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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-13136
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HOME PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 16-1455126
(State of incorporation) (I.R.S. Employer Identification No.)
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850 Clinton Square, Rochester, New York 14604
(Address of principal executive offices)(Zip Code)
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(585) 546-4900
(Registrant's telephone number, including area code)
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N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer X Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 28, 2006
$.01 par value 31,533,194
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HOME PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2006 (Unaudited) and December
31, 2005 4
Consolidated Statements of Operations (Unaudited) - Three months ended
March 31, 2006 and 2005 5
Consolidated Statements of Comprehensive Income (Unaudited) - Three
months ended March 31, 2006 and 2005 6
Consolidated Statements of Cash Flow (Unaudited) - Three months ended
March 31, 2006 and 2005 7
Notes to Consolidated Financial Statements (Unaudited) 8-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 21-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 6. Exhibits 33
Signatures 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
(Unaudited) (Note1)
----------- -------
ASSETS
Real estate:
Land $401,756 $402,299
Construction in progress 8,657 4,471
Buildings, improvements and equipment 2,723,546 2,704,372
Real estate held for sale, net 225,756 219,776
---------- ----------
3,359,715 3,330,918
Less: accumulated depreciation (470,691) (446,367)
---------- ----------
Real estate, net 2,889,024 2,884,551
Cash and cash equivalents 7,426 5,391
Cash in escrows 36,060 36,760
Accounts receivable 6,522 7,386
Prepaid expenses 16,183 16,141
Deferred charges 11,845 11,156
Other assets 10,341 12,536
Other assets held for sale 3,574 3,949
---------- ----------
Total assets $2,980,975 $2,977,870
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,801,230 $1,768,483
Line of credit 65,000 82,000
Accounts payable 19,520 19,458
Accrued interest payable 8,540 8,274
Accrued expenses and other liabilities 23,934 22,565
Security deposits 21,583 21,742
Liabilities held for sale 74,845 75,267
---------- ----------
Total liabilities 2,014,652 1,997,789
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Commitments and contingencies
Minority interest 314,695 323,269
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Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000
shares issued and outstanding at March 31, 2006 and December 31,
2005. 60,000 60,000
Common stock, $.01 par value; 80,000,000 shares authorized;
31,525,090 and 31,184,256 shares issued and outstanding at March
31, 2006 and December 31, 2005. 316 312
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 783,959 773,396
Accumulated other comprehensive income 289 206
Distributions in excess of accumulated earnings (192,936) (177,102)
---------- ----------
Total stockholders' equity 651,628 656,812
---------- ----------
Total liabilities and stockholders' equity $2,980,975 $2,977,870
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
---- ----
Revenues:
Rental income $111,638 $100,885
Property other income 7,170 4,514
Interest income 91 68
Other income 517 588
---------- ----------
Total revenues 119,416 106,055
---------- ----------
Expenses:
Operating and maintenance 58,135 51,226
General and administrative 5,039 5,405
Interest 27,195 23,201
Depreciation and amortization 25,046 21,268
Impairment of assets held as General Partner - 400
---------- ----------
Total expenses 115,415 101,500
Income from operations 4,001 4,555
Minority interest in operating partnerships (922) (879)
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Income from continuing operations 3,079 3,676
Discontinued operations
Income (loss) from operations, net of $1,285 and ($1,802) in 2006 and
2005 allocated to minority interest, respectively 2,409 (3,648)
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Net income 5,488 28
Preferred dividends (1,350) (1,898)
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Net income (loss) available to common shareholders $4,138 $ (1,870)
========== ==========
Basic earnings per share data:
Income from continuing operations $0.05 $ 0.05
Discontinued operations 0.08 (0.11)
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Net income (loss) available to common shareholders $0.13 $ (0.06)
Diluted earnings per share data:
Income from continuing operations $0.05 $ 0.05
Discontinued operations 0.08 (0.11)
---------- ----------
Net income (loss) available to common shareholders $0.13 $ (0.06)
========== ==========
Weighted average number of shares outstanding:
Basic 31,250,002 31,785,440
========== ==========
Diluted 31,810,301 32,227,972
========== ==========
Dividends declared per share $0.64 $0.63
========== ==========
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 MARCH 31, 2006 AND 2005
(UNAUDITED, IN THOUSANDS)
2006 2005
---- ----
Net income $5,488 $28
Other comprehensive income (loss):
Change in fair value of hedged instruments 83 353
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Net comprehensive income $5,571 $381
====== ====
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED, IN THOUSANDS)
2006 2005
---- ----
Cash flows from operating activities:
Net income $5,488 $28
------ ------
Adjustments to reconcile net income to net cash provided by operating activities:
Income (loss) allocated to minority interest 2,207 (923)
Depreciation and amortization 25,010 24,756
Impairment of assets held as General Partner - 7,725
Issuance of restricted stock, compensation cost of stock options and deferred compensation 700 625
Changes in assets and liabilities:
Other assets 3,260 165
Accounts payable and accrued liabilities 1,587 (10,661)
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Total adjustments 32,764 21,687
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Net cash provided by operating activities 38,252 21,715
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Cash flows from investing activities:
Purchase of properties and other assets, net of mortgage notes assumed and UPREIT Units
issued - (19,553)
Additions to properties (25,620) (18,215)
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Net cash used in investing activities (25,620) (37,768)
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Cash flows from financing activities:
Proceeds from sale of common stock, net 11,359 2,646
Repurchase of common stock (5,680) (54,265)
Proceeds from mortgage notes payable 102,963 82,040
Payments of mortgage notes payable (70,288) (12,626)
Proceeds from line of credit 59,500 99,200
Payments on line of credit (76,500) (65,200)
Payments of deferred loan costs (1,202) (506)
Withdrawals from (additions to) cash escrows, net 602 (1,761)
Dividends and distributions paid (31,351) (31,505)
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Net cash provided by (used in) financing activities (10,597) 18,023
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Net increase in cash and cash equivalents 2,035 1,970
Cash and cash equivalents:
Beginning of year 5,391 7,925
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End of period $7,426 $9,895
======= =======
Supplemental disclosure of non-cash operating, investing and financing activities:
Cash paid for interest $28,041 $25,327
Mortgage loans assumed associated with property acquisitions - 7,916
Issuance of UPREIT Units associated with property and other acquisitions - 12,611
Increase in real estate associated with the purchase of UPREIT Units 3,419 -
Exchange of UPREIT Units for common shares 2,350 156
Fair value of hedge instruments 313 (131)
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)
The accompanying notes are an integral part of these consolidated financial statements.
Page 34 of 34
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, 2005.
2. Organization and Basis of Presentation
Organization
Home Properties, Inc. (the "Company ") was formed in November 1993, as a
Maryland corporation and 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. The Company conducts its business through Home Properties, L.P.
(the "Operating Partnership"), a New York limited partnership. As of March 31,
2006, the Company operated 158 apartment communities with 47,002 apartments. Of
this total, the Company owned 153 communities, consisting of 43,433 apartments,
managed as general partner one partnership that owned 868 apartments, and fee
managed four communities, consisting of 2,701 apartments for third parties.
The Company elected to be taxed as a REIT under the Internal Revenue Code, as
amended, for all periods presented. A corporate REIT is a legal entity which
holds real estate interests and must meet a number of organizational and
operational requirements, including a requirement that it currently distribute
at least 90% of its adjusted taxable income to stockholders. As a REIT, the
Company generally will not be subject to corporate level tax on taxable income
it distributes currently to its stockholders. Management believes that all such
conditions for the avoidance of income taxes have been met for the periods
presented. Accordingly, no provision for federal and state income taxes have
been made.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its 65.6% (66.5% at March 31, 2005) interest in the Operating
Partnership. Such interest has been calculated as the percentage of outstanding
common shares divided by the total outstanding common shares and Operating
Partnership Units ("UPREIT Units") outstanding. The remaining 34.4% (33.5% at
March 31, 2005) 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 indirectly 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. Organization and Basis of Presentation (continued)
The accompanying consolidated financial statements include the accounts of Home
Properties Management, Inc. and Home Properties Resident Services, Inc. (the
"Management Companies"). The Management Companies are wholly owned subsidiaries
of the Company. In addition, the Company consolidates one affordable housing
limited partnership in accordance with FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities. All significant inter-company
balances and transactions have been eliminated in these consolidated financial
statements.
Reclassifications
Certain reclassifications have been made to the 2005 consolidated financial
statements to conform to the 2006 presentation.
3. Stock Benefit Plan
The Company has adopted the 1994 Stock Benefit Plan, as amended (the "Plan").
Plan participants include officers, non-employee directors, and key employees of
the Company. The Plan provided for the issuance of up to 1,596,000 shares to
officers and employees and 154,000 shares for issuance to non-employee
directors. Options granted to officers and employees of the Company vest 20% for
each year of service until 100% vested on the fifth anniversary. Certain
officers' options (264,000) and directors' options (149,100) vest immediately
upon grant. The exercise price per share for stock options may not be less than
100% of the fair market value of a share of common stock on the date the stock
option is granted (110% of the fair market value in the case of incentive stock
options granted to employees who hold more than 10% of the voting power of the
Company's common stock). Options granted to directors and employees who hold
more than 10% of the voting power of the Company expire after five years from
the date of grant.
All other options expire after ten years from the date of grant. The Plan also
allowed for the grant of stock appreciation rights and restricted stock awards.
No additional options will be granted under this Plan.
On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan (the "2000
Plan"). The 2000 Plan participants include directors, officers, regional
managers and on-site property managers. The 2000 Plan limits the number of
shares issuable under the plan to 2,755,000, of which 205,000 were to be
available for issuance to the non-employee directors. No additional options will
be granted under the 2000 Plan.
On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan (the "2003
Plan"). Plan participants include directors, officers, regional managers and
on-site property managers. The 2003 Plan limits the number of shares issuable
under the plan to 2,859,475, of which 249,475 are to be available for issuance
to the non-employee directors. At March 31, 2006, 1,121,250 and 90,000 common
shares were available for future grant of options or awards under the 2003 plan
for officers and employees and non-employee directors, respectively.
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, Share Based Payments ("SFAS 123R"). The statement is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS 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. Prior
to January 1, 2006, the Company applied the provisions of SFAS No. 148
Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment to SFAS No. 123 ("SFAS 148"). Under SFAS 148, the Company recognized
compensation cost related to stock option grants, based on the fair value on the
date of the grant, over the service period of the employee receiving the award.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Stock Benefit Plan (continued)
Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 148. The Company uses the Black-Scholes formula to estimate the fair value
of stock options granted to employees for both SFAS 123R and SFAS 148. SFAS 123R
and SFAS 148 require the estimation of forfeitures when recognizing compensation
expense and that this estimate of forfeitures be adjusted over the requisite
service period should actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative catch-up adjustment,
which is recognized in the period of change and which impact the amount of
unamortized compensation expense to be recognized in future periods. For options
granted prior to January 1, 2006, the Company uses the nominal vesting period
approach. For option grants after January 1, 2006, the Company will apply the
non-substantive vesting period approach. As a result of the adoption of SFAS
123R, the Company began capitalizing stock-based compensation costs as a
component of employee compensation that is capitalized as part of
self-constructed fixed assets. The Company applied the modified prospective
application in adopting SFAS 123R. The adoption of SFAS 123R did not have a
material impact on the Company's results of operations, financial position or
liquidity.
A summary of stock options activity for the three-months ended March 31, 2006 is
as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Price Contractual Intrinsic Value
Number of Options Per Option Term (000's)
----------------- ---------- ---- -------
Options outstanding at December 31, 2005 2,662,581 $36.18
Granted - -
Exercised ( 344,409) 32.88
Cancelled (47,574) 37.33
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Options outstanding at March 31, 2006 2,270,598 $ 36.66 7.3 $ 32,787
========= ======= === ========
Options exercisable at March 31, 2006 833,586 $ 33.19 6.0 $ 14,930
========= ======= === ========
The total cash received from the exercise of options during the three-months
ended March 31, 2006 was $11,325. The total intrinsic value of options exercised
during the three-months ended March 31, 2006 was $5,762. As of March 31, 2006,
there was $2,076 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the stock option plans; that
cost is expected to be recognized over a weighted-average period of 1.65 years.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Stock Benefit Plan (continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Ended March 31,
----------------------------
Assumption 2006 2005
---------- ---- ----
Dividend yields 6.55% 6.55%
Expected volatility 18.76% 18.76%
Expected lives of the options with a lifetime of ten years 7.5 Years 7.5 Years
Expected lives of the options with a lifetime of five years 5.0 Years 5.0 Years
Risk free interest rate 4.10% 4.10%
For the three-month periods ended March 31, 2006 and 2005, the Company
recognized $216 and $171 in stock compensation costs related to its outstanding
stock options.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share
Basic earnings per share ("EPS") is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock-based compensation including stock
options (using the treasury stock method), restricted stock, phantom shares
under the Company's incentive compensation plan, and the conversion of any
cumulative convertible preferred stock. The exchange of an UPREIT Unit for
common stock will have no effect on diluted EPS as Unitholders and stockholders
effectively share equally in the net income of the Operating Partnership. Income
from continuing operations is the same for both the basic and diluted
calculation.
The reconciliation of the basic and diluted earnings per share for the three
months ended March 31, 2006 and 2005 is as follows:
2006 2005
---- ----
Income from continuing operations $3,079 $3,676
Less: Preferred dividends (1,350) (1,898)
---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 1,729 1,778
Discontinued operations 2,409 (3,648)
---------- ----------
Net income (loss) available to common shareholders $4,138 $ (1,870)
========== ==========
Basic weighted average number of shares outstanding 31,250,002 31,785,440
Effect of dilutive stock options 536,474 357,856
Effect of phantom and restricted shares 23,825 84,676
---------- ----------
Diluted weighted average number of shares outstanding 31,810,301 32,227,972
========== ==========
Basic earnings per share data:
Income from continuing operations $0.05 $0.05
Discontinued operations 0.08 (0.11)
---------- ----------
Net income (loss) available to common shareholders $0.13 $ (0.06)
========== ==========
Diluted earnings per share data:
Income from continuing operations $0.05 $0.05
Discontinued operations 0.08 (0.11)
---------- ----------
Net income (loss) available to common shareholders $0.13 $ (0.06)
========== ==========
For the three-month periods ended March 31, 2006 and 2005, no unexercised stock
options to purchase shares of the Company's common stock were excluded in the
computation of diluted EPS as the options' exercise prices were less than the
average market price of the Company's stock during each period.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share (continued)
For the three-month period ended March 31, 2005 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. On May 26, 2005, the Series D Convertible Cumulative
Preferred Stock were converted and the common shares issued upon such conversion
were included in outstanding common shares from the date of conversion.
5. Other Income
Other income for the three-month periods ended March 31, 2006 and 2005 primarily
reflects 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 is the general partner in one VIE syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company manages the day-to-day operations of the partnership for a
management fee. In addition, the Company has an operating deficit guarantee and
tax credit guarantee to its limited partners (as discussed in Note 11). The
Company is responsible to fund operating deficits to the extent there are any
and can receive operating incentive awards when cash flows reach certain levels.
The effect on the consolidated balance sheet as of March 31, 2006 is an increase
in "Total assets" of $20,700, an increase in "Total liabilities" of $18,200, and
an increase in "Minority interest" of $2,500. Of the $18,200 increase in "Total
liabilities," $16,900 represents non-recourse mortgage debt.
Effective March 31, 2005, the Company was under contract or letter of intent for
the sale of three VIEs. The Company performed a valuation analysis on the
underlying investment of one VIE, and as a result, recorded an impairment charge
of $400 for the three month period ended March 31, 2005 to adjust the net book
value of the Company's investment in the property to the Company's estimate of
fair market value. This VIE is no longer held for sale as of December 31, 2005,
and is included in the consolidated results of operations for both the
three-month periods ended March 31, 2006 and 2005. The other two VIEs were
disposed of through a transfer of deed in lieu of foreclosure in September 2005.
The Company had repurchased the limited partner's interests in satisfaction of
any tax credit guarantees or other obligations to that partner in January, 2005
for $5,700. In connection with the Company's decision to dispose of the
property, the Company performed a valuation analysis on the underlying real
estate, and as a result, recorded a $7,300 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. Finally, on September, 30, 2005, the deed was transferred to the mortgage
holder in lieu of foreclosure resulting in a gain on sale of real estate of
$7,700.
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 all of the aggregation criteria under SFAS No. 131. The operating
segments are aggregated as Core and Non-core properties.
Non-segment revenue to reconcile to total revenue consists of interest income
and other income. Non-segment assets to reconcile to total assets include cash
and cash equivalents, cash in escrows, accounts receivable, prepaid expenses,
deferred charges, other assets and other assets held for sale.
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, 2005. Non-core properties consist of
apartment communities acquired during 2005 and 2006, such that full year
comparable operating results are not available. In addition, core properties
does not include assets held for sale as of March 31, 2006 and 2005.
The Company assesses and measures segment operating results based on a
performance measure referred to as net operating income. Net operating income is
defined as total revenues less operating and maintenance expenses.
The accounting policies of the segments are the same as those described in Notes
1 and 2 of the Company's Form 10-K for the year ended December 31, 2005.
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, net operating income, and assets for each of the reportable segments are summarized as follows for the three-month periods ended March 31,
2006, and 2005:
2006 2005
---- ----
Revenues
Apartments owned
Core properties $109,838 $103,613
Non-core properties 8,970 1,786
Reconciling items 608 656
---------- ----------
Total revenues $119,416 $106,055
========== ==========
Net operating income
Apartments owned
Core properties $56,473 $53,804
Non-core properties 4,200 369
Reconciling items 608 656
---------- ----------
Combined segment net operating income 61,281 54,829
General & administrative expenses (5,039) (5,405)
Interest expense (27,195) (23,201)
Depreciation and amortization (25,046) (21,268)
Impairment of assets held as General Partner - (400)
Minority interest in operating partnership (922) (879)
---------- ----------
Income from continuing operations $3,079 $3,676
========== ==========
Assets - As of March 31, 2006 and December 31, 2005
Apartments owned
Core properties $2,332,986 $2,082,413
Held for sale properties 225,756 219,776
Non-core properties 330,282 582,362
Reconciling items 91,951 93,319
---------- ----------
Total assets $2,980,975 $2,977,870
========== ==========
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
three-month period ended March 31, 2005. The total combined purchase price
(including closing costs) of $40,143 equates to approximately $73 per unit.
Consideration for the communities was funded through the assumption or placement
of new debt of $7,916, $19,616 from the Company's line of credit and $12,611 of
UPREIT Units.
The following unaudited proforma information was prepared as if the 2005
transactions related to the acquisition of the 2005 Acquired Communities had
occurred on January 1, 2005. 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, 2005, nor does it purport to
represent the results of operations for future periods. Adjustments to the
proforma condensed combined statement of operations for the three-month period
ended March 31, 2005, consist principally of providing net operating activity
and recording interest, depreciation and amortization from January 1, 2005 to
the acquisition date as appropriate.
For the Three-months Ended
March 31, 2005
--------------
Total revenues $112,621
Net income available to common shareholders $1,714
Per common share data:
Net income available to common shareholders
Basic $0.05
Diluted $0.05
Weighted average numbers of shares outstanding:
Basic 31,785,440
Diluted 32,227,972
9. Derivative Financial Instruments
The Company enters into financial derivative instruments only for the purpose of
minimizing risk and, thereby, protecting income. Derivative instruments utilized
as part of the Company's risk management strategy may include interest rate
swaps and caps. All derivatives are recognized on the balance sheet at fair
value. The Company does not employ leveraged derivative instruments, nor does it
enter into derivative instruments for trading or speculative purposes.
The Company has four interest rate swaps that effectively convert variable rate
debt to fixed rate debt. As of March 31, 2006, the aggregate fair value of the
Company's interest rate swaps was $313 prior to the allocation of minority
interest and is included in the consolidated balance sheets. For the
three-months ending March 31, 2006, as the critical terms of the interest rate
swaps and the hedged items are the same, no ineffectiveness was recorded in the
consolidated statements of operations. All components of the interest rate swaps
were included in the assessment of hedge effectiveness. The fair value of the
interest rate swaps is based upon the estimate of amounts the Company would
receive or pay to terminate the contract at the reporting date and is estimated
using interest rate market pricing models.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. Disposition of Property and Discontinued Operations
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 for the three-months ended March 31, 2005
are the operating results, net of minority interest, of four apartment community
dispositions (all sold in 2005) and four VIE dispositions (all sold in 2005).
In addition, included in discontinued operations for the three-months ended
March 31, 2006 and 2005 are the operating results, net of minority interest, of
twenty-one apartment communities held for sale as of March 31, 2006. 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 as follows for the three-months ended March 31, 2006 and 2005:
2006 2005
---- ----
Revenues:
Rental income $10,436 $14,274
Property other income 803 674
------ ------
Total revenues 11,239 14,948
------ ------
Expenses:
Operating and maintenance 6,222 8,359
Interest expense 1,286 1,763
Depreciation and amortization 37 2,928
Impairment of real property - 7,325
------ ------
Total expenses 7,545 20,375
------ ------
Income (loss) from discontinued operations before minority interest and gain (loss)
on disposition of property 3,694 (5,427)
Minority interest in limited partnerships - (23)
Minority interest in operating partnerships (1,285) 1,802
------ ------
Income from discontinued operations $2,409 $(3,648)
====== ======
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. Disposition of Property and Discontinued Operations (continued)
The major classes of assets and liabilities held for sale as of March 31, 2006 and December 31, 2005 were as follows
2006 2005
---- ----
Real estate:
Land $28,372 $27,820
Buildings, improvements and equipment 251,852 246,181
-------- --------
280,224 274,001
Less: accumulated depreciation (54,468) (54,225)
-------- --------
Real estate held for sale, net 225,756 219,776
-------- --------
Other assets:
Cash in escrows 446 348
Accounts receivable 757 650
Prepaid expenses 2,371 2,951
-------- --------
Other assets held for sale 3,574 3,949
-------- --------
Liabilities:
Mortgage notes payable 73,135 73,603
Accrued expenses and other liabilities 428 431
Security deposits 1,282 1,233
-------- --------
Liabilities held for sale 74,845 75,267
-------- --------
Net assets held for sale $154,485 $148,458
======== ========
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. At the time,
the Company believed the assessment and the state's underlying position were
neither supportable by the law nor consistent with previously provided
interpretative guidance from the office of the State Secretary of Revenue.
During December 2003, the state's governor signed legislation which included the
REIT tax provisions. Based upon this, Company's tax counsel expected that the
outstanding litigation would 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 State Commonwealth Court concerning the 1999 tax year.
Settlement discussions occurred during the third quarter of 2005 for the open
years 1999-2001. In March, 2006, the Company settled the 1999 year under audit
for $56, including interest. In addition, the Company has made settlement offers
for the 2000 and 2001 tax years which, if accepted, would result in a payment of
$147, including interest. The Company believes, and has been advised by counsel,
that this settlement should be acceptable to the Department of Revenue and is
awaiting final approval of the offer. The Company has accrued $147 at March 31,
2006.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. Commitments and Contingencies (continued)
As a result of a New York State sales tax audit, the Company had filed Voluntary
Disclosure Agreements ("VDAs") with the four other states where it estimated to
have significant financial exposure. During 2005, the Company signed VDAs with
these states which agreed to limit the VDA filing period back to January 1,
2001, and satisfied all financial obligations under the VDAs. During 2005, the
Company 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. 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. During the third quarter of 2005, the Company
finalized negotiations with New York State settling a sales tax audit covering
the period June 1, 2002 through November 30, 2004. The settlement was not
materially different from what had been accrued and has been fully paid as of
March 31, 2006.
In connection with various UPREIT transactions, the Company has agreed to
maintain certain levels of nonrecourse debt for a period of 5 to 10 years
associated with the contributed properties acquired. In addition, the Company is
restricted in its ability to sell certain contributed properties (50% of the
owned portfolio) for a period of 5 to 15 years except through a tax deferred
Internal Revenue Code Section 1031 like-kind exchange.
Guarantees
As of March 31, 2006, 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 $3,000. As of
March 31, 2006, 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 ("Home Leasing"), 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
$3.4 or $40 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 $135. Additional deferred purchase price of $10 was recognized during
the three-months ended March 31, 2006. The cumulative gain recognized on the
sale of these assets through March 31, 2006 amounted to $74. If the management
of this property is retained for the entire three years the Company expects to
receive an additional $30 for the period April 1, 2006 through January 1, 2007.
The gain on sale would then be approximately $104.
13. Subsequent Events
On April 5, 2006, the Company sold two apartment communities with a total of 92
units, located in the New Jersey region for $9.2 million. A gain on sale of
approximately $4.5 million (before allocation of minority interest) will be
recorded in the second quarter of 2006.
On May 4, 2006, the Board of Directors approved a dividend of $.64 per share on
its common stock for the quarter ended March 31, 2006. This is the equivalent of
an annual distribution of $2.56 per share. The dividend is payable May 26, 2006
to shareholders of record on May 16, 2006.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. Subsequent Events (continued)
On May 4, 2006, the Company also declared a regular dividend of $.5625 per share
on its Series F Cumulative Redeemable Preferred Stock, for the quarter ending
May 31, 2006. The dividend on the preferred shares is payable on May 31, 2006 to
shareholders of record on May 16, 2006. 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 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 UPREIT Unitholders, capital
improvements and repairs and maintenance for the properties, acquisition of
additional properties, property development, stock repurchases 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.
Cash provided by operating activities was $38,252 and $21,715 for the
three-month period ended March 31, 2006 and 2005, respectively. Cash used in
investing activities was $25,620 and $37,768 for the three-month period ended
March 31, 2006 and 2005, respectively. Cash provided by (used in) financing
activities was $(10,597) and $18,023 for the three-month period ended March 31,
2006 and 2005, respectively.
As of March 31, 2006, the Company has an unsecured line of credit agreement with
M&T Bank of $140 million which expires September 1, 2008. The Company's
outstanding balance as of March 31, 2006, was $65 million. Borrowings under the
line of credit bear interest at .75% 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.
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 property debt
financing, 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 March 31, 2006, the Company owned 26
properties with 5,405 apartment units, which were unencumbered by debt.
A significant source of liquidity in 2006 is expected to be from the sale of
properties. Management has included in its operating plan that the Company will
strategically dispose of assets totaling approximately $250 million in 2006,
although there can be no assurance that such dispositions will actually occur.
In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. The available balance on the shelf
registration statement at March 31, 2006 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, all
250,000 shares of the 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 2005, the Company issued $55,600 of UPREIT
Units as consideration for three acquired properties.
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. During the first three months of 2006, the Company's additional capital
raised under the DRIP netted to zero after taking into account share repurchases
used in lieu of new stock issuance.
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its common stock or UPREIT
Units. The shares/units may be repurchased through open market or privately
negotiated transactions at the discretion of Company management. The Board's
action did not establish a target stock price or a specific timetable for
repurchase. During the three months ended March 31, 2006, 107,800 shares were
repurchased by the Company. At March 31, 2006, the Company had authorization to
repurchase 3,112,395 shares. The Company will continue to monitor stock prices,
the published net asset value, and acquisition alternatives to determine the
current best use of capital between the two major uses of capital - stock
buyback and acquisitions.
As of March 31, 2006, the weighted average rate of interest on mortgage debt is
5.8% and the weighted average maturity is approximately seven years.
Approximately 95% 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 is the general partner in one VIE syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company manages the day-to-day operations of the partnership for a
management fee. In addition, the Company has an operating deficit guarantee and
tax credit guarantee to its limited partner. The Company is responsible to fund
operating deficits to the extent there are any and can receive operating
incentive awards when cash flows reach certain levels. The effect on the
consolidated balance sheet as of March 31, 2006 is an increase in "Total assets"
of $20,700, an increase in "Total liabilities" of $18,200, and an increase in
"Minority interest" of $2,500. Of the $18,200 increase in total liabilities,
$16,900 represent non-recourse mortgage debt.
Effective March 31, 2005, the Company was under contract or letter of intent for
the sale of three VIEs. The Company performed a valuation analysis on the
underlying investment of one VIE, and as a result, recorded an impairment charge
of $400 for the three month period ended March 31, 2005 to adjust the net book
value of the Company's investment in the property to the estimate of fair market
value. This VIE is no longer considered held for sale as of December 31, 2005,
and is included in the consolidated results of operations for both the
three-month periods ending March 31, 2006 and 2005.
In addition, the two other VIEs were disposed of in the third quarter of 2005
through a transfer of deed in lieu of foreclosure. The Company had repurchased
the limited partner's interests in satisfaction of any tax credit guarantees or
other obligations to that partner in January, 2005 for $5,700. In connection
with the Company's decision to dispose of the property, the Company performed a
valuation analysis on the underlying real estate, and as a result, recorded a
$7,300 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. Finally, on September, 30, 2005, the
deed was transferred to the mortgage holder in lieu of foreclosure resulting in
a gain on sale of real estate of $7,700.
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 $3,000. Such
guarantee requires the Company to operate the property in compliance with
Internal Revenue Code Section 42 for 15 years. In addition, acting as the
general partner in this 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.
Acquisitions and Dispositions
There were no transactions closed during the quarter ended March 31, 2006 for
either acquisitions or dispositions.
During the first quarter the Company continued the previously announced
marketing of its entire Detroit portfolio and received numerous offers for
various combinations of properties and the entire portfolio. The Company is
working with a specific buyer who is currently performing due diligence. The
Company believes its previously stated financial expectations and timeline to
complete the sale by the end of the second quarter of 2006 are achievable.
On April 5, 2006, the Company sold two apartment communities with a total of 92
units, located in the New Jersey region for $9.2 million. A gain on sale of
approximately $4.5 million (before allocation of minority interest) will be
recorded in the second quarter of 2006. The weighted average first year
capitalization rate projected on these dispositions is 3.95%.
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 2008 and had $65 million outstanding at March 31, 2006. The $1.9
billion in mortgage notes payable have varying maturities ranging from 1 to 36
years. The weighted average interest rate of the Company's fixed rate notes was
5.87% and 5.95% at March 31, 2006 and December 31, 2005, respectively. The
weighted average interest rate of the Company's variable rate notes and credit
facility was 5.42% and 4.82% at March 31, 2006 and December 31, 2005,
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 March 31,
2006, 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 affiliate 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 its 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 the Company 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 $141
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 and does not anticipate any payment on
the guarantees. In addition, the Company, acting as general partner in this
partnership, is obligated to advance funds to meet partnership operating
deficits.
Capital Improvements
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-month periods ended March 31,
2006 and 2005, approximately $131 per unit was estimated to be spent on
recurring capital expenditures. The table below summarizes the actual total
capital improvements, (including assets held for sale) incurred by major
categories for the three-month periods ended March 31, 2006 and 2005 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-month period ended March 31, 2006 as follows:
For the three-month period ended March 31,
(in thousands, except per unit data)
2006 2005
------------------------------------------------------------------ ------------------------
Recurring Per Non-Recurring Per Total Capital Per Total Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvements Unit(a) Improvements Unit(a)
------ ------- ------ ------- ------------ ------- ------------ -------
New Buildings $ - $ - $1,423 $33 $1,423 $33 $1,336 $32
Major building
improvements 988 23 3,508 81 4,496 104 2,108 51
Roof replacements 358 8 479 11 837 19 976 24
Site improvements 358 8 637 15 995 23 670 16
Apartment upgrades 717 17 4,253 98 4,970 115 4,546 110
Appliances 608 14 448 10 1,056 24 882 21
Carpeting/Flooring 1,857 42 566 13 2,423 55 2,138 52
HVAC/Mechanicals 554 13 2,749 63 3,303 76 2,182 53
Miscellaneous 261 6 622 14 883 20 915 22
------ ---- ------- ---- ------- ---- ------- ----
Totals $5,701 $131 $14,685 $338 $20,386 $469 $15,753 $381
====== ==== ======= ==== ======= ==== ======= ====
(a) Calculated using the weighted average number of units outstanding, including
35,817 core units, 5,138 held for sale units, 2005 acquisition and construction
units of 2,478 for the three-month period ended March 31, 2006 and 35,817 core
units, 5,138 held for sale units and 2005 acquisition units of 550 for the three
month period ended March 31, 2005.
The schedule below summarizes the breakdown of total capital improvements
between core, held for sale and non-core as follows:
For the three-month period ended March 31,
(in thousands, except per unit data)
2006 2005
---------------------------------------------------------------------- ------------------------
Recurring Per Non-Recurring Per Total Capital Per Total Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvements Unit(a) Improvements Unit(a)
------ ------- ------ ------- ------------ ------- ------------ -------
Core Communities $4,703 $131 $12,189 $340 $16,892 $471 $14,848 $415
Held For Sale 673 131 1,008 196 1,681 327 863 168
------ ---- ------- ---- ------- ---- ------- ----
Total Same Store 5,376 131 13,197 322 18,573 453 15,711 384
2006 Acquisition
Communities - - - - - - - -
2005 Acquisition
Communities 325 131 1,488 600 1,813 732 42 76
------ ---- ------- ---- ------- ---- ------- ----
Sub-total 5,701 131 14,685 338 20,386 469 15,753 381
2006 Disposed
Communities - - - - - - - -
2005 Disposed
Communities - - - - - - 918 1,125
Construction In
Progress - - 4,195 - 4,195 - 1,342 -
Corporate office
expenditures (1) - - - - 1,070 - 288 -
------ ---- ------- ---- ------- ---- ------- ----
$5,701 $131 $18,880 $435 $25,651 $566 $18,301 $426
------ ---- ------- ---- ------- ---- ------- ----
No distinction is made between recurring and non-recurring expenditures for
corporate office. Corporate office expenditures include principally computer
hardware, software and office furniture and fixtures.
Results of Operations
Comparison of three-months ended March 31, 2006 to the same period in 2005
The Company had 124 apartment communities with 35,817 units which were owned
during the three-month periods being presented (the "Core Properties"). The
Company has acquired/developed an additional eight apartment communities with
2,478 units during 2005 (the "2005 Acquired Communities"). The Company also
disposed of four properties with a total of 816 units during 2005 (the "2005
Disposition Communities"). Also, the Company has placed twenty-one properties
with a total of 5,138 units into held for sale status, which had full quarter
results for the periods being presented ("Held for Sale Communities"). The
results of these disposed and held for sale properties have been classified as
discontinued operations and are not included in the table below. The inclusion
of the Acquired Communities generally accounted for the significant changes in
operating results for the three-months ended March 31, 2006. In addition,
effective April 1, 2004, the reported income from operations include the
consolidated report of one investment where the Company is the managing general
partner that has been determined to be a VIE.
A summary of the net operating income from Core Properties is as follows (in
thousands):
Three Months
------------
2006 2005 $ Change % Change
---- ---- -------- --------
Rent $102,946 $99,135 $3,811 3.8%
-------- ------- ------ ---
Utility Recovery Revenue 1,791 104 1,687 1622.1%
Other Income 5,101 4,374 727 16.6%
-------- ------- ------ ---
Total Property Other Income 6,892 4,478 2,414 53.9%
-------- ------- ------ ---
Total Revenue 109,838 103,613 6,225 6.0%
Operating and Maintenance (53,365) (49,809) (3,556) -7.1%
-------- ------- ------ ---
Net Operating Income $56,473 $53,804 $2,669 5.0%
======= ======= ====== ===
A summary of the net operating income from continuing operations is as follows (in thousands):
Three Months
------------
2006 2005 $ Change % Change
---- ---- -------- --------
Rent $111,638 $100,885 $10,753 10.7%
-------- -------- ------- ----
Utility Recovery Revenue 1,900 104 1,796 1726.9%
Other Income 5,270 4,410 860 19.5%
-------- -------- ------- ----
Total Property Other Income 7,170 4,514 2,656 58.8%
-------- -------- ------- ----
Total Revenue 118,808 105,399 13,409 12.7%
Operating and Maintenance (58,135) (51,226) (6,909) -13.5%
-------- -------- ------- ----
Net Operating Income $ 60,673 $ 54,173 $6,500 12.0%
======== ======== ======= ====
NOI may fall within the definition of "non-GAAP financial measure" set forth in
Item 10(e) of Regulation S-K and, as a result, Home Properties may be required
to include in this report a statement disclosing the reasons why management
believes that presentation of this measure provides useful information to
investors. Home Properties believes that NOI is helpful to investors as a
supplemental measure of the operating performance of a real estate company
because it is a direct measure of the actual operating results of the Company's
apartment properties. In addition, the apartment communities are valued and sold
in the market by using a multiple of NOI. The Company also uses this measure to
compare its performance to that of its peer group.
Of the $10,753 increase in rental income, $6,820 is attributable to the Acquired
Communities and $122 is attributable to the VIE. The balance of this increase,
or $3,811 which is from the Core Properties, was the result of an increase of
2.5% in weighted average rental rates, plus an increase in occupancy from 92.8%
to 94.1%. 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 utility recovery
charges, operation of laundry facilities, late charges, administrative fees,
garage and carport charges, revenue from corporate apartments, cable revenue,
pet charges, and miscellaneous charges to residents increased by $2,656. Of this
increase, $242 is attributable to the Acquired Communities and $2,414 represents
a 53.9% increase from the Core Properties. Included in the Core increase is
$1,681 which represents increased utility recovery charges compared to 2005.
Other income decreased $48 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 $6,909 increase in operating and maintenance expenses, $2,853 is
attributable to the Acquired Communities and $500 is attributable to the
consolidation of the VIE. The balance, a $3,556 increase, is attributable to the
Core Properties and is primarily due to increases in natural gas heating costs,
property insurance and site level incentive compensation. These increases were
offset in part by a reduction in personnel costs and snow removal costs. Natural
gas heating costs were up $2,374 or 28.0% over 2005. We have seen significant
increases in the cost of natural gas per decatherm. Last year we had a weighted
average cost of $6.23 per decatherm versus this year's average cost of $9.65.
Property insurance increased $733, or 50.7%, for the period primarily due to a
general increase in our property and general liability premiums, and losses to
date which have been projected using actuarial assumptions. Site level incentive
compensation increased $271, or 81.1%. This represents an increased focus on
creating a higher level of property management compensation coming from
incentive based performance measures. Personnel expenses were down $458, or
4.3%. Snow removal costs were down $493 or 46.3%. The first quarter 2006
produced below normal snowfalls compared to normal snowfall in 2005.
General and administrative expense decreased in 2006 by $366. General and
administrative expenses as a percentage of total revenues were 3.9% for 2006 as
compared to 4.5% for 2005. The decrease is the result of a $1,000 reduction in
external costs incurred for auditing, tax and consultation expense, including
costs to comply with Section 404 of Sarbanes-Oxley. A significant portion of the
costs in 2005 related to the non-recurring first year efforts for 404
compliance. This was partially offset by increases in recruiting, external costs
associated with the implementation of a property management software system, and
stock option compensation costs.
Interest expense increased in 2006 by $3,994 as a result of the increased
borrowings in connection with acquisition of the 2005 Acquisition Communities
and additional mortgage debt and refinanced mortgage debt incurred during 2006.
Depreciation and amortization expense increased $3,778 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. During the
first three months of 2005, the Company recorded impairment charges of $400,
which pertains to an impairment charge taken on the one remaining VIE to reduce
its investment to fair market value.
Included in discontinued operations for the three-months ended March 31, 2005
are the operating results, net of minority interest, of four apartment community
dispositions (all sold in 2005) and VIE dispositions (all sold in 2005).
In addition, included in discontinued operations for the three-months ended
March 31, 2006 and 2005 are the operating results, net of minority interest, of
twenty-one apartment communities held for sale as of March 31, 2006. 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.
Funds From Operations
Pursuant to the revised definition of Funds From Operations ("FFO") adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), FFO is defined as net income (computed in accordance with
accounting principles generally accepted in the United States of America
("GAAP")) excluding gains or losses from sales of property, minority interest,
extraordinary items and cumulative effect of change in accounting principle plus
depreciation from real property including adjustments for unconsolidated
partnerships and joint ventures less dividends from non-convertible preferred
shares. Because of the limitations of the FFO definition as published by NAREIT
as set forth above, the Company has made certain interpretations in applying the
definition. The Company believes all adjustments not specifically provided for
are consistent with the definition.
Management believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO should be considered
in conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management believes that by excluding
gains or losses related to dispositions of property and excluding real estate
depreciation (which can vary among owners of similar assets in similar condition
based on historical cost accounting and useful life estimates), FFO can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs. FFO does not include the cost incurred for
capital improvements (including capitalized interest) reflected as an increase
to real estate assets. The Company's total capital improvements include an
annual reserve for anticipated recurring, non-revenue generating capitalized
costs of $525 per apartment unit. Please refer to the "Capital Improvement"
section above in MD&A. FFO should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flow as a
measure of liquidity.
The calculation of FFO and reconciliation to GAAP net income available to common
shareholders for the three-months ended March 31, 2006 and 2005 are presented
below (in thousands):
2006 2005
---- ----
Net income (loss) available to common shareholders $4,138 $(1,870)
Real property depreciation and amortization 24,498 23,602
Minority interest 922 879
Minority interest - income (loss) from discontinued operations 1,285 (1,802)
-------- --------
FFO - Basic $30,843 $20,809
-------- --------
Convertible preferred dividends ((2)) - -
FFO - Diluted $30,843 $20,809
======== ========
Weighted average common shares/units
outstanding(1):
- Basic 47,912.2 47,477.1
======== ========
- Diluted (2) 48,472.5 47,919.7
======== ========
(1) The calculation assumes the conversion of dilutive common stock equivalents
including convertible preferred stock and the conversion of all UPREIT
Units to common shares.
(2) The convertible preferred stock had an anti-dilutive effect; therefore, the
convertible preferred dividends are not included in FFO diluted for the
three-months ended March 31, 2005.
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 following calculation is defined as total revenues from
discontinued operations less operating and maintenance expenses.
Calculation Presented for Series F Preferred Covenant
Three-months ended
-----------------------------------------------
Mar.31, Dec.31, Sept.30, June30,
2006 2005 2005 2005
---- ---- ---- ----
EBITDA
Total revenues $119,416 $114,835 $125,775 $121,636
Net operating income (loss) from discontinued operations 5,017 5,677 1,045 (343)
Operating and maintenance (58,135) (51,801) (54,161) (53,623)
General and administrative (5,039) (5,209) (4,894) (4,144)
------ ------ ------ ------
$61,259 $63,502 $67,765 $63,526
Fixed Charges
Interest expense $27,195 $25,793 $27,059 $25,173
Interest expense on discontinued operations 1,286 1,578 382 279
Preferred dividends 1,350 1,350 1,350 1,681
Capitalized interest 313 312 254 339
------ ------ ------ ------
$30,144 $29,033 $29,045 $27,472
Times Coverage ratio: 2.03 2.19 2.33 2.31
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. The line of
credit has not been used for long-term financing but adds a certain amount of
flexibility, especially in meeting the Company's acquisition goals. Many times
it is easier to temporarily finance an acquisition or stock repurchases 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. Starting in 2001 and continuing
into 2004 many regions of the United States had experienced varying degrees of
economic recession and certain recessionary trends, such as a temporary
reduction in occupancy and reduced pricing power limiting the ability to
aggressively raise rents. Starting in the second half on 2004 and continuing
into 2006, we have seen a reversal of these recessionary trends. In light of
this, we will continue to review our business strategy; however, we believe that
given our property type and the geographic regions in which we are located, we
do not anticipate any changes in our strategy or material effects on financial
performance.
Declaration of Dividend
On May 4, 2006, the Board of Directors approved a dividend of $.64 per share on
its common stock for the quarter ended March 31, 2006. This is the equivalent of
an annual distribution of $2.56 per share. The dividend is payable May 26, 2006
to shareholders of record on May 16, 2006.
On May 4, 2006, the Company also declared a regular dividend of $.5625 per share
on its Series F Cumulative Redeemable Preferred Stock, for the quarter ending
May 31, 2006. The dividend on the preferred shares is payable on May 31, 2006 to
shareholders of record on May 16, 2006. 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. 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. During December
2003, the state's governor signed legislation which included the REIT tax
provisions. Based upon this, Company's tax counsel expected that the outstanding
litigation would 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
State Commonwealth Court concerning the 1999 tax year. Settlement discussions
have occurred during the third quarter of 2005 for the open years 1999-2001. In
March 2006, the Company settled the 1999 year under audit for $56, including
interest. In addition, the Company has made settlement offers for the 2000 and
2001 years which, if accepted, would result in a payment of $147, including
interest. The Company believes that the likelihood of settling all of the open
years has increased, and has accrued $147 at March 31, 2006.
As a result of a State sales tax audit, the Company had filed Voluntary
Disclosure Agreements ("VDAs") with the four other states where it estimated to
have significant financial exposure. During the first six months of 2005, the
Company signed VDAs with these states which agreed to limit the VDA filing
period back to January 1, 2001, and has satisfied all financial obligations
under the VDAs. For the 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. During the third quarter of
2005, the Company finalized negotiations with New York State settling a sales
tax audit covering the period June 1, 2002 through November 30, 2004. The
settlement was not materially different from what had been accrued and has been
paid in full as of March 31, 2006.
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.
HOME PROPERTIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At March 31,
2006 and December 31, 2005, approximately 95% and 91%, respectively, of the
Company's debt bore interest at fixed rates with a weighted average maturity of
approximately 7 years for both periods, respectively, and a weighted average
interest rate of approximately 5.87% and 5.95%, respectively, including the $28
million and $29 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 18 and 12 years, respectively, and
a weighted average interest rate of 4.75% and 4.54%, respectively, at March 31,
2006 and December 31, 2005. The Company does not intend to utilize a significant
amount of permanent variable rate debt to acquire properties in the future. On
occasion, the Company may use its line of credit in connection with a property
acquisition or stock repurchase with the intention to refinance at a later date.
The Company believes, however, that in no event would increases in interest
expense as a result of inflation significantly impact the Company's
distributable cash flow.
At March 31, 2006 and December 31, 2005, the interest rate risk on $28 million
and $29 million, respectively, of such variable rate debt has been mitigated
through the use of interest rate swap agreements (the "Swaps") with major
financial institutions. The Company is exposed to credit risk in the event of
non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.
At March 31, 2006 and December 31, 2005, the fair value of the Company's fixed
rate debt, including the $28 million and $29 million, respectively, which was
swapped to a fixed rate, amounted to a liability of $1.84 billion and $1.89
billion, respectively, compared to its carrying amount of $1.82 billion and
$1.84 billion, respectively. The Company estimates that a 100 basis point
increase in market interest rates at March 31, 2006 would have changed the fair
value of the Company's fixed rate debt to a liability of $1.76 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
March 31, 2006, the Company had no other material exposure to market risk.
HOME PROPERTIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted by the Company under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the officers who certify the Company's
financial reports and to the other members of senior management and the Board of
Directors.
The principal executive officer and principal financial officer evaluated, as of
March 31, 2006, the effectiveness of the disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15-d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) and have determined that such disclosure
controls and procedures are effective.
There have been no changes in the internal controls over financial reporting
identified in connection with that evaluation, or that occurred during the first
quarter of the year ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. The Company has not identified any material weaknesses in
its internal controls.
HOME PROPERTIES, INC.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Refer to the Risk Factors disclosure in the Company's Form 10-K for the year
ended December 31, 2005. There have been no material changes in these risk
factors during the three-months ended March 31, 2006 and through the date of
this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action does not establish a specific target stock price or a specific
timetable for share repurchase. In addition, participants in the Company's Stock
Benefit Plan can use common stock of the Company that they already own to pay
all or a portion of the exercise price payable to the Company upon the exercise
of an option. In such event, the common stock used to pay the exercise price is
returned to authorized but unissued status, and for purposes of this table is
deemed to have been repurchased by the Company. At December 31, 2004 the Company
had authorization to repurchase 2,000,000 shares of common stock and UPREIT
Units under the stock repurchase program. During 2005, the Company repurchased
2,779,805 shares at a cost of $111,738,000, and in January, 2006, an additional
107,800 shares at a cost of $4,468,000. On each of February 16, 2005 and
November 4, 2005, the Board of Directors approved a 2,000,000-share increase in
the stock repurchase program, resulting in a remaining authorization level of
3,112,395 shares as of March 31, 2006. The following table summarizes the total
number of shares (units) repurchased by the Company during the three-month
period ending March 31, 2006.
Total shares (units) Maximum shares
Total shares Average purchased as (units) that may
(units) price per part of publicly- yet be purchased
Period purchased(1) share(unit) announced Plan under the Plan
------ ------------ ------------ -------------- --------------
Balance December 31, 2005 3,220,195
January 1, 2006 to January 31, 2006 109,359 $41.54 107,800 3,112,395
February 1, 2006 to February 28, 2006 1,146 $49.11 - -
March 1, 2006 to March 31, 2006 9,643 $49.92 - -
------- ------ ------- ---------
120,148 $42.28 107,800 3,112,395
------- ------ ------- ---------
(1) During the three-months ended March 31, 2006, the Company repurchased
12,348 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"), which are included in this table.
ITEM 6. EXHIBITS
Exhibit 10.82 Development Agreement, dated March 27, 2006 between Nelson B.
Leenhouts and Home Properties, Inc. - Incorporated by reference to the Form
filed by Home Properties, Inc. on March 27, 2006.
Exhibit 10.83 Amendment No. Eighty to the Second Amended and Restated Limited
Partnership Agreement
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certification of Chief Executive Officer
Exhibit 32.2 Section 906 Certification of Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME PROPERTIES, INC.
(Registrant)
Date: May 8, 2006
By: /s/ Edward J. Pettinella
------------------------
Edward J. Pettinella
President and Chief Executive Officer
Date: May 8, 2006
By: /s/ David P. Gardner
------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer