accounting
principle - (.01) - -
---------- ---------- ---------- ----------
Net Income available to common shareholders $.19 $.41 $.25 $.27
==== ==== ==== ====
Diluted earnings per share
Income from continuing operations $.36 $.42 $.26 $.28
Discontinued operations (.17) (.01) (.01) (.02)
Cumulative effect of change in accounting
principle - (.01) - -
---------- ---------- ---------- ----------
Net Income available to common shareholders $.19 $.40 $.25 $.26
==== ==== ==== ====
Unexercised stock options and warrants to purchase 547,000 shares of the
Company's common stock for the three- and six-month periods ended June 30, 2005
were not included in the computations of diluted EPS because the options'
exercise prices were greater than the average market price of the Company's
stock during those periods.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share (continued)
-- -------------------------------------
For the three- and six-month periods ended June 30, 2004, no unexercised stock
options to purchase shares of the Company's common stock were excluded in the
computations of diluted EPS as the options' exercise prices were less than the
average market price of the Company's stock during each period. For the three-
and six-month periods ended June 30, 2005 and 2004, the 833,333 common stock
equivalents on an as-converted basis of the Series D Convertible Cumulative
Preferred Stock have an antidilutive effect and are not included in the
computation of diluted EPS to the extent they were not converted. On May 26,
2005, the Series D convertible preferred stock were converted and were included
in outstanding common shares from the date of conversion.
5. Other income
-- ------------
Other income for the three-month periods ended June 30, 2005 and 2004 is
management and other real-estate service fees.
6. Variable interest entities
-- --------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R -
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities, "VIE"). The
Company had made a determination that all 41 of the remaining limited
partnerships as of that date were Variable Interest Entities.
The Company determined that it was not the primary beneficiary in seven
partnerships syndicated under U.S. Department of Housing and Urban Development
subsidy programs of which all have been sold as of June 30, 2005. The Company
purchased the general partnership interests in these partnerships in January,
1996. These partnerships were set up to provide low income housing to residents
through subsidized rents and below market debt governed by HUD. The Company as
general partner and managing agent managed the day-to-day operations of the
partnerships for a fee (5% of rents collected). The Company's economic benefit
from these partnerships was the management fee. There was no exposure to the
Company of loss as a result of its involvement with these partnerships. No
management fees were recognized on these partnerships during the three- and
six-month periods ended June 30, 2005. The management fees earned on these
partnerships were $35 and $73 for the three- and six-month periods ended June
30, 2004. The assets and liabilities of the seven partnerships totaled $8.5
million and $14.1 million at June 30, 2004, respectively.
The Company had further determined that it was the primary beneficiary in 34 of
the VIEs and therefore consolidated these entities effective March 31, 2004.
Beginning with the second quarter of 2004, the Company consolidated the results
of operations of the VIEs. The results of operations of the remaining three of
the original 34 VIEs for the three- and six-month periods ending June 30, 2005
are included in discontinued operations as all of the VIEs are held for sale as
described below.
The Company was the general partner in these 34 VIEs syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company managed the day-to-day operations of these partnerships for
a management fee. In addition, the Company has certain operating deficit
guarantees and tax credit guarantees to its limited partners (as discussed in
Note 11). The Company is responsible to fund operating deficits to the extent
there are any and can receive operating incentive awards when cash flow reach
certain levels. The effect on the consolidated balance sheet as of June 30, 2005
is an increase in Total assets of $45.1 million, an increase in Total
liabilities of $48.3 million, an increase in Minority interest of $1.7 million,
and a decrease in Stockholders' equity of $4.9 million. Of the $48.3 million
increase in total liabilities, $46.4 million represent non-recourse
mortgage debt. In connection with the adoption of FIN 46R, the Company recorded
a $321 charge, net of minority interest, for a cumulative effect of a change in
accounting principle during the first quarter of 2004. This charge was a result
of the negative capital accounts of minority interest partners that were
absorbed by the Company.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. Variable interest entities (continued)
-- --------------------------------------
Effective June 30, 2005, the Company has closed on the sale of all but three of
the 41 VIEs. In addition, the Company has a letter of intent for the sale of one
of the remaining three VIEs. Based on the offer received in the first quarter of
2005 on one of these three VIEs, the Company had recorded an impairment charge
of $400 for the three month period ended March 31, 2005. The remaining two VIEs
(not under contract for sale) are being disposed of through a default on the
non-recourse financing. The Company repurchased the limited partner's interests
in satisfaction of any tax credit guarantees or other obligations to that
partner in January, 2005 for $5.7 million. The Company performed a valuation
analysis on the underlying real estate, and as a result, recorded a $7.3 million
impairment of real estate to adjust the net book value of the property to the
Company's estimate of fair market value. The mortgage note was sold in March,
2005. An abandonment of the property is expected to occur later in the third
quarter ending September 30, 2005.
During the first quarter of 2004, the Company recorded an impairment charge of
$1.6 million to reduce the value of the assets associated with the VIEs to
management's estimate of fair market value. The impairment charge is classified
in the financial statements as "Impairment of assets held as general partner" of
$1,116 and "Equity in earnings (losses) of unconsolidated affiliates" of $484. A
portion of the total $1,116 charge, or $171, represents monies loaned to certain
affordable properties during the first quarter of 2004 to fund operating
shortfalls, which were not anticipated to be recovered from projected sale
proceeds. The remaining balance of $945 pertains to an additional net impairment
charge taken to reduce the assets to estimated fair market value. Of the total
impairment charge recorded of $1.6 million for the three-month period ended
March 31, 2004, $655 related to cash advances to fund operating shortfalls.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. Segment Reporting
-- -----------------
The Company is engaged in the ownership and management of primarily market rate
apartment communities. Each apartment community is considered a separate
operating segment. Each segment on a stand alone basis is less than 10% of the
revenues, profit or loss, and assets of the combined reported operating segments
and meets the majority of the aggregation criteria under SFAS No. 131. The
operating segments are aggregated and segregated as Core and Non-core
properties.
Non-segment revenue to reconcile to total revenue consists of interest and
dividend income and other income. Non-segment assets to reconcile to total
assets include cash and cash equivalents, cash in escrows, accounts receivable,
prepaid expenses, investments in and advances to affiliates, 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, 2004. Non-core properties consist of
apartment communities acquired during 2004 and 2005, such that full year
comparable operating results are not available.
The accounting policies of the segments are the same as those described in Notes
1 and 2 of the Company's Form 10-K for the year ended December 31, 2004.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds from Operations ("FFO"). FFO is defined
as net income (computed in accordance with GAAP) excluding gains or losses from
the sales of property and business or non-cash real estate impairment charge,
minority interest in the Operating Partnership, extraordinary items, plus real
estate depreciation, less dividends from non-convertible preferred shares. FFO
is not a measure of operating results or cash flows from operating activities as
measured by generally accepted accounting principles and it is not indicative of
cash available to fund cash needs and should not be considered an alternative to
cash flows as a measure of liquidity. Other companies may calculate similarly
titled performance measures in a different manner.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. Segment Reporting (continued)
-- -----------------------------
The revenues, profit (loss), and assets for each of the reportable segments are
summarized as of and for the six- and three-month periods ended June 30, 2005,
and 2004 as follows:
Six Months Three Months
---------- ------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues
Apartments owned
Core properties $221,612 $217,782 $111,909 $109,818
Non-core properties 17,643 5,680 9,215 3,990
Reconciling items 1,168 1,462 512 845
-------- -------- -------- --------
Total Revenue $240,423 $224,924 $121,636 $114,653
======== ======== ======== ========
Profit (loss)
Funds from operations:
Apartments owned
Core properties $118,347 $117,747 $62,302 $62,228
Non-core properties 9,774 3,338 5,199 2,313
Reconciling items 1,168 1,462 512 845
-------- -------- -------- --------
Segment contribution to FFO 129,289 122,547 68,013 65,386
General and administrative expenses (9,549) (9,617) (4,144) (4,892)
Interest expense (50,116) (43,599) (25,173) (22,674)
Depreciation of unconsolidated affiliates - 556 - 13
Non-real estate depreciation/amortization (1,596) (1,678) (783) (936)
FAS 141 acquisition rent / intangibles 408 510 188 328
Equity in earnings (losses) of unconsolidated affiliates - (563) - (25)
Impairment of assets held as General Partner - (1,116) - -
Impairment of affordable assets not in FFO - 945 - -
Loss on sale of business - (17) - -
Income (loss) from discontinued operations before
minority interest and depreciation (7,970) 1,281 (343) 80
Redeemable preferred dividend (Series F) (2,700) (2,700) ( 1,350) ( 1,350)
-------- -------- -------- --------
Funds from Operations 57,766 66,549 36,408 35,930
Depreciation - apartments owned (47,120) (42,772) (23,737) (21,803)
Depreciation of unconsolidated affiliates - (1,615) - (1,072)
FAS 141 acquisition rent/intangibles (408) (510) (188) (328)
Redeemable preferred dividend 2,700 2,700 1,350 1,350
Impairment of affordable assets not in FFO - (945) - -
Loss from discontinued operations before minority
interest and loss on disposition of property 7,970 1,088 343 1,611
Minority interest in operating partnership ( 5,749) ( 6,712) ( 4,151) ( 4,423)
-------- -------- -------- --------
Income from continuing operations $15,159 $17,783 $10,025 $11,265
======= ======= ======= =======
Assets - As of June 30, 2005 and December 31, 2004
Apartments owned:
- Core $2,364,174 $2,368,691
- Non-core 353,181 349,291
Reconciling items 93,076 98,814
------ ------
Total Assets $2,810,431 $2,816,796
========== ==========
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. Pro Forma Condensed Financial Information
-- -----------------------------------------
The Company acquired three apartment communities ("2005 Acquired Communities")
with a combined 550 apartment units in three unrelated transactions during the
six-month period ended June 30, 2005. The total combined purchase price
(including closing costs) of $40.2 million equates to approximately $73 per
unit. Consideration for the communities was funded through the assumption or
placement of new debt of $7.9 million, $19.7 million from the Company's line of
credit and $12.6 million of UPREIT Units.
The following proforma information was prepared as if the 2005 transactions
related to the acquisition of the 2005 Acquired Communities had occurred on
January 1, 2004. The proforma financial information is based upon the historical
consolidated financial statements and is not necessarily indicative of the
consolidated results which actually would have occurred if the transactions had
been consummated on January 1, 2004, nor does it purport to represent the
results of operations for future periods. Adjustments to the proforma condensed
combined statement of operations for the six- and three-month periods ended June
30, 2005 and 2004, consist principally of providing net operating activity and
recording interest, depreciation and amortization from January 1, 2004 to the
acquisition date as appropriate.
For the Six Months For the Three Months
Ended June 30, Ended June 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Total revenues $240,999 $227,465 $121,636 $117,194
Net income available to common shareholders before
cumulative effect of change in accounting principle 11,571 13,821 8,344 9,709
Net income available to common shareholders 11,571 13,500 8,344 9,709
Per common share data:
Net income available to common shareholders before
cumulative effect of change in accounting principle
Basic $0.36 $0.42 $0.26 $0.30
Diluted $0.36 $0.42 $0.26 $0.29
Net income available to common shareholders
Basic $0.36 $0.41 $0.26 $0.30
Diluted $0.36 $0.41 $0.26 $0.29
Weighted average numbers of shares outstanding:
Basic 31,831,604 32,600,754 31,843,551 32,876,882
Diluted 32,252,276 33,088,059 32,279,115 33,317,967
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. Derivative Financial Instruments
-- --------------------------------
The Company has four interest rate swaps that effectively convert variable rate
debt to fixed rate debt. As of June 30, 2005, the aggregate fair value of the
Company's interest rate swaps was $253 prior to the allocation of minority
interest and is included in accrued expenses and other liabilities in the
consolidated balance sheets. For the three-and six-months ending June 30, 2005,
as the critical terms of the interest rate swaps and the hedged items are the
same, no ineffectiveness was recorded in the consolidated statements of
operations. All components of the interest rate swaps were included in the
assessment of hedge effectiveness. The fair value of the interest rate swaps is
based upon the estimate of amounts the Company would receive or pay to terminate
the contract at the reporting date and is estimated using interest rate market
pricing models.
10. Disposition of Property and Discontinued Operation
--- --------------------------------------------------
In connection with the Company's strategic asset disposition program, management
is constantly reevaluating the performance of its portfolio on a
property-by-property basis. The Company from time to time determines that it is
in the best interest of the Company to dispose of assets that have reached their
potential or are less efficient to operate due to their size or remote location
and reinvest such proceeds in higher performing assets located in targeted
geographic markets. It is possible that the Company will sell such properties
at a loss. In addition, it is possible that for assets held for use, certain
holding period assumptions made by the Company may change which could result in
the Company's recording of an impairment charge.
Included in discontinued operations are the operating results, net of minority
interest, of three VIEs for the three- months ended June 30, 2005 and five VIEs
for the six-months ended June 30, 2005. Three of the VIEs are held for sale as
of June 30, 2005. Assets and liabilities for these three VIEs of approximately
$45.1 million and $48.3 million, respectively, are included in the Consolidated
Balance Sheet and relate primarily to real estate and mortgage notes,
respectively. Included in mortgage notes payable is approximately $46.4 million
related to these three VIEs. For purposes of the discontinued operations
presentation, the Company only includes interest expense associated with
specific mortgage indebtedness of the properties that are sold or classified as
held for sale.
The operating results of the components of discontinued operations are
summarized for the three- and six-month periods ended June 30, 2005 and 2004 as
follows:
Six months Three months
---------- ------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues
Rental income $4,214 $12,989 $2,013 $9,524
Property other income 171 419 97 243
Other income (loss) ( 113) - ( 54) -
------- -------- -------- -------
Total revenues 4,272 13,408 2,056 9,767
------- -------- -------- -------
Expenses
Operating and maintenance 4,194 8,001 2,120 6,164
Interest expense 300 2,962 279 2,359
Depreciation and amortization - 4,231 - 3,570
Impairment of real property 7,725 1,100 - 1,100
------- -------- -------- -------
Total expenses 12,219 16,294 2,399 13,193
------- -------- -------- -------
Income (loss) from discontinued operations before minority interest
and gain (loss) on disposition of property ( 7,947) (2,886) ( 343) ( 3,426)
Minority interest in limited partnership (23) 1,815 - 1,815
Minority interest in operating partnership 2,635 284 114 463
------- -------- -------- -------
Income (loss) from discontinued operations ($5,335) ($ 787) ($ 229) ($1,148)
======= ======== ======== =======
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. Commitments and Contingencies
--- -----------------------------
Contingencies
The Company is not a party to any legal proceedings which are expected to have a
material adverse effect on the Company's liquidity, financial position or
results of operations. The Company is subject to a variety of legal actions for
personal injury or property damage arising in the ordinary course of its
business, most of which are covered by liability insurance. While the resolution
of these matters cannot be predicted with certainty, management believes that
the final outcome of such legal proceedings and claims will not have a material
adverse effect on the Company's liquidity, financial position or results of
operations.
In 2001, the Company underwent a state capital stock tax audit. The state had
assessed taxes of $469 for the 1998 and 1999 tax years under audit. If the
state's position is applied to all tax years through December 31, 2001, the
assessment would be $1.3 million. At the time, the Company believed the
assessment and the state's underlying position were not supportable by the law
nor consistent with previously provided interpretative guidance from the office
of the State Secretary of Revenue. After two subsequent enactments by the state
legislation during 2002 affecting the pertinent tax statute, the Company was
advised by outside tax counsel that its filing position for 1998-2001 should
prevail. During December 2003, the state's governor signed legislation which
included the REIT tax provisions. Based upon this, Company's tax counsel expects
that the outstanding litigation should now be able to be resolved. Effective
January 1, 2003, the Company reorganized the ownership of Home Properties Trust,
which should subject the Company to a much lower level of tax going forward. In
September 2004, the Company settled the 1998 year under audit for a total of
$39, including interest. During the first quarter of 2005, the Company filed a
protest with the Pennsylvania State Commonwealth Court concerning the 1999 tax
year. No settlement offer has been made or discussed related to the 1999 tax
year. The 1999-2001 tax years will take time to resolve, however, the Company's
outside counsel still maintains that the Company should not have any additional
liability.
During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861. This was included in the first quarter 2004 results and allocated $448 to
expense and $413 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance and
recorded at June 30, 2004 a liability of $1,712. This was included in the second
quarter results and allocated $761 to expense and $951 capitalized to real
estate assets for improvements. The liability recorded relates to the period
beginning on the later of: (i) the date the Company first purchased property in
the applicable state; or (ii) January 1, 1997 and ending on June 30, 2004. In
addition, the Company increased the liability for sales tax exposure by $68 for
the six-month period ended December 31, 2004. The Company has filed Voluntary
Disclosure Agreements (VDAs) with the four states where it had significant
financial exposure. During the first six months of 2005, the Company signed VDAs
with these states which have agreed to limit the VDA filing period back to
January 1, 2001, and has satisfied all financial obligations under the VDAs. For
the three- and six-month periods ended June 30, 2005, the Company has recorded
adjustments to the liability for both the effects of signing the VDAs as well as
for the results of the Company's additional testing for the first six months.
The net impact of these adjustments resulted in a decrease in real estate assets
of $175, interest expense of $115 and operating expenses of $108 for a net
decrease to the accrued liability of $398. The Company recognizes that the
liability recorded of $665 as of June 30, 2005 is an estimate and that the
actual tax liability that will be paid in the future may be less than or greater
than this estimate.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. Commitments and Contingencies (Continued)
--- -----------------------------------------
Guarantees
As of June 30, 2005, the Company, through its general partnership interest in an
affordable property limited partnership, has guaranteed the Low Income Housing
Tax Credits to limited partners totaling approximately $3.0 million. As of June
30, 2005, there were no known conditions that would make such payments necessary
relating to these guarantees. In addition, the Company, acting as general
partner in this partnership, is obligated to advance funds to meet partnership
operating deficits.
12. Related Party Transactions
--- --------------------------
On January 1, 2004, the Company sold certain assets of its commercial property
management division to Home Leasing LLC, which is owned by Nelson and Norman
Leenhouts. This division managed approximately 2.2 million square feet of gross
leasable area, as well as certain planned communities. The initial amount paid
was $82. In addition, the Company is entitled to receive a percentage of the
management fee received by Home Leasing in connection with the management of one
of the commercial properties for a period not to exceed 36 months. The expected
monthly fee as outlined in the contract is approximately $4.6 or $55 per year.
If Home Leasing continues to manage the property for three years, the Company is
expected to receive total additional deferred purchase price of $166. No
additional deferred purchase price was recognized during the six months ended
June 30, 2005. The cumulative gain recognized on the sale of these assets
through June 30, 2005 amounted to $24. If the management of this property is
retained for the entire three years the Company expects to receive an additional
$110 for the period July 1, 2005 through January 1, 2007. The gain on sale would
then be approximately $134.
13. Subsequent Events
--- -----------------
On July 8, 2005, the Company sold a 110-unit property in Philadelphia for $5.9
million. A gain on sale of approximately $1.8 million (before allocation of
minority interest) will be recorded in the third quarter related to this sale.
On July 15, 2005, the Company acquired Sayville Commons, a 342-unit apartment
community located in Sayville (Long Island), New York. The total purchase price
of $63.6 million equates to approximately $186 per unit. Consideration included
$43.6 million in 10-year fixed mortgage debt at an interest rate of 5.0% and $20
million from the Company's line of credit.
On August 3, 2005, the Board of Directors approved a dividend of $.63 per share
for the quarter ended June 30, 2005. This is the equivalent of an annual
distribution of $2.52 per share. The dividend is payable August 26, 2005 to
shareholders of record on August 15, 2005.
On August 3, 2005, the Company also declared a regular dividend of $.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending August 31, 2005. The dividend on the preferred shares is payable on
August 31, 2005 to shareholders of record on August 15, 2005. This dividend is
equivalent to an annualized rate of $2.25 per share.
HOME PROPERTIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
Forward-Looking Statements
--------------------------
This discussion contains forward-looking statements. Although the Company
believes expectations reflected in such forward-looking statements are based on
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 within anticipated budgets, the actual pace of future acquisitions
and sales, including the sale of the general partner interests in affordable
properties, and continued access to capital to fund growth.
Liquidity and Capital Resources
-------------------------------
The Company's principal liquidity demands are expected to be distributions to
the common and preferred stockholders and Operating Partnership Unitholders,
capital improvements and repairs and maintenance for the properties, acquisition
of additional properties, property development and debt repayments.
The Company intends to meet its short-term liquidity requirements through net
cash flows provided by operating activities and its unsecured line of credit.
The Company considers its ability to generate cash to be adequate to meet all
operating requirements and make distributions to its stockholders in accordance
with the provisions of the Internal Revenue Code, as amended, applicable to
REITs.
As of June 30, 2005, the Company had an unsecured line of credit from M and T Bank
of $115 million. The Company's outstanding balance as of June 30, 2005, was $78
million. Borrowings under the line of credit bear interest at 1.05% over the
one-month LIBOR rate. Accordingly, increases in interest rates will increase the
Company's interest expense and as a result will affect the Company's results of
operations and financial condition. The Company is evaluating alternatives to
replace the line of credit as the existing agreement expires on September 1,
2005. The new agreement is expected to reflect a combination of less restrictive
covenants as well as a reduced spread in pricing.
On November 23, 2004, the Company signed a supplemental demand note with M and T
Bank. The note has a maximum principal amount of $42 million. Borrowings on the
note bear interest at 1.25% over the one-month LIBOR rate. The demand note was
entered into to fund the Company's stock repurchase program. There was no
balance outstanding as of June 30, 2005 on the supplemental demand note.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and its
credit facility, it intends to satisfy such requirements through additional long
term secured or unsecured indebtedness, proceeds from the sale of properties,
the issuance of UPREIT Units, proceeds from the Dividend Reinvestment Plan
("DRIP"), or the issuance of additional equity securities. As of June 30, 2005,
the Company owned 22 properties with 4,239 apartment units, which were
unencumbered by debt.
In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. The available balance on the shelf
registration statement at June 30, 2005 was $144.4 million.
In June 2000, the Company issued $25 million of Series D Preferred Stock in a
private transaction with The Equitable Life Assurance Society of the United
States. The Series D Preferred Stock carried an annual dividend rate equal to
the greater of 8.775% or the actual dividend paid on the Company's common shares
into which the preferred shares can be converted. The stock had a conversion
price of $30 per share and a five-year, non-call provision. On May 26, 2005,
250,000 shares of Series D Preferred Stock were converted into 833,333 shares of
common stock. The conversion of preferred shares to common shares did not have
an effect on the reported results of operations.
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million. The net proceeds were used to fund the Series B
preferred stock repurchase, property acquisitions, and property upgrades. The
Series F Preferred Shares are redeemable by the Company at anytime on or after
March 25, 2007 at a redemption price of $25.00 per share, plus any accumulated,
accrued and unpaid dividends. Each Series F Preferred share will receive an
annual dividend equal to 9.00% of the liquidation preference per share
(equivalent to a fixed annual amount of $2.25 per share).
The issuance of UPREIT Units for property acquisitions continues to be a source
of capital for the Company. During the first six months of 2005, the Company
acquired three communities with 550 units for a total purchase price of $40.2
million. The Company issued UPREIT Units valued at approximately $12.6 million
as part of the consideration for two of the properties, with the balance funded
by the assumption of debt and cash. During 2004, the Company acquired ten
communities with 2,486 units for a total purchase price of $247.5 million. The
Company issued UPREIT Units valued at approximately $12.1 million as part of the
consideration for two of the properties, with the balance funded by the
assumption of debt and cash.
During 2004, $17.6 million of common stock (net of $6 million share repurchase)
was issued under the Company's DRIP. During the first six months of 2005, the
Company's additional capital raised under the DRIP netted to zero.
The DRIP was amended, effective December 10, 2004, in order to reduce
management's perceived dilution from issuing new shares at or below the
underlying net asset value. The discount on reinvested dividends and optional
cash purchases was reduced from 2% to 0%. The maximum monthly investment
(without receiving approval from the Company) is currently $1 thousand. As
expected, these changes significantly reduced participation in the plan.
Management will continue to monitor the relationship between the Company's stock
price and estimated net asset value. In addition, in the fourth quarter of 2004,
the Company began meeting share demand in the program through share repurchase
by the transfer agent in the open market on the Company's behalf instead of new
share issuance. This removes essentially 100% of the dilution caused by issuing
new shares at a price less than the net asset value in an economic and efficient
manner.
On February 16, 2005, the Board of Directors increased its authorization by
2,000,000 shares to repurchase its common stock or UPREIT Units in connection
with the Company's stock repurchase program. The shares/units may be repurchased
through open market or privately negotiated transactions at the discretion of
Company management. The Board's action does not establish a target stock price
or a specific timetable for share repurchase. During the six months ended June
30, 2005, 1,300,700 shares were repurchased by the Company, with all that
activity occurring in the first quarter. At June 30, 2005 the Company had
authorization to repurchase 2,699,300 shares of common stock and UPREIT Units
under the stock repurchase program. During 2005, the Company will monitor stock
prices, the published net asset value, and acquisition alternatives to determine
the current best use of capital between the two major uses of capital - stock
buyback and acquisitions.
As of June 30, 2005, the weighted average rate of interest on mortgage debt is
5.8% and the weighted average maturity is approximately eight years.
Approximately 88% of the debt is fixed rate. This limits the exposure to changes
in interest rates, minimizing the effect on results of operations and financial
condition.
Variable Interest Entities
--------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R -
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities, "VIE"). The
Company had made a determination that all 41 of the remaining limited
partnerships as of that date were Variable Interest Entities.
The Company determined that it was not the primary beneficiary in seven
partnerships syndicated under U.S. Department of Housing and Urban Development
subsidy programs of which all have been sold as of June 30, 2005. The Company
purchased the general partnership interests in these partnerships in January,
1996. These partnerships were set up to provide low income housing to residents
through subsidized rents and below market debt governed by HUD. The Company as
general partner and managing agent managed the day-to-day operations of the
partnership for a fee (5% of rents collected). The Company's economic benefit
from these partnerships was the management fee. There is no exposure to the
Company of loss as a result of its involvement with these partnerships. No
management fees were recognized on these partnerships during the three- and
six-month periods ended June 30, 2005. The management fees earned on these
partnerships were $35 and $73 for the three- and six-month periods ended June
30, 2004. The assets and liabilities of the seven partnerships totaled $8.5
million and $14.1 million at June 30, 2004, respectively.
The Company had further determined that it was the primary beneficiary in 34 of
the VIEs and therefore consolidated these entities effective March 31, 2004.
Beginning with the second quarter of 2004, the Company consolidated the results
of operations of the VIEs. The results of operations of the remaining three of
the original 34 VIEs for the three-month period ending June 30, 2005 are
included in discontinued operations as all of the VIEs are held for sale as
described below.
The Company was the general partner in these 34 VIEs syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company manages the day-to-day operations of these partnerships for
a management fee. In addition, the Company has certain operating deficit
guarantees and tax credit guarantees to its limited partners. The Company is
responsible to fund operating deficits to the extent there are any and can
receive operating incentive awards when cash flow reach certain levels. The
effect on the consolidated balance sheet as of June 30, 2005 is an increase in
Total assets of $45.1 million, an increase in Total liabilities of $48.3
million, an increase in Minority interest of $1.7 million, and a decrease in
Stockholders' equity of $4.9 million. In connection with the adoption of FIN
46R, the Company recorded a $321 charge, net of minority interest, for a
cumulative effect of a change in accounting principle during the first quarter
of 2004. This charge was a result of the negative capital accounts of minority
interest partners that were absorbed by the Company. Of the $48.3 million
increase in total liabilities, $46.4 million represent non-recourse mortgage
debt.
Effective June 30, 2005, the Company has closed on the sale of all but three of
the 41 VIEs. In addition, the Company is under contract or letter of intent for
the sale of one of the remaining three VIEs. Based on the offer received on one
of these three VIEs, the Company had recorded an impairment charge of $400 for
the three month period ended March 31, 2005. The remaining two VIEs are being
disposed of through a default on the non-recourse financing. The Company
repurchased the limited partner's interests in satisfaction of any tax credit
guarantees or other obligations to that partner in January, 2005 for $5.7
million. The Company performed a valuation analysis on the underlying real
estate, and as a result, recorded a $7.3 million impairment of real estate
during the first quarter of 2005 to adjust the net book value of the property to
the Company's estimate of fair market value. The mortgage note was sold in
March, 2005. The Company is currently planning on transferring title of the
property to either the new mortgage holder, another interested buyer, or walking
away from the property. A transfer or abandonment is expected to occur in the
third quarter ending September 30, 2005.
During the first quarter of 2004, the Company recorded an impairment charge of
$1.6 million to reduce the value of the assets associated with the VIEs to
management's estimate of fair market value. The impairment charge is classified
in the financial statements as "Impairment of assets held as general partner" of
$1,116 and "Equity in earnings (losses) of unconsolidated affiliates" of $484. A
portion of the total $1,116 charge, or $171, represents monies loaned to certain
affordable properties during the first quarter of 2004 to fund operating
shortfalls, which were not anticipated to be recovered from projected sale
proceeds. The remaining balance of $945 pertains to an additional net impairment
charge taken to reduce the assets to estimated fair market value. Of the total
impairment charge recorded of $1.6 million for the three-month period ended
March 31, 2004, $655 relates to cash advances to fund operating shortfalls.
The Company, through its general partnership interest in an affordable property
limited partnership, has guaranteed the low income housing tax credits to the
limited partners for a period of ten years totaling approximately $3 million.
Such guarantee requires the Company to operate the property in compliance with
Internal Revenue Code Section 42 for 15 years. In addition, acting as the
general partner in this one partnership, the Company is obligated to advance
funds to meet partnership operating deficits.
The Company believes the property's operations conform to the applicable
requirements as set forth above. In addition, the Company has required the buyer
of its general partner interests in the limited partnerships to secure releases
of the Company's guarantees from the limited partners.
As indicated above, the Company is working towards a complete disposition of its
general partner interests in affordable properties. The following table
summarizes the effect of the consolidation requirements of FIN 46R on the
balance sheet as of June 30, 2005.
Consolidation Summary of the Balance Sheet as of June 30, 2005
(in thousands)
June 30, 2005 Effect of FIN 46R June 30, 2005
(before FIN 46R) Consolidation (as reported)
---------------- ------------- -------------
ASSETS
Real estate:
Land $ 408,231 $ - $ 408,231
Construction in progress 4,687 - 4,687
Buildings, improvements and equipment 2,717,544 - 2,717,544
Real estate held for sale or disposal, net - 41,072 41,072
---------- --------- ----------
3,130,462 41,072 3,171,534
Less: accumulated depreciation ( 454,179) - ( 454,179)
---------- --------- ----------
Real estate, net 2,676,283 41,072 2,717,355
Cash and cash equivalents 9,713 360 10,073
Cash in escrows 41,502 806 42,308
Accounts receivable 4,294 91 4,385
Prepaid expenses 13,203 462 13,665
Investment in and advances to affiliates 356 ( 356) -
Deferred charges 10,420 2,666 13,086
Other assets 9,559 - 9,559
---------- --------- ----------
Total assets $2,765,330 $ 45,101 $2,810,431
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,670,180 $ 46,415 $1,716,595
Line of credit 78,000 - 78,000
Accounts payable 14,449 1,039 15,488
Accrued interest payable 7,856 89 7,945
Accrued expenses and other liabilities 22,292 457 22,749
Security deposits 23,102 263 23,365
---------- --------- ----------
Total liabilities 1,815,879 48,263 1,864,142
---------- --------- ----------
Minority interest 290,466 1,742 292,208
---------- --------- ----------
Stockholders' equity 658,985 ( 4,904) 654,081
---------- --------- ----------
Total liabilities and stockholders' equity $2,765,330 $45,101 $2,810,431
========== ======= ==========
Acquisitions and Dispositions
-----------------------------
During the first six months of 2005, the Company acquired three apartment
communities in three unrelated transactions. The acquisitions consisted of one
apartment community in Maryland with a total of 204 units, and two apartment
communities in New Jersey with a combined 346 units. The total purchase price of
$40.2 million, including closing costs, equated to an average of $73.2 per
apartment. Consideration included $7.9 million of assumed or new debt,
$19.7 million in cash or line of credit, and $12.4 million of UPREIT Units (fair
market value of $12.6 million). The UPREIT Units are exchangeable for shares of
the Company's common stock on a one-for-one basis. For the two acquisitions
involving the issuance of OP units, values of $41.25 and $39.25 per unit were
used for the purpose of determining the number of OP Units issued in each
acquisition. Both values were set when the transactions were negotiated. The
combined weighted average expected first year capitalization rate on these
acquisitions is 6.5%. Capitalization rate ("cap rate") is defined as the rate of
interest used to convert the first year expected net operating income ("NOI")
less a 3.0% management fee into a single present value. NOI is defined by the
Company as rental income and property other income less operating and
maintenance expenses. Management generally considers NOI to be an appropriate
measure of operating performance because it helps investors to understand the
operations of a community. In addition, the apartment communities are valued and
sold in the market by using a multiple of NOI.
Contractual Obligations and Other Commitments
---------------------------------------------
The primary obligations of the Company relate to its borrowings under the line
of credit and mortgage notes payable. The Company's line of credit matures in
September 2005, and had $78 million outstanding at June 30, 2005. No balance was
outstanding at June 30, 2005 on the Company's supplemental demand note. The $1.7
billion in mortgage notes payable have varying maturities ranging from 1 to 37
years. The weighted average interest rate of the Company's fixed rate notes was
6.00% and 6.23% at June 30, 2005 and December 31, 2004, respectively. The
weighted average interest rate of the Company's variable rate notes and credit
facility was 4.1% and 2.98% at June 30, 2005 and December 31, 2004,
respectively.
The Company has a non-cancelable operating ground lease for one of its
properties. The lease expires May 1, 2020, with options to extend the term of
the lease for two successive terms of twenty-five years each. The lease provides
for contingent rental payments based on certain variable factors. At June 30,
2005, future minimum rental payments required under the lease are $70 per year
until the lease expires.
The Company leases its corporate office space from an entity affiliated with
Nelson and Norman Leenhouts, and the office space for its regional offices from
third parties. The corporate office space requires an annual base rent plus a
pro-rata portion of property improvements, real estate taxes, and common area
maintenance. The regional office leases require an annual base rent plus a
pro-rata portion of real estate taxes.
On December 1, 2004, the Company entered into a lease agreement with a third
party owner to manage the operations of one of their communities. The lease has
a term of five years, but after two years, (from the 24th month to the 36th
month) the owner may require us to buy the property. From the 36th month to the
end of the lease term, the Company has the right to require the owner to sell
the property to the Company. It is the Company's expectation that closing on the
acquisition of the property will occur no later than 36 months after the
commencement of the lease. The estimated future acquisition cost is $140
million.
As discussed in the section entitled "Variable Interest Entities," the Company,
through its general partnership interest in an affordable property limited
partnership, has guaranteed the Low Income Housing Tax Credits to limited
partners totaling approximately $3 million. With respect to the guarantee of the
low income housing tax credits, the Company believes the property's operations
conform to the applicable requirements (as set forth above in the seventh
paragraph of the "Variable Interest Entities" section) and does not anticipate
any payment on the guarantees. In addition, the Company, acting as general
partner in this partnership, is obligated to advance funds to meet partnership
operating deficits. The Company has required the buyers of its general partner
interests in the limited partnerships to secure releases of the Company's
guarantees from the limited partner and/or to indemnify the Company against
payment on those guarantees.
Capital Improvements
--------------------
The Company's policy is to capitalize costs related to the acquisition,
development, rehabilitation, construction and improvement of properties. Capital
improvements are costs that increase the value and extend the useful life of an
asset. Ordinary repair and maintenance costs that do not extend the useful life
of the asset are expensed as incurred. Costs incurred on a lease turnover due to
normal wear and tear by the resident are expensed on the turn. Recurring capital
improvements typically include: appliances, carpeting and flooring, HVAC
equipment, kitchen/ bath cabinets, new roofs, site improvements and various
exterior building improvements. Non- recurring, revenue generating capital
improvements include, among other items: community centers, new windows, and
kitchen/ bath apartment upgrades. Revenue generating capital improvements will
directly result in rental earnings or expense savings. The Company capitalizes
interest and certain internal personnel costs related to the communities under
rehabilitation and construction.
The Company estimates that on an annual basis $525 per unit is spent on
recurring capital expenditures. During the three-and six-month period ended June
30, 2005 approximately $131 and $263 per unit was estimated to be spent on
recurring capital expenditures. The table below summarizes the actual total
capital improvements, (excludes assets held for sale) incurred by major
categories for the three-and six-month periods ended June 30, 2005 and 2004 and
an estimate of the breakdown of total capital improvements by major categories
between recurring and non-recurring, revenue generating capital improvements for
the three-and six-month period ended June 30, 2005 as follows:
For the three-month period ended June 30,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------------------------
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 $ - $ - $ 983 $ 23 $ 983 $ 23 $ 665 $ 16
Major building improvements 965 23 4,056 96 5,021 119 5,310 131
Roof replacements 368 9 617 14 985 23 921 23
Site improvements 352 8 1,880 45 2,232 53 2,858 70
Apartment upgrades 695 16 4,418 105 5,113 121 6,520 161
Appliances 594 14 439 10 1,033 24 987 24
Carpeting/Flooring 1,812 43 820 19 2,632 62 2,283 56
HVAC/Mechanicals 534 12 2,816 67 3,350 79 3,354 83
Miscellaneous 237 6 730 17 967 23 859 21
------ ---- ------- ---- ------- ---- ------- ----
Totals $5,557 $131 $16,759 $396 $22,316 $527 $23,757 $585
====== ==== ======= ==== ======= ==== ======= ====
(a) Calculated using the weighted average number of units outstanding,
including 39,284 core units, 2004 acquisition units of 2,486 and 2005
acquisition units of 550 for the three-month period ended June 30, 2005 and
39,284 core units and 2004 acquisition units of 1,278 for the three-month
period ended June 30, 2004.
For the six-month period ended June 30,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------------------------
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 $ - $ - $ 2,313 $ 55 $ 2,313 $ 55 $ 1,218 $ 30
Major building improvements 1,924 46 5,371 127 7,295 173 8,706 217
Roof replacements 734 17 1,222 29 1,956 46 1,352 34
Site improvements 703 17 2,219 53 2,922 70 3,962 99
Apartment upgrades 1,385 33 8,453 200 9,838 233 12,854 320
Appliances 1,185 28 736 17 1,921 45 1,923 48
Carpeting/Flooring 3,613 86 1,224 29 4,837 115 4,517 112
HVAC/Mechanicals 1,064 25 4,864 115 5,928 140 6,148 153
Miscellaneous 472 11 1,416 34 1,888 45 1,853 46
------- ---- ------- ---- ------- ---- ------- ------
Totals $11,080 $263 $27,818 $659 $38,898 $922 $42,533 $1,059
======= ==== ======= ==== ======= ==== ======= ======
(a) Calculated using the weighted average number of units outstanding,
including 39,284 core units, 2004 acquisition units of 2,486 and 2005
acquisition units of 422 for the six-month period ended June 30, 2005 and
39,284 core units and 2004 acquisition units of 899 for the six-month
period ended June 30, 2004.
The schedule below summarizes the breakdown of total capital improvements
(excludes assets held for sale) between core and non-core as follows:
For the three-month period ended June 30,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvements Unit Improvements Unit
------ ---- ------ ---- ------------ ---- ------------ ----
Core Communities $5,158 $131 $15,752 $401 $20,910 $532 $23,010 $586
2005 Acquisition Communities 72 131 222 404 294 535 - -
2004 Acquisition Communities 327 131 785 316 1,112 447 748 585
------ ---- ------- ---- ------- ---- ------- ----
Sub-total 5,557 131 16,759 396 22,316 527 23,758 586
2004 Disposed Communities - - - - - - 838 526
Corporate office expenditures(1) - - - - 1,694 - 1,691 -
------ ---- ------- ---- ------- ---- ------- ----
$5,557 $131 $16,759 $396 $24,010 $527 $26,287 $583
====== ==== ======= ==== ======= ==== ======= ====
For the six-month period ended June 30,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvements Unit Improvements Unit
Core Communities $10,317 $263 $25,990 $662 $36,307 $925 $41,664 $1,061
2005 Acquisition Communities 111 263 224 532 335 795 - -
2004 Acquisition Communities 652 263 1,604 645 2,256 908 868 966
Sub-total 11,080 263 27,818 659 38,898 922 42,532 1,058
------ ---- ------- ---- ------- ---- ------- ----
2004 Disposed Communities - - - - - - 1,330 821
Corporate office expenditures(1) - - - - 3,328 - 2,271 -
------ ---- ------- ---- ------- ---- ------- ----
$11,080 $263 $27,818 $659 $42,226 $922 $46,133 $1,049
======= ==== ======= ==== ======= ==== ======= ======
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office.
Results of Operations
---------------------
Summary of Core Properties
The Company had 139 apartment communities with 39,284 units which were owned
during the six-month period being presented (the "Core Properties"). The Company
has acquired an additional thirteen apartment communities with 3,036 units
during 2005 and 2004 (the "Acquired Communities"). The Company also disposed of
five properties with a total of 1,646 units during 2004 (the "Disposition
Communities"). The Disposition Communities have been classified as discontinued
operations. Finally, beginning with the second quarter of 2004, the results of
operations for the both the three- and six-month periods ending June 30, 2004,
include the results of operations of four affordable limited partnerships
("Affordable LPs") that have been consolidated in accordance with FIN 46R for
the first time. The Affordable LPs also have been classified as discontinued
operations. The inclusion of the Acquired Communities generally accounted for
the significant changes in operating results for the three-and six-months ended
June 30, 2005.
A summary of the net operating income from Core Properties is as follows (in
thousands):
Six Months Three Months
---------- ------------
2005 2004 $ Change % Change 2005 2004 $ Change % Chg
---- ---- -------- -------- ---- ---- -------- -----
Rental income $210,914 $208,096 $2,818 1.4% $106,156 $104,655 $1,501 1.4%
Property other income 10,698 9,686 1,012 10.4% 5,753 5,163 590 11.4%
-------- -------- ------ - --- ------- ------- ------ ----
Total income 221,612 217,782 3,830 1.8% 111,909 109,818 2,091 1.9%
Operating and Maintenance (103,265) (100,035) (3,230) ( 3.2%) (49,607) (47,590) ( 2,017) (4.2%)
-------- -------- ------ - --- ------- ------- ------ ----
Net operating income
$118,347 $117,747 $ 600 0.5% $62,302 $62,228 $ 74 0.1%
======== ======== ======== === ======= ======= == ===
A summary of the net operating income from continuing operations is as follows
(in thousands):
Six Months Three Months
---------- ------------
2005 2004 $ Change % Change 2005 2004 $ Change % Chg
---- ---- -------- -------- ---- ---- -------- -----
Rental income $227,990 $213,585 $14,405 6.7% $115,032 $108,524 $6,508 6.0%
Property other income 11,265 9,877 1,388 14.1% 6,092 5,284 808 15.3%
-------- -------- ------ - --- ------- ------- ------ ----
Total income 239,255 223,462 15,793 7.1% 121,124 113,808 7,316 6.4%
Operating and Maintenance (111,134) (102,377) ( 8,757) (8.6%) ( 53,623) (49,267) (4,356) (8.8%)
-------- -------- ------ - --- ------- ------- ------ ----
Net operating income $128,121 $121,085 $7,036 5.8% $67,501 $64,541 $2,960 4.6%
======== ======== ====== === ======= ======= ====== ===
Comparison of six-months ended June 30, 2005 to the same period in 2004
Of the $14,405 increase in rental income, $11,587 is attributable to the
Acquired Communities. The balance of this increase, or $2,818 which is from the
Core Properties, was the result of an increase of 2.4% in weighted average
rental rates, offset with a decrease in occupancy from 93.7% to 92.7%. 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 rates and vacant units at
market rents.
Property other income, which consists primarily of income from operation of
laundry facilities, late charges, administrative fees, garage and carport
charges, net profits from corporate apartments, cable revenue, pet charges,
utility recover charges, and miscellaneous charges to residents increased by
$1,388. Of this increase, $377 is attributable to the Acquired Communities and
$1,012 represents a 10.4% increase from the Core Properties.
Other income decreased $136 due primarily to a decrease in the level of
management fee activity as a result of the sale of the affordable limited
partnerships.
Of the $8,757 increase in operating and maintenance expenses, $5,527 is
attributable to the Acquired Communities. The balance, a $3,230 increase, is
attributable to the Core Properties and is primarily due to increases in natural
gas heating costs, personnel costs, and real estate taxes. These increases were
offset in part by savings in repairs and maintenance and insurance expenses.
Natural gas heating costs were up $1,626 or 14% over 2004. We have seen
significant increases in the cost of natural gas per decatherm. Last year we had
contracts at $5.13 per decatherm, this year the cost is $6.52. Personnel
expenses were up $1,726, or 7.7%. Contributing to this was normal operating
payroll increases of $988, or 4.8%, an increase in site level incentive
compensation of $431, and a vacation accrual of $455 of which approximately $200
represents a catch-up from previous years as we now have the ability to track
this in our HR system. Real estate taxes were up $1,508, or 7.0%. Of this, $204,
or 1.0% is from a prepaid tax adjustment needed to bring our balance sheet to
the proper amount. The balance is a 6.0% increase in normal increases in
assessed values and tax rates. The decrease in repairs and maintenance was
$1,029 or 6.9% compared to a year ago. The six month period in 2004 included
$805 from the NYS sales tax audit. Property insurance decreased for the period
primarily due to a decrease in our property and general liability premiums, and
losses to date which have been projected using actuarial assumptions.
General and administrative expense decreased in 2005 by $68, or 0.7%. General
and administrative expenses as a percentage of total revenues (including revenue
from discontinued operations) were 4.0% for 2005 as compared to 4.1% for 2004.
The decrease is the result of a reduction in the level of corporate incentive
compensation bonus accrued in 2005, mostly offset by increased expenses relating
to the completion of the 404 compliance and audit work completed in the first
quarter of 2005.
Interest expense increased in 2005 by $6,517 as a result of the increased
borrowings in connection with acquisition of the 2005 Acquisition Communities, a
full quarter of interest expense for the 2004 Acquisition Communities and
additional mortgage debt and refinanced mortgage debt incurred during 2004.
Interest expense was reduced in the second quarter of 2005 by $393 while
interest expense in the first quarter of 2004 was reduced by $996 when two
mortgage loans were paid off early at amounts less than the amounts carried on
the Company's balance sheet. Finally, $233 in interest relative to the sales tax
liability recorded and described above is included in 2004.
Depreciation and amortization expense increased $5,559 due to the depreciation
on the Acquisition Communities and the capital additions to the Core Properties.
The Company has sold virtually all of the assets associated with its general
partner interests in the affordable properties in order to focus solely on the
direct ownership and management of market rate apartment communities. The assets
included principally loans, advances and management contracts. During the first
six months of 2004, the Company recorded impairment charges of $1,116. Of this
total, $171 represents advances made to certain of the Affordable LPs, which the
Company believes will not be repaid upon the sale of the loans. The remaining
$945 pertains to an additional net impairment charge taken on Phase III to
reduce the assets to fair market value. In connection with FIN 46R, the Company
was required to consolidate the majority of the Affordable LPs results of
operations beginning April 1, 2004. The results of operations of the Affordable
LPs is included in discontinued operations for both the six-month periods ended
June 30, 2005 and 2004.
The equity in earnings (losses) of unconsolidated affiliates was a loss of $563
for the six months ended June 30, 2004 is primarily the result of the general
partner recording a greater share of the underlying investment's losses due to
the loans and advances to certain of the affordable property limited
partnerships where the limited partner has no capital account. This is pursuant
to the accounting requirements of EITF 99-10, "Percentage Used to Determine the
Amount of Equity Method Losses." Included and classified in this account were
$484 of advances made during the first three months of 2004 which the Company
believes will not be repaid upon sale.
Minority interest decreased $963 due to a general decrease in income from
operations.
Included in discontinued operations for the six-month period ended June 30,
2005, are the results of operations of the Affordable LPs that in connection
with FIN 46R were required to be consolidated beginning April 1, 2004. As all
significant contingencies surrounding the sale of the Affordable LPs have been
resolved the Company has considered these assets held for sale and has reported
them in discontinued operations (see further detail supplied under "Variable
Interest Entities" section).
During the six months ended June 30, 2005, the Company reported a combined $77
loss, net of minority interest, relating to additional expenses incurred in the
same period for sales which took place during 2004. These costs represent a
change in estimate from those accrued at the time of sale. Included in the $511
net gain on disposition of property reported for the six months of 2004 is the
sale of an apartment community in Rochester, NY, where the Company recorded a
gain on sale in the second quarter, net of minority interest, of approximately
$557.
In connection with the adoption of FIN 46R, the Company recorded a $321
cumulative effect charge of a change in accounting principle in the first
quarter of 2004. This charge was the result of negative capital accounts of
minority interest partners that were absorbed by the Company.
Comparison of the three-months ended June 30, 2005 to the same period in 2004
-----------------------------------------------------------------------------
Of the $6,508 increase in rental income, $5,007 is attributable to the Acquired
Communities. The balance of this increase, or $1,501 which is from the Core
Properties, was the result of an increase of 2.1% in weighted average rental
rates, offset by a decrease in occupancy from 93.8% to 93.2%. 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 rates and vacant units at
market rents.
Property other income, which consists primarily of income from operation of
laundry facilities, late charges, administrative fees, garage and carport
charges, net profits from corporate apartments, cable revenue, pet charges,
utility recovery charges, and miscellaneous charges to residents increased by
$808. Of this increase, $218 is attributable to the Acquired Communities and
$590 represents an 11.4% increase from the Core Properties.
Other income decreased $259 due primarily to a decrease in the level of
management fee activity as a result of the sale of the affordable limited
partnerships.
Of the $4,356 increase in operating and maintenance expenses, $2,339 is
attributable to the Acquired Communities. The balance, a $2,017 increase, is
attributable to the Core Properties and is primarily due to increases in natural
gas heating costs, personnel costs, and real estate taxes. These increases were
offset in part by a reduction in repairs and maintenance and property insurance.
Natural gas utility costs were up $1,003, or 33.1% due to significant increases
in the cost of natural gas per decatherm as compared to a year ago. Personnel
expenses increased $881, with $448 resulting from increased site level incentive
compensation reflecting improving rent and occupancies compared to a year ago.
The 5.7% variance in real estate taxes results from normal increases in assessed
values and tax rates. The decrease of $638 in repairs and maintenance primarily
results from $493 in sales tax recorded in 2004 not repeated in 2005. Property
insurance decreased for the period primarily due to a decrease in our property
and general liability premiums, and losses to date which have been projected
using actuarial assumptions.
General and administrative expense decreased in 2005 by $748, or 15.3%. General
and administrative expenses as a percentage of total revenues were 3.4% for 2005
as compared to 4.1% for 2004. A significant component of the reduction is from
the level of corporate incentive compensation bonus accrued in 2005 compared to
a year ago.
Interest expense increased in 2005 by $2,499 as a result of the increased
borrowings in connection with a full quarter of interest expense for the 2004
Acquisition Communities and additional mortgage debt and refinanced mortgage
debt which took place during 2004. Interest expense was reduced in the second
quarter of 2005 by $393 when one mortgage loan was paid off early at an amount
less than the amount carried on the Company's balance sheet.
Depreciation and amortization expense increased $2,413 due to the depreciation
on the Acquisition Communities and the capital additions to the Core Properties.
The equity in earnings (losses) of unconsolidated affiliates for the three
months ended June 30, 2004 of $25 is primarily the result of the general partner
recording a greater share of the underlying investment's losses due to the loans
and advances to certain of the affordable property limited partnerships where
the limited partner has no capital account. This is pursuant to the accounting
requirements of EITF 99-10, "Percentage Used to Determine the Amount of Equity
Method Losses." Included and classified in this account are $25 of advances made
in the second quarter of 2004 to one of the remaining unconsolidated affordable
partnerships. In connection with FIN 46R, the Company was required to
consolidate the majority of the affordable limited partnerships results of
operations beginning April 1, 2004.
Minority interest decreased $272 due to a general decrease in income from
operations.
Included in discontinued operations for the three-month period ended June 30,
2005 are the results of operations of the Affordable LPs that, in connection
with FIN 46R, were required to be consolidated beginning April 1, 2004. As all
significant contingencies surrounding the sale of the affordable properties have
been resolved the Company has considered these assets held for sale and have
reported them in discontinued operations.
During the three months ended June 30, 2005, the Company reported a combined $77
loss, net of minority interest, relating to additional expenses incurred in the
same quarter for sales which took place during 2004. These costs represent a
change in estimate from those accrued at the time of sale. Included in the $524
net gain on disposition of property reported for the six months of 2004 is the
sale of an apartment community in Rochester, NY, where the Company recorded a
gain on sale in the second quarter, net of minority interest, of approximately
$557.
Funds From Operations
---------------------
Pursuant to the revised definition of Funds From Operations ("FFO") adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), FFO is defined as net income (computed in accordance with
accounting principles generally accepted in the United States of America
("GAAP")) excluding gains or losses from sales of property, minority interest,
extraordinary items and cumulative effect of change in accounting principle plus
depreciation from real property including adjustments for unconsolidated
partnerships and joint ventures less dividends from non-convertible preferred
shares. NAREIT has recently changed guidance on the interpretation of impairment
charges recorded against the value of real estate. The previous interpretation
was that impairment charges in real estate would be an add back to arrive at
FFO, similar to a loss on sale of real estate. The Company is following this new
interpretation effective April 1, 2004 on a go-forward basis. The change is not
suggested to be retroactive to any prior period reported. Because of the
limitations of the FFO definition as published by NAREIT as set forth above, the
Company has made certain interpretations in applying the definition. The Company
believes all adjustments not specifically provided for are consistent with the
definition.
Management believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO should be considered
in conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management believes that by excluding
gains or losses related to dispositions of property and excluding real estate
depreciation (which can vary among owners of similar assets in similar condition
based on historical cost accounting and useful life estimates), FFO can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs. FFO does
not include the cost incurred for capital improvements (including capitalized
interest) reflected as an increase to real estate assets. The total capital
improvements include an annual reserve for anticipated recurring, non-revenue
generating capitalized costs of $525 per apartment unit. Please refer to the
Capital Improvement section above in MD and A. Cash provided by operating activities
was $64,004 and $85,160 for the six-month period ended and $42,914 and $47,801
for the three-month period ended June 30, 2005 and 2004, respectively. Cash used
in investing activities was $61,787 and $104,807 for the six-month period ended
and $24,019 and $19,866 for the three-month period ended June 30, 2005 and 2004,
respectively. Cash provided by (used in) financing activities was ($69) and
$20,382 for the six-month period ended and ($18,717) and ($28,351) for the
three-month period ended June 30, 2005 and 2004, respectively. FFO should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flow as a measure of liquidity.
The calculation of FFO and reconciliation to GAAP net income available to common
Shareholders for the six-and three-months ended June 30, 2005 and 2004 are
presented below (in thousands):
Six Months Three Months
2005 2004 2005 2004
---- ---- ---- ----
Net income available to common shareholders $ 6,168 $13,322 $ 8,038 $ 8,742
Convertible preferred dividends 879 1,097 330 549
Minority interest 5,749 6,712 4,151 4,423
Minority interest - income (loss) from discontinued operations (2,635) (284) (114) (463)
Depreciation and amortization from real property 47,528 43,282 23,925 22,131
Depreciation from real property from unconsolidated entities - 1,615 - 1,072
Impairment on General Partner real estate investment - 945 - -
Loss on disposition of property - 50 - -
(Gain) loss on disposition of discontinued operations, net of
minority interest 77 (511) 77 (524)
Cumulative effect of change in accounting principle, net of
minority interest - 321 - -
-------- -------- -------- --------
FFO as defined above $57,766 $66,549 $36,407 $35,930
======= ======= ======= =======
Weighted average common shares/units outstanding(1):
- Basic 47,598.2 48,531.1 47,684.2 48,718.7
======== ======== ======== ========
- Diluted 48,018.9 49,851.7 48,623.5 49,993.1
======== ======== ======== ========
(1) The calculation assumes the conversion of dilutive common stock equivalents
including convertible preferred stock and the conversion of all UPREIT
units to common shares.
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
---------
Series F Preferred Stock
In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Article
Supplementary, of at least 1.75 to 1.0. The fixed charge coverage ratio and the
components thereof do not represent a measure of cash generated from operating
activities in accordance with generally accepted accounting principles and are
not necessarily indicative of cash available to fund cash needs. Further, this
ratio should not be considered as an alternative measure to net income as an
indication of the Company's performance or of cash flow as a measure of
liquidity. The Company has been in compliance with the covenant since the Series
F Preferred Stock was issued. If the Company fails to be in compliance with this
covenant for six or more consecutive fiscal quarters, the holders of the Series
F Preferred Stock would be entitled to elect two directors to the board of
directors of the Company. The calculation of the fixed charge coverage ratio for
the four most recent quarters since the issuance of the Series F Preferred Stock
is presented below (in thousands). Net operating income from discontinued
operations in the calculation below is defined as total revenues from
discontinued operations less operating and maintenance expenses.
Calculation Presented for Series F Covenants
--------------------------------------------
Three-months ended
------------------
June 30, Mar.31, Dec. 31, Sept. 30,
2005 2005 2004 2004
---- ---- ---- ----
EBITDA
Total revenues $121,636 $118,787 $118,357 $118,942
Net operating income (loss) from discontinued operations (343) 142 2,143 1,364
Operating and maintenance (53,623) ( 57,511) (52,227) (50,372)
General and administrative (4,144) ( 5,405) ( 9,482) ( 4,879)
Equity in earnings (losses) of unconsolidated affiliates - - - 25
-------- -------- -------- --------
$63,526 $ 56,013 $58,791 $ 65,080
Fixed Charges
Interest expense $25,173 $ 24,943 $23,891 $ 23,496
Interest expense on discontinued operations 279 21 442 40
Preferred dividends 1,681 1,898 1,898 1,898
Capitalized interest 339 191 191 230
-------- -------- -------- --------
$27,472 $ 27,053 $26,422 $ 25,664
Fixed charge coverage ratio: 2.31 2.07 2.23 2.54
Line of Credit
--------------
The Credit Agreement relating to the Company's line of credit provides for the
Company to maintain certain financial ratios and measurements. One of these
covenants is that the Company may not pay any distribution to its shareholders
and holders of its UPREIT Units if a distribution, when added to other
distributions paid during the three immediately preceding fiscal quarters,
exceeds the greater of : (i) 90% of funds from operations, and 110% of cash
available for distribution; and (ii) the amount required to maintain the
Company's status as a REIT. During the first and second quarters of 2005, the
funds from operations payout ratio was 90.3% and 90.3%, respectively, when
measured for the current quarter and the three immediate preceding fiscal
quarters. Due to the non-recurring legal settlement of $3.8 million in the
fourth quarter of 2004, the Company did not meet the required ratio. Appropriate
waivers have been granted by the participating banks. The line of credit has not
been used for long-term financing but adds a certain amount of flexibility,
especially in meeting the Company's acquisition goals. Many times it is easier
to temporarily finance an acquisition in a short-term nature through the line of
credit, with long term secured financing or other sources of capital
replenishing the line of credit availability.
Economic Conditions
-------------------
Substantially all of the leases at the Company's apartment communities are for a
term of one year or less, which enables the Company to seek increased rents upon
renewal of existing leases or commencement of new leases. These short-term
leases minimize the potential adverse effect of inflation on rental income,
although residents may leave without penalty at the end of their lease terms and
may do so if rents are increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing intensities and at different times. During the past three years and
continuing into 2005 many regions of the United States have experienced varying
degrees of economic recession and certain recessionary trends, such as the cost
of obtaining sufficient property and liability insurance coverage, short-term
interest rates, and a temporary reduction in occupancy. In light of this, we
will continue to review our business strategy however, we believe that given our
property type and the geographic regions in which we are located, we do not
anticipate any changes in our strategy or material effects in financial
performance.
Declaration of Dividend
-----------------------
On August 3, 2005, the Board of Directors approved a dividend of $.63 per share
for the quarter ended June 30, 2005. This is the equivalent of an annual
distribution of $2.52 per share. The dividend is payable August 26, 2005 to
shareholders of record on August 15, 2005.
On August 3, 2005 the Company also declared a regular dividend of $0.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending August 31, 2005. The dividend on the preferred shares is payable on
August 31, 2005, to shareholders of record on August 15, 2005. This dividend is
equivalent to an annualized rate of $2.25 per share.
Contingency
-----------
The Company is not a party to any legal proceedings which are expected to have a
material adverse effect on the Company's liquidity, financial position or
results of operations. The Company is subject to a variety of legal actions for
personal injury or property damage arising in the ordinary course of its
business, most of which are covered by liability insurance. While the resolution
of these matters cannot be predicted with certainty, management believes that
the final outcome of such legal proceedings and claims will not have a material
adverse effect on the Company's liquidity, financial position or results of
operations.
In 2001, the Company underwent a state capital stock tax audit. The state had
assessed taxes of $469 for the 1998 and 1999 tax years under audit. If the
state's position is applied to all tax years through December 31, 2001, the
assessment would be $1.3 million. At the time, the Company believed the
assessment and the state's underlying position were not supportable by the law
nor consistent with previously provided interpretative guidance from the office
of the State Secretary of Revenue. After two subsequent enactments by the state
legislation during 2002 affecting the pertinent tax statute, the Company was
advised by outside tax counsel that its filing position for 1998-2001 should
prevail. During December 2003, the state's governor signed legislation which
included the REIT tax provisions. Based upon this, Company's tax counsel expects
that the outstanding litigation should now be able to be resolved. Effective
January 1, 2003, the Company reorganized the ownership of Home Properties Trust,
which should subject the Company to a much lower level of tax going forward. In
September 2004, the Company settled the 1998 year under audit for a total of
$39, including interest. During the first quarter of 2005, the Company filed a
protest with the Pennsylvania State Commonwealth Court concerning the 1999 tax
year. No settlement offer has been made or discussed related to the 1999 tax
year. The 1999-2001 tax years will take time to resolve, however, the Company's
outside counsel still maintains that the Company should not have any additional
liability.
During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861. This was included in the first quarter 2004 results and allocated $448 to
expense and $413 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance and
recorded at June 30, 2004 a liability of $1,712. This was included in the second
quarter results and allocated $761 to expense and $951 capitalized to real
estate assets for improvements. The liability recorded relates to the period
beginning on the later of: (i) the date the Company first purchased property in
the applicable state; or (ii) January 1, 1997 and ending on June 30, 2004. In
addition, the Company increased the liability for sales tax exposure by $68 for
the six-month period ended December 31, 2004. The Company has filed Voluntary
Disclosure Agreements (VDAs) with the four states where it had significant
financial exposure. During the first six months of 2005, the Company signed VDAs
with these states which have agreed to limit the VDA filing period back to
January 1, 2001, and has satisfied all financial obligations under the VDAs. For
the three- and six-month periods ended June 30, 2005, the Company has recorded
adjustments to the liability for both the effects of signing the VDAs as well as
for the results of the Company's additional testing for the first six months.
The net impact of these adjustments resulted in a decrease in real estate assets
of $175, interest expense of $115 and operating expenses of $108 for a net
decrease to the accrued liability of $398. The Company recognizes that the
liability recorded of $665 as of June 30, 2005 is an estimate and that the
actual tax liability that will be paid in the future may be less than or greater
than this estimate.
In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Articles
Supplementary to the Company's Articles of Incorporation, of at least 1.75 to
1.0. The fixed charge coverage ratio and the components thereof do not represent
a measure of cash generated from operating activities in accordance with
generally accepted accounting principles and are not necessarily indicative of
cash available to fund cash needs. Further, this ratio should not be considered
as an alternative measure to net income as an indication of the Company's
performance or of cash flow as a measure of liquidity. The Company has been in
compliance with the covenant since the Series F Preferred Stock was issued. If
the Company fails to be in compliance with this covenant for six or more
consecutive fiscal quarters, the holders of the Series F Preferred Stock would
be entitled to elect two directors to the board of directors of the Company.
New Accounting Standards
------------------------
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R Share Based Payment (SFAS No. 123R). The statement is a revision of
SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No 123R supersedes
APB Opinion No. 25 Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R, requires that entities recognize the
cost of employee services received in exchange for awards of equity instruments
(i.e. stock options) based on the grant-date fair value of those awards. The
Statement is effective for the first fiscal periods beginning after December 15,
2005. On January 1, 2003, the Company adopted the provisions of SFAS No. 148
Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment to SFAS No. 123. Effective on that date, the Company began recognizing
compensation cost related to stock option grants. Based upon the Company's
adoption of SFAS No. 148, the Company does not expect the issuance of SFAS No.
123R to have a material impact on the Company's results of operations, financial
position or liquidity.
HOME PROPERTIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At June 30,
2005 and December 31, 2004, approximately 88% and 89%, respectively, of the
Company's debt bore interest at fixed rates with a weighted average maturity of
approximately 8 years and a weighted average interest rate of approximately
6.00% and 6.23%, respectively, including the $31 million and $34 million,
respectively, of debt which has been swapped to a fixed rate. The remainder of
the Company's debt bears interest at variable rates with a weighted average
maturity of approximately 7 and 8 years, respectively, and a weighted average
interest rate of 4.05 % and 2.98%, respectively, at June 30, 2005 and December
31, 2004. 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
with the intention to refinance at a later date. The Company believes, however,
that in no event would increases in interest expense as a result of inflation
significantly impact the Company's distributable cash flow.
At June 30, 2005 and December 31, 2004, the interest rate risk on $31 million
and $34 million, respectively, of such variable rate debt has been mitigated
through the use of interest rate swap agreements (the "Swaps") with major
financial institutions. The Company is exposed to credit risk in the event of
non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.
At June 30, 2005 and December 31, 2004, the fair value of the Company's fixed
rate debt, including the $31 million and $34 million, respectively, which was
swapped to a fixed rate, amounted to a liability of $1.69 billion compared to
its carrying amount of $1.58 billion. The Company estimates that a 100 basis
point increase in market interest rates at June 30, 2005 would have changed the
fair value of the Company's fixed rate debt to a liability of $1.61 billion.
The Company intends to continuously monitor and actively manage interest costs
on its variable rate debt portfolio and may enter into swap positions based upon
market fluctuations. In addition, the Company believes that it has the ability
to obtain funds through additional equity offerings and/or the issuance of
UPREIT Units. Accordingly, the cost of obtaining such interest rate protection
agreements in relation to the Company's access to capital markets will continue
to be evaluated. The Company has not, and does not plan to, enter into any
derivative financial instruments for trading or speculative purposes. As of June
30, 2005, the Company had no other material exposure to market risk.
HOME PROPERTIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted by the Company under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the officers who certify the Company's
financial reports and to the other members of senior management and the Board of
Directors.
The principal executive officer and principal financial officer evaluated, as of
June 30, 2005, the effectiveness of the disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15-d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and have determined that such disclosure
controls and procedures are effective.
There have been no changes in the internal controls over financial reporting
identified in connection with that evaluation, or that occurred during the
second quarter of the year ended December 31, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting. The Company has not identified any material weaknesses
in its internal controls.
PART II - OTHER INFORMATION
HOME PROPERTIES, INC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action does not establish a specific target stock price or a specific
timetable for share repurchase. Recently, the Company's Board of Directors
removed certain price restrictions, which substantially enhances the Company's
ability to repurchase shares. At December 31, 2004, the Company had
authorization to repurchase 2,000,000 shares of common stock and UPREIT Units
under the stock repurchase program. On February 16, 2005, the Board of Directors
approved a 2,000,000 share increase in the stock repurchase program. In
addition, participants in the Company's Stock Benefit Plan can use common stock
of the Company that they already own to pay all or a portion of the exercise
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. The following table summarizes the total number of shares (units)
repurchased by the Company during the three-month period ending June 30, 2005.
Maximum shares
Total shares Average Total shares (units) (units) available
(units) price per purchased under under the
Period purchased(1) share (unit) Company Program Company Program
------ ------------ ------------ --------------- ---------------
Balance March 31, 2005 2,699,300
April 1, 2005 to April 30, 2005 1,885 $39.21 - -
May 1, 2005 to May 31, 2005 8,569 $42.35 - -
June 1, 2005 to June 30, 2005 12,947 $41.08 - -
23,401 $41.39 - 2,699,300
====== ====== =========
(1) During the three months ended June 30, 2005, the Company repurchased 16,363
shares of common stock through share repurchase by the transfer agent in
the open market in connection with the Company's Dividend Reinvestment Plan
(DRIP). In addition, during May, 2005, 7,038 shares of common stock were
used in satisfaction of the Company's obligation upon the exercise of stock
options issued.
Item 4. Submission of Matter to a Vote of Security Holders
------- --------------------------------------------------
The annual meeting of the Company's stockholders was held on May 6, 2005. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, withheld or against, abstentions and the number of
broker non-votes, as applicable, with respect to each matter.
The twelve directors proposed by the Company for re-election were elected to one
year terms by the following vote:
DIRECTOR NAME SHARES FOR SHARES WITHHELD
------------- ---------- ---------------
William Balderston, III 26,303,994 762,948
Josh E. Fidler 25,179,657 1,887,285
Alan L. Gosule 26,703,637 363,305
Leonard F. Helbig, III 26,364,107 702,835
Roger W. Kober 26,310,801 756,141
Norman P. Leenhouts 26,404,199 662,743
Nelson B. Leenhouts 26,403,953 662,989
Edward J. Pettinella 26,408,176 658,766
Clifford W. Smith, Jr. 26,315,728 751,214
Paul L. Smith 26,358,395 708,547
Thomas S. Summer 26,700,671 366,271
Amy L. Tait 26,389,974 676,968
The stockholders approved the Company's Amended and Restated 2003 Stock Benefit
Plan.
Shares Voted For: 14,606,191
Shares Voted Against: 7,903,603
Shares Abstaining: 84,261
Broker Non-Votes: 4,472,887
The stockholders approved the Company's Second Amended and Restated Director
Deferred Compensation Plan.
Shares Voted For: 21,364,853
Shares Voted Against: 1,135,320
Shares Abstaining: 93,882
Broker Non-Votes: 4,472,887
The stockholders ratified the appointment of PricewaterhouseCoopers, LLP as the
Company's independent registered public accounting firm for 2005.
Shares Voted For: 26,665,138
Shares Voted Against: 356,552
Shares Abstaining: 45,252
Item 6. Exhibits
------- --------
Exhibit 31.1 Section 302 Certifications of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certifications of Chief Executive Officers
Exhibit 32.2 Section 906 Certification of Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME PROPERTIES, INC.
---------------------
(Registrant)
Date: August 9, 2005
By: /s/ Edward J. Pettinella
-------------------------------------
Edward J. Pettinella
President and Chief Executive Officer
Date: August 9, 2005
By: /s/ David P. Gardner
-------------------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer