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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 SEPTEMBER 30, 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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 16-1455126
(State of incorporation) (I.R.S. Employer Identification No.)
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850 Clinton Square, Rochester, New York 14604
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(Address of principal executive offices)(Zip Code)
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(585) 546-4900
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(Registrant's telephone number, including area code)
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N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
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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 Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 31, 2006
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$.01 par value 32,943,009
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HOME PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2006 (Unaudited) and December 31, 2005 4
Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 2006 and 2005 5
Consolidated Statements of Operations (Unaudited) -
Nine months ended September 30, 2006 and 2005 6
Consolidated Statements of Comprehensive Income (Unaudited) -
Three months ended September 30, 2006 and 2005 7
Consolidated Statements of Comprehensive Income (Unaudited) -
Nine months ended September 30, 2006 and 2005 8
Consolidated Statements of Cash Flow (Unaudited) -
Nine months ended September 30, 2006 and 2005 9
Notes to Consolidated Financial Statements (Unaudited) 10-21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22-34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 6. Exhibits 37
Signatures 38
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
---- ----
(Unaudited) (Note 1)
ASSETS
Real estate:
Land $ 422,437 $ 401,747
Construction in progress 2,455 4,471
Buildings, improvements and equipment 2,743,397 2,700,554
Real estate held for sale, net 144,559 223,938
----------- -----------
3,312,848 3,330,710
Less: accumulated depreciation (425,090) (446,159)
----------- -----------
Real estate, net 2,887,758 2,884,551
Cash and cash equivalents 7,700 5,391
Cash in escrows 30,867 36,674
Accounts receivable 7,805 7,372
Prepaid expenses 16,832 16,141
Deferred charges 10,767 11,156
Other assets 13,137 12,536
Other assets held for sale 5,791 4,049
----------- -----------
Total assets $ 2,980,657 $ 2,977,870
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 1,798,611 $ 1,768,483
Line of credit 59,500 82,000
Accounts payable 16,444 19,458
Accrued interest payable 8,846 8,274
Accrued expenses and other liabilities 23,507 22,565
Security deposits 21,655 21,657
Liabilities held for sale 79,633 75,352
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Total liabilities 2,008,196 1,997,789
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Commitments and contingencies
Minority interest 262,415 323,269
----------- -----------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares
issued and outstanding at September 30, 2006 and December 31, 2005. 60,000 60,000
Common stock, $.01 par value; 80,000,000 shares authorized; 33,523,040 and
31,184,256 shares issued and outstanding at September 30, 2006 and
December 31, 2005. 335 312
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued
or outstanding - -
Additional paid-in capital 864,561 773,396
Accumulated other comprehensive income 215 206
Distributions in excess of accumulated earnings (215,065) (177,102)
----------- -----------
Total stockholders' equity 710,046 656,812
----------- -----------
Total liabilities and stockholders' equity $ 2,980,657 $ 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 SEPTEMBER 30, 2006 AND 2005
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
---- ----
Revenues:
Rental income $ 105,740 $ 96,316
Property other income 7,270 5,636
Interest income 553 92
Other income 1,692 476
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Total revenues 115,255 102,520
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Expenses:
Operating and maintenance 45,650 42,105
General and administrative 5,607 4,894
Interest 26,637 23,971
Depreciation and amortization 24,236 20,333
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Total expenses 102,130 91,303
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Income from operations 13,125 11,217
Minority interest in operating partnerships (3,381) (3,219)
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Income from continuing operations 9,744 7,998
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Discontinued operations:
Income from operations, net of $873 and $1,130 in 2006 and 2005 allocated to
minority interest, respectively 2,167 2,338
Gain (loss) on disposition of property, net of ($80) and $3,080 in 2006 and
2005 allocated to minority interest, respectively (200) 6,367
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Discontinued operations 1,967 8,705
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Net income 11,711 16,703
Preferred dividends (1,350) (1,350)
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Net income available to common shareholders $ 10,361 $ 15,353
========= =========
Basic earnings per share data:
Income from continuing operations $ 0.25 $ 0.20
Discontinued operations 0.06 0.27
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Net income available to common shareholders $ 0.31 $ 0.47
======= =======
Diluted earnings per share data:
Income from continuing operations $ 0.24 $ 0.20
Discontinued operations 0.06 0.27
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Net income available to common shareholders $ 0.30 $ 0.47
======= =======
Weighted average number of shares outstanding:
Basic 33,336,346 32,518,949
========== ==========
Diluted 34,103,614 32,950,121
========== ==========
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 OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
---- ----
Revenues:
Rental income $ 311,721 $ 281,149
Property other income 20,047 13,618
Interest income 763 233
Other income 2,713 1,503
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Total revenues 335,244 296,503
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Expenses:
Operating and maintenance 141,064 129,297
General and administrative 16,703 14,443
Interest 78,973 67,742
Depreciation and amortization 70,166 58,619
Impairment of assets held as general partner - 400
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Total expenses 306,906 270,501
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Income from operations 28,338 26,002
Minority interest in operating partnerships (7,344) (6,939)
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Income from continuing operations 20,994 19,063
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Discontinued operations:
Income from operations, net of $3,013 and $524 in 2006 and 2005 allocated to
minority interest, respectively 6,397 1,097
Gain on disposition of property, net of $984 and $3,041 in 2006 and 2005
allocated to minority interest, respectively 2,161 6,290
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Discontinued operations 8,558 7,387
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Net income 29,552 26,450
Preferred dividends (4,050) (4,929)
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Net income available to common shareholders $ 25,502 $ 21,521
========= =========
Basic earnings per share data:
Income from continuing operations $ 0.52 $ 0.44
Discontinued operations 0.26 0.23
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Net income available to common shareholders $ 0.78 $ 0.67
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Diluted earnings per share data:
Income from continuing operations $ 0.51 $ 0.43
Discontinued operations 0.26 0.23
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Net income available to common shareholders $ 0.77 $ 0.66
======= =======
Weighted average number of shares outstanding:
Basic 32,526,831 32,072,307
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Diluted 33,145,665 32,481,218
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Dividends declared per share $ 1.92 $ 1.89
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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 SEPTEMBER 30, 2006 AND 2005
(UNAUDITED, IN THOUSANDS)
2006 2005
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Net income $ 11,711 $ 16,703
Other comprehensive income (loss):
Change in fair value of hedged instruments (104) 216
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Net comprehensive income $ 11,607 $ 16,919
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED, IN THOUSANDS)
2006 2005
---- ----
Net income $ 29,552 $ 26,450
Other comprehensive income:
Change in fair value of hedged instruments 9 488
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Net comprehensive income $ 29,561 $ 26,938
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED, IN THOUSANDS)
2006 2005
---- ----
Cash flows from operating activities:
Net income $ 29,552 $ 26,450
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Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to minority interest 11,341 10,504
Depreciation and amortization 76,817 75,781
Impairment of assets held as general partner - 400
Impairment of real property - 7,325
Gain on disposition of property and business (3,145) (10,302)
Issuance of restricted stock, compensation cost of stock options and deferred compensation 3,336 1,982
Changes in assets and liabilities:
Cash held in escrows 2,372 2,601
Other assets (1,873) (3,003)
Accounts payable and accrued liabilities (2,008) (8,518)
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Total adjustments 86,840 76,770
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Net cash provided by operating activities 116,392 103,220
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Cash flows from investing activities:
Purchase of properties and other assets, net of mortgage notes assumed and UPREIT Units
issued (66,828) (99,139)
Additions to properties (76,515) (72,980)
Proceeds from sale of properties and business, net 234,865 5,574
Withdrawals from (additions to) funds held in escrow, net 634 (19)
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Net cash provided by (used in) investing activities 92,156 (166,564)
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Cash flows from financing activities:
Proceeds from sale of common stock, net 22,575 6,117
Repurchase of common stock (86,964) (61,330)
Proceeds from mortgage notes payable 147,219 237,952
Payments of mortgage notes payable (170,336) (61,209)
Proceeds from line of credit 321,300 258,200
Payments on line of credit (343,800) (222,200)
Payments of deferred loan costs (1,565) (2,530)
Withdrawals from cash escrows, net 169 52
Dividends and distributions paid (94,837) (94,369)
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Net cash provided by (used in) financing activities (206,239) 60,683
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,309 (2,661)
Cash and cash equivalents:
Beginning of year 5,391 7,925
---------- ----------
End of period $ 7,700 $ 5,264
========== ==========
Supplemental disclosure of non-cash operating, investing and financing activities:
Cash paid for interest $87,057 $77,450
Mortgage loans assumed associated with property acquisitions 58,536 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 107,039 2,856
Exchange of UPREIT Units for common shares 63,116 3,442
Fair value of hedge instruments 211 (67)
Net real estate disposed in connection with FIN 46R consolidation - (50,467)
Other assets disposed in connection with FIN 46R consolidation - (6,940)
Mortgage debt disposed in connection with FIN 46R consolidation - (59,339)
Other liabilities disposed in connection with FIN 46R consolidation - (1,187)
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Unaudited Interim Financial Statements
The interim consolidated financial statements of Home Properties, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the applicable rules and regulations of the Securities and Exchange Commission.
Accordingly, certain disclosures that would accompany annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America are omitted. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary for the fair statement of the
consolidated financial statements for the interim periods have been included.
The current period's results of operations are not necessarily indicative of
results which ultimately may be achieved for the year. The interim consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 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 in the ownership, management, acquisition, and
rehabilitation of residential apartment communities primarily in selected
Northeast, Mid-Atlantic, and Southeast Florida regions of the United States. The
Company conducts its business through Home Properties, L.P. (the "Operating
Partnership"), a New York limited partnership. As of September 30, 2006, the
Company operated 142 apartment communities with 42,878 apartments. Of this
total, the Company owned 137 communities, consisting of 39,309 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 Real Estate Investment Trust ("REIT") under
the Internal Revenue Code, as amended, for all periods presented. A corporate
REIT is a legal entity which holds real estate interests and must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 90% of its adjusted taxable income to
stockholders. As a REIT, the Company generally will not be subject to corporate
level tax on taxable income it distributes currently to its stockholders.
Management believes that all such conditions for the avoidance of income taxes
have been met for the periods presented. Accordingly, no provisions 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 71.6% (65.2% at December 31, 2005 and 67.4% at September 30,
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 28.4% (34.8% at December 31, 2005 and 32.6% at September 30, 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, an interpretation of ARB No. 51 -
Consolidated Financial Statements ("FIN 46R"). All significant inter-company
balances and transactions have been eliminated in these consolidated financial
statements.
Reclassifications
Certain reclassifications have been made to the 2005 consolidated financial
statements to conform to the 2006 presentation.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and measurement of
assets and liabilities associated with tax positions taken or expected to be
taken in a tax return. The Company reviewed its current tax positions for any
potential uncertain tax positions that would qualify under FIN 48. Based on its
review, the Company does not anticipate that the adoption of FIN 48 in January
2007 will have a material impact on the Company's cash flows, results of
operations, financial position or liquidity.
In September 2006, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements ("SAB 108"). In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements and
the related financial statement disclosures. This model is commonly referred to
as the "dual approach" because it requires quantification of errors under both
the iron curtain and the roll-over methods. The roll-over method focuses
primarily on the impact of a misstatement on the income statement, including the
reversing effect of prior year misstatements but its use can lead to the
accumulation of misstatements in the balance sheet. The iron-curtain method
focuses primarily on the effect of correcting the period-end balance sheet with
less emphasis on the reversing effects of prior year errors on the income
statement. The Company will initially apply the provisions of SAB 108 in
connection with the preparation of our annual financial statements for the year
ending December 31, 2006. The Company does not expect that the provisions of SAB
108 will have any impact on its financial statements.
3. Stock Benefit Plan
The Company's 1994 Stock Benefit Plan (the "1994 Plan") was adopted by the
Company at the time of its initial public offering. On February 1, 2000, the
Company adopted the 2000 Stock Benefit Plan, which was subsequently amended (the
"2000 Plan"). On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan
and on May 6, 2005, the shareholders approved the Amended and Restated 2003
Stock Benefit Plan (the "2003 Plan"). No additional options will be issued under
the 1994 Plan and the 2000 Plan. Participants in each of the above referenced
plans (the "Option Plans") include officers, non-employee directors, and key
employees of the Company. The 1994 Plan provided for the issuance of up to
1,596,000 options to officers and employees and 154,000 options to non-employee
directors. 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. 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. Under the 1994 Plan, 1,542,381 shares have been granted
to employees and 153,654 shares have been
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Stock Benefit Plan (continued)
granted to non-employee directors. Awards for 2,451,922 shares have been granted
to employees and awards for 166,460 shares have been granted to non-employee
directors under the 2000 Plan. Under the 2003 Plan and as of September 30, 2006,
2,261,126 awards for shares have been issued to employees and 204,475 awards for
shares have been issued to non-employee directors and 653,534 and 45,000 common
shares are available for future grant of awards under the 2003 Plan for officers
and employees and non-employee directors, respectively. Options granted under
the Option Plans vest 20% for each year of service until 100% vested on the
fifth anniversary, except that options issued to certain officers (276,000) and
all of the options issued to non-employee directors under the 1994 Plan and 2000
Plan vested immediately upon grant. The exercise price per share for stock
options issued under all of the Option Plans 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. Options granted to non-employee directors under the 1994 Plan and the
2000 Plan expire after five years from the date of grant. All other options
expire after ten years from the date of grant. The Option Plans allow for the
grant of options, stock appreciation rights and restricted stock awards. No
stock appreciation rights have been granted.
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.
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 impacts 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 applies the
non-substantive vesting period approach which resulted in $677 additional
compensation costs for retirement eligible employees and directors than would
have been recognized under SFAS 148. 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Stock Benefit Plan (continued)
A summary of stock options activity for the nine months ended September 30, 2006
is as follows:
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number of Price Per Contractual Intrinsic
Options Option Term Value
------- ------ ---- -----
Options outstanding at December 31, 2005 2,662,581 $36.18
Granted 551,430 51.07
Exercised (629,635) 34.19
Cancelled (132,756) 39.67
--------- -------
Options outstanding at September 30, 2006 2,451,620 $ 39.85 7.5 $ 42,426
========= ======= === ========
Options exercisable at September 30, 2006 987,676 $ 34.28 6.0 $ 22,602
========= ======= === ========
Options unvested at September 30, 2006 1,463,944 $ 43.62 8.5 $ 19,824
========= ======= === ========
The total cash received from the exercise of options was $21,525 and $5,995
during the nine months ended September 30, 2006 and 2005. The total intrinsic
value of options exercised was $11,601 and $2,086 during the nine months ended
September 30, 2006 and 2005. As of September 30, 2006, there was $3,941 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 2.26 years.
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 for the three and nine months ended September 30, 2006 and 2005 as
follows:
Three Months Nine Months
------------------------ -----------------------
Assumption 2006 2005 2006 2005
---------- ---- ---- ---- ----
Expected dividend yields 5.29% 6.55% 5.29% 6.55%
Expected volatility 18.73% 18.76% 18.73% 18.76%
Expected lives of the options with a lifetime
of ten years 6.5 Years 7.5 Years 6.5 Years 7.5 Years
Expected lives of the options with a lifetime
of five years 5.0 Years 5.0 Years 5.0 Years 5.0 Years
Risk free interest rate 5.09% 4.10% 5.09% 4.10%
Our computation of expected dividend yield is computed using an anticipated
increase of the dividend by approximately 2% to 5% a year based on the annual
dividend exercised each year over the Black-Scholes stock value. The expected
volatility is based on the historical volatility of our stock over a time period
from the initial public offering and ending on the grant date. The expected
lives of the options with a lifetime of ten years was determined by applying the
"simplified method" approach for plain vanilla option grants made prior to
January 1, 2008 as prescribed by Staff Accounting Bulletin No. 107, Share-Based
Payment ("SAB 107"). The risk-free interest rates are based on the U.S. Treasury
yield curve in effect at the time of grant.
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 Company recognized stock compensation costs related to its outstanding stock
options of $399 and $191 for the three months ended September 30, 2006 and 2005
and $1,288 and $646 for the nine months ended September 30, 2006 and 2005.
During the nine months ended September 30, 2006 and 2005, the Company granted
60,566 and 57,375 shares of restricted stock to both employees and directors,
respectively. The directors' grants included above for the nine months ended
September 30, 2006 and 2005 were 9,000 and 7,875, respectively. All of the
directors' shares vest 100% on the fifth anniversary of the date of the grant.
All of the 51,566 and 49,500 shares of restricted stock granted to key employees
during 2006 and 2005 vest 25% on each anniversary of the date of the grant for a
period of four years. The restricted shares were granted during 2006 and 2005 at
a weighted average price of $50.81 and $41.47, respectively. Total compensation
cost recorded for the nine months ended September 30, 2006 and 2005 for the
restricted shares was $1,958 and $1,257, respectively. The restricted stock
outstanding at September 30, 2006 and 2005 was 295,079 and 306,496,
respectively.
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 and
nine months ended September 30, 2006 and 2005 follows:
Three Months Nine Months
------------------------ ------------------------
2006 2005 2006 2005
---- ---- ---- ----
Income from continuing operations $ 9,744 $ 7,998 $ 20,994 $ 19,063
Less: Preferred dividends (1,350) (1,350) (4,050) (4,929)
-------- -------- --------- ---------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 8,394 6,648 16,944 14,134
Discontinued operations 1,967 8,705 8,558 7,387
-------- -------- --------- ---------
Net income available to common shareholders $ 10,361 $ 15,353 $ 25,502 $ 21,521
======== ======== ========= =========
Basic weighted average number of shares outstanding 33,336,346 32,518,949 32,526,831 32,072,307
Effect of dilutive stock options 717,061 381,652 563,861 351,765
Effect of phantom and restricted shares 50,207 49,520 54,973 57,146
---------- ---------- ---------- ----------
Diluted weighted average number of shares outstanding 34,103,614 32,950,121 33,145,665 32,481,218
========== ========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ 0.25 $ 0.20 $ 0.52 $ 0.44
Discontinued operations 0.06 0.27 0.26 0.23
------- ------- -------- --------
Net income available to common shareholders $ 0.31 $ 0.47 $ 0.78 $ 0.67
======= ======= ======== ========
Diluted earnings per share data:
Income from continuing operations $ 0.24 $ 0.20 $ 0.51 $ 0.43
Discontinued operations 0.06 0.27 0.26 0.23
------- ------- -------- --------
Net income available to common shareholders $ 0.30 $ 0.47 $ 0.77 $ 0.66
======= ======= ======== ========
For the three and nine months ended September 30, 2006 and the nine months ended
September 30, 2005, unexercised stock options to purchase 900 and 542,800 shares
of the Company's common stock were excluded in the computation of diluted EPS as
the options' exercise prices were greater than the average market price of the
Company's stock during each period, respectively. For the three months ended
September 30, 2005, no unexercised stock options to purchase shares of the
Company's common stock were excluded in the computations of diluted EPS as the
options' exercise prices were less than the average market price of the
Company's stock during each period.
For the nine months ended September 30, 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 was converted and the common shares issued upon such conversion
were included in outstanding common shares from the date of conversion.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. Other Income
Other income for the three and nine months ended September 30, 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 ("FIN 46R"). The interpretation addresses
consolidation by businesses of special purpose entities (variable interest
entities, "VIE").
The Company is the general partner in one VIE syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company manages the day-to-day operations of the partnership for a
management fee. In addition, the Company has an operating deficit guarantee and
tax credit guarantee to its limited partners (as discussed in Note 12). The
Company is responsible to fund operating deficits to the extent there are any
and can receive operating incentive awards when cash flows reach certain levels.
The effect on the consolidated balance sheet as of September 30, 2006 is an
increase in "Total assets" of $20,391, an increase in "Total liabilities" of
$17,662, and an increase in "Minority interest" of $2,729. Of the $17,662
increase in "Total liabilities," $16,821 represents non-recourse mortgage debt.
Effective June 30, 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 nine months ended September 30, 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 was no longer held for sale as of December 31, 2005,
and is included in the consolidated results of operations for both the three and
nine months ended September 30, 2006 and 2005. The other two VIEs were disposed
of through a transfer of deed in lieu of foreclosure in September 2005. The
Company repurchased the limited partner's interests in satisfaction of any tax
credit guarantees or other obligations to that partner in January, 2005 for
$5,700. 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 $7,325 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 $7,686.
7. Line of Credit
As of September 30, 2006, the Company had an unsecured line of credit agreement
with M&T Bank for $140 million which expires September 1, 2008. The Company's
outstanding balance as of September 30, 2006, was $59.5 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. Segment Reporting
The Company is engaged in the ownership and management of market rate apartment
communities. Each apartment community is considered a separate operating
segment. Each segment on a stand alone basis is less than 10% of the revenues,
net operating income, and assets of the combined reported operating segments and
meets all of the aggregation criteria under Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). The operating segments are aggregated as Core and
Non-core properties.
Non-segment revenue to reconcile to total revenue consists of interest income
and other income. Non-segment assets to reconcile to total assets include cash
and cash equivalents, cash in escrows, accounts receivable, prepaid expenses,
deferred charges, 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. Core properties do not include
assets held for sale as of September 30, 2006 and December 31, 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.
The revenues, net operating income and assets for each of the reportable
segments are summarized for the three and nine months ended September 30, 2006
and 2005 as follows:
Three Months Nine Months
------------------------- ------------------------
2006 2005 2006 2005
---- ---- ---- ----
Revenues
--------
Apartments owned
Core properties $ 101,873 $ 97,919 $ 302,074 $ 286,497
Non-core properties 11,137 4,033 29,694 8,270
Reconciling items 2,245 568 3,476 1,736
---------- ---------- --------- ---------
Total revenues $ 115,255 $ 102,520 $ 335,244 $ 296,503
========== ========== ========= =========
Net operating income
--------------------
Apartments owned
Core properties $ 60,518 $ 58,203 $ 174,190 $ 162,596
Non-core properties 6,842 1,644 16,514 2,874
Reconciling items 2,245 568 3,476 1,736
---------- ---------- --------- ---------
Net operating income 69,605 60,415 194,180 167,206
General & administrative expenses (5,607) (4,894) (16,703) (14,443)
Interest expense (26,637) (23,971) (78,973) (67,742)
Depreciation and amortization (24,236) (20,333) (70,166) (58,619)
Impairment of assets held as general partner - - - (400)
Minority interest in operating partnership (3,381) (3,219) (7,344) (6,939)
---------- ---------- --------- ---------
Income from continuing operations $ 9,744 $ 7,998 $ 20,994 $ 19,063
========== ========== ========= =========
Assets - As of September 30, 2006 and December 31, 2005
-------------------------------------------------------
Apartments owned
Core properties $ 2,272,273 $ 2,082,413
Held for sale properties 144,559 223,938
Non-core properties 470,926 578,200
Reconciling items 92,899 93,319
----------- -----------
Total assets $ 2,980,657 $ 2,977,870
=========== ===========
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. Derivative Financial Instruments
The Company 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 September 30, 2006, the aggregate fair value of
the Company's interest rate swaps was $211 prior to the allocation of minority
interest and is included in the consolidated balance sheets. For the three and
nine months ending September 30, 2006 and 2005, as the critical terms of the
interest rate swaps and the hedged items are the same, no ineffectiveness was
recorded in the consolidated statements of operations. All components of the
interest rate swaps were included in the assessment of hedge effectiveness. The
fair value of the interest rate swaps is based upon the estimate of amounts the
Company would receive or pay to terminate the contract at the reporting date and
is estimated using interest rate market pricing models.
10. Acquisitions
On September 7, 2006, the Company purchased two apartment communities from a
single seller consisting of 348 and 264 units, respectively, for a total
purchase price of $83.1 million ($48.9 million and $34.2 million, respectively).
The transaction consisted of the assumption of two mortgages: a $22.0 million
fixed rate mortgage at an interest rate of 7.63% maturing on October 1, 2010
(fair market value of $23.7 million), and; a $20.4 million fixed rate mortgage
at an interest rate of 7.05% maturing on August 1, 2011 (fair market value of
$21.7 million). The balance was funded through the Company's line of credit.
11. Disposition of Property and Discontinued Operations
The Company reports its property dispositions as discontinued operations as
prescribed by the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). Pursuant to the definition of a
component of an entity in SFAS 144, assuming no significant continuing
involvement by the former owner after the sale, the sale of an apartment
community is considered a discontinued operation. In addition, apartment
communities classified as held for sale are also considered a discontinued
operation. The Company generally considers assets to be held for sale when all
significant contingencies surrounding the closing have been resolved, which
often corresponds with the actual closing date. The Company has classified the
entire Upstate portfolio as held for sale at September 30, 2006. The Upstate
portfolio consists of eighteen communities with 4,567 units in total; four
properties and 1,644 apartment units in Buffalo, NY, nine properties and 1,680
apartment units in Rochester, NY and five properties and 1,243 apartment units
in Syracuse, NY. The Company has announced the signing of a definitive contract
to sell the portfolio and has met all of the requirements under SFAS 144.
Properties classified in this manner through September 30, 2006, as discussed
below, were reclassified as such in the accompanying consolidated statements of
operations for each of the periods presented.
Included in discontinued operations for the three and nine months ended
September 30, 2006 and 2005 are the operating results, net of minority interest,
of twenty-one apartment communities sold during the nine months ended September
30, 2006 and the eighteen apartment communities held for sale as of September
30, 2006 . In addition to the aforementioned, included in discontinued
operations for the three and nine months ended September 30, 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).
For purposes of the discontinued operations presentation, the Company only
includes interest expense and losses from early extinguishment of debt
associated with specific mortgage indebtedness of the properties that are sold
or held for sale.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. Disposition of Property and Discontinued Operations (continued)
The operating results of discontinued operations are summarized for the three
and nine months ended September 30, 2006 and 2005 as follows:
Three Months Nine Months
------------ -----------
2006 2005 2006 2005
---- ---- ---- ----
Revenues:
Rental Income $ 9,780 $ 23,247 $ 49,163 $ 70,618
Property other income 1,304 2,014 4,967 5,355
------- ------- ------- -------
Total revenues 11,084 25,261 54,130 75,973
------- ------- ------- -------
Operating and maintenance 5,959 13,017 29,782 41,153
Interest expense 1,279 3,470 9,387 10,115
Depreciation and amortization 806 5,306 5,551 15,736
Impairment of real property - - - 7,325
------- ------- ------- -------
Total expenses 8,044 21,793 44,720 74,329
------- ------- ------- -------
Income from discontinued operations before minority interest
and gain (loss) on disposition of property 3,040 3,468 9,410 1,644
Minority interest in limited partnerships - - - (23)
Minority interest in operating partnerships (873) (1,130) (3,013) (524)
------- ------- ------- -------
Income from discontinued operations $ 2,167 $ 2,338 $ 6,397 $ 1,097
======= ======= ======= =======
The major classes of assets and liabilities held for sale as of September 30,
2006 and December 31, 2005 are as follows:
2006 2005
---- ----
Real estate:
Land $ 8,809 $ 28,372
Buildings, improvements and equipment 231,079 249,999
-------- ---------
239,888 278,371
Less: accumulated depreciation (95,329) (54,433)
-------- ---------
Real estate held for sale, net 144,559 223,938
-------- ---------
Other assets:
Cash in escrows 3,067 434
Accounts receivable 352 664
Prepaid expenses 2,372 2,951
-------- ---------
Other assets held for sale 5,791 4,049
-------- ---------
Liabilities:
Mortgage notes payable 78,498 73,603
Accrued expenses and other liabilities 464 431
Security deposits 671 1,318
-------- ---------
Liabilities held for sale 79,633 75,352
-------- ---------
Net assets held for sale $ 70,717 $ 152,635
======== =========
12. 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.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. Commitments and Contingencies (continued)
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 (47% by number
of apartment communities of the owned portfolio) for a period of 7 to 15 years
except through a tax deferred like-kind exchange. The remaining terms on the
sale restrictions range from 1 to 9 years.
Guarantees
As of September 30, 2006, the Company, through its general partnership interest
in an affordable property limited partnership, has guaranteed low income housing
tax credits to limited partners for a remaining period of nine years totaling
approximately $3,000. As of September 30, 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.
13. 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 was owned by
Nelson and Norman Leenhouts and is now owned by Nelson 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. Subsequently, some
of those assets were transferred from Home Leasing to Broadstone Real Estate LLC
("Broadstone"), which is owned by Norman Leenhouts. In addition to the initial
amount, the Company is entitled to receive a percentage of the management fee
received by Broadstone 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
Broadstone 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 $34 was recognized during the nine months ended
September 30, 2006. The cumulative gain recognized on the sale of these assets
through September 30, 2006 amounted to $98. If the management of this property
is retained for the entire three years the Company expects to receive an
additional $6 for the period October 1, 2006 through January 1, 2007. The gain
on sale would then be approximately $104.
14. Subsequent Events
October 4, 2006, the Company acquired two communities located in Bel Air and
Cockeysville, Maryland, with a total of 320 units from a single seller for a
total of $32.4 million. The transaction consisted of the assumption of two
mortgages: a $5.0 million fixed rate mortgage at an interest rate of 5.69%
maturing on September 1, 2013 (fair market value of $5.2 million), and; a $6.4
million fixed rate mortgage at an interest rate of 5.30% maturing on April 1,
2013, and $20.4 million of UPREIT Units. The balance was funded through the
Company's line of credit.
On October 24, 2006, the Company issued $200 million (including a $25 million
over-allotment purchase option exercised after the original $175 million
issuance) of exchangeable senior notes with a coupon of 4.125%. The notes are
convertible into cash equal to the principal amount of the notes and, at the
Company's option, cash or common stock at the rate of 13.6357 shares per $1,000
principal amount (equivalent to an initial exchange price of $73.34 per share)
subject to adjustment. The notes are not redeemable at the option of the Company
for five years, except to preserve the status of the Company as a REIT. Holders
of the notes may require the Company to repurchase the notes upon the occurrence
of certain designated events. In addition, prior to November 1, 2011, the
holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021.
On October 24, 2006, simultaneously with the closing of the exchangeable senior
notes, the Company repurchased 933,000 shares of common stock at a price of
$62.15 per share and paid off the amount outstanding on the line of credit.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. Subsequent Events (continued)
On October 27, 2006, the Board of Directors approved a dividend of $0.65 per
share on its common stock for the quarter ended September 30, 2006. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
November 28, 2006 to shareholders of record on November 17, 2006.
On October 27, 2006, the Company also declared a regular dividend of $0.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending November 30, 2006. The dividend on the preferred shares is payable on
November 30, 2006 to shareholders of record on November 17, 2006. This dividend
is equivalent to an annualized rate of $2.25 per share.
On October 27, 2006, the Board of Directors increased authorization under the
stock repurchase program by 2,000,000 shares, after which, the total remaining
authorization was 2,606,448 shares.
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, its unsecured line of credit, and
sale of exchangeable senior notes. 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 $116,392 for the nine months ended
September 30, 2006 compared to $103,220 for the same period in 2005. The change
is primarily due to higher income from both continuing and discontinued
operations driven by higher average rents and higher occupancies during the 2006
period, plus a reduction in prepaid property taxes resulting from the 2006
Disposition Communities. Cash provided by (used in) investing activities was
$92,156 for the nine months ended September 30, 2006 compared to ($166,564) for
the same period in 2005. The change is primarily due to the proceeds resulting
from the 2006 Disposition Communities. Cash provided by (used in) financing
activities was ($206,239) for the nine months ended September 30, 2006 compared
to $60,683 for the same period in 2005. The change is primarily due to the
payment of $73 million of mortgages related to the 2006 Disposition Communities,
$58 million net pay down of the line of credit, $44 million less proceeds from
mortgage debt in connection with new acquisitions, and $26 million additional
cash used in the stock buy back program in the 2006 period; partially offset by
$16 million increased proceeds from stock options exercised in the 2006 period.
The 2006 period also included $86 million less cash provided from mortgage
refinancing than the 2005 period.
As of September 30, 2006, the Company had 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 September 30, 2006, was $59.5 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. The Company repaid all of the amounts outstanding on the
line of credit on October 24, 2006 with the proceeds of its 4.125% exchangeable
senior notes due 2026, described below.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and its
unsecured credit facility, it intends to satisfy such requirements through
property debt financing, proceeds from the sale of properties, the issuance of
UPREIT Units, proceeds from the Dividend Reinvestment Plan ("DRIP"), or the
issuance of additional debt and equity securities. As of September 30, 2006, the
Company owned 22 properties with 4,532 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 specified assets in 2006. The Company has sold $238
million to date. In August 2006, the Company announced their intention to
strategically dispose of its Upstate New York portfolio. These assets are
classified as held for sale at September 30, 2006. The Company has the portfolio
under contract for sale and expects the closing to occur no later than December
31, 2006.
On October 24, 2006, the Company issued $200 million (including a $25 million
over-allotment purchase option exercised after the original $175 million
issuance) of exchangeable senior notes with a coupon of 4.125%. The notes are
convertible into cash equal to the principal amount of the notes and, at the
Company's option, cash or common stock at the rate of 13.6357 shares per $1,000
principal amount (equivalent to an initial exchange price of $73.34 per share)
subject to adjustment. The notes are not redeemable at the option of the Company
for five years, except to preserve the status of the Company as a REIT. Holders
of the notes may require the Company to repurchase the notes upon the occurrence
of certain designated events. In addition, prior to November 1, 2011, the
holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021.
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 September 30, 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 could 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 $55.6 million of
UPREIT Units as consideration for three acquired properties. During October
2006, the Company issued $20.4 million of UPREIT Units as consideration for two
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. During the first nine
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 nine months ended September 30, 2006, 1,680,521 shares
were repurchased by the Company. At September 30, 2006, the Company had
authorization to repurchase an additional 1,539,674 shares. On October 24, 2006,
the Company repurchased 933,000 shares of its common stock at $62.15 per share
pursuant to a special authorization by the Board of Directors in connection with
the issuance f its 4.125% exchangeable senior notes due 2026. On October 27,
2006 the Board of Directors of the Company authorized repurchase of up to
2,000,000 additional 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 September 30, 2006, the weighted average rate of interest on mortgage debt
was 5.8% and the weighted average maturity is approximately seven years.
Approximately 95% of the debt bears interest at a 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 ("FIN 46R"). The interpretation addresses
consolidation by businesses of special purpose entities (variable interest
entities, "VIE").
The Company is the general partner in one VIE syndicated using low income
housing tax credits under Section 42 of the Internal Revenue Code. As general
partner, the Company manages the day-to-day operations of the partnership for a
management fee. In addition, the Company has an operating deficit guarantee and
tax credit guarantee to its limited partner. The Company is responsible to fund
operating deficits to the extent there are any and can receive operating
incentive awards when cash flows reach certain levels. The effect on the
consolidated balance sheet as of September 30, 2006 is an increase in "Total
assets" of $20,391, an increase in "Total liabilities" of $17,662, and an
increase in "Minority interest" of $2,729. Of the $17,662 increase in "Total
liabilities," $16,821 represents non-recourse mortgage debt.
Effective June 30, 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 nine months ended September 30, 2005 to adjust the net book
value of the Company's investment in the property to the estimate of fair market
value. This VIE was no longer considered held for sale as of December 31, 2005,
and is included in the consolidated results of operations for both the three and
nine months ending September 30, 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
$7,325 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 $7,686.
The Company, through its general partnership interest in the VIE, has guaranteed
the low income housing tax credits to the limited partners for a remaining
period of nine years totaling approximately $3,000. Such guarantee requires the
Company to operate the property in compliance with Internal Revenue Code Section
42 for 15 years. In addition, acting as the general partner in this partnership,
the Company is obligated to advance funds to meet partnership operating
deficits. The Company believes the property's operations conform to the
applicable requirements as set forth above.
Acquisitions and Dispositions
On September 7, 2006, the Company purchased two apartment communities from a
single seller consisting of 348 and 264 units, respectively, for a total
purchase price of $83.1 million ($48.9 million and $34.2 million, respectively).
The transaction consisted of the assumption of two mortgages: a $22.0 million
fixed rate mortgage at an interest rate of 7.63% maturing on October 1, 2010
(fair market value of $23.7 million), and; a $20.4 million fixed rate mortgage
at an interest rate of 7.05% maturing on August 1, 2011 (fair market value of
$21.7 million). The balance was funded through the Company's line of credit.
There were no dispositions during the third quarter of 2006; however, the
Company has classified as held for sale the entire Upstate portfolio. The
Upstate portfolio consists of eighteen communities with 4,567 units in total;
four properties and 1,644 apartment units in Buffalo, NY, nine properties and
1,680 apartment units in Rochester, NY and five properties and 1,243 apartment
units in Syracuse, NY. The Company has announced the signing of a definitive
contract to sell the portfolio and expects closing to occur in the fourth
quarter of 2006.
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 $59.5 million outstanding at September 30, 2006. The $1.9
billion in mortgage notes payable have varying maturities ranging from 1 to 35
years. The weighted average interest rate of the Company's fixed rate notes was
5.80% and 5.95% at September 30, 2006 and December 31, 2005, respectively. The
weighted average interest rate of the Company's variable rate notes and credit
facility was 5.77% and 4.82% at September 30, 2006 and December 31, 2005,
respectively.
On October 24, 2006, the Company issued $200 million (including a $25 million
over-allotment purchase option exercised after the original $175 million
issuance) of exchangeable senior notes with a coupon of 4.125%. The notes are
convertible into cash equal to the principal amount of the notes and, at the
Company's option, cash or common stock at the rate of 13.6357 shares per $1,000
principal amount (equivalent to an initial exchange price of $73.34 per share)
subject to adjustment. The notes are not redeemable at the option of the Company
for five years, except to preserve the status of the Company as a REIT. Holders
of the notes may require the Company to repurchase the notes upon the occurrence
of certain designated events. In addition, prior to November 1, 2011, the
holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021.
The Company has a non-cancelable operating ground lease for one of its
properties that is held for sale. 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 September 30, 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 non-affiliated third parties. The corporate
office space requires an annual base rent plus a pro-rata portion of property
improvements, real estate taxes, and common area maintenance. The regional
office leases require an annual base rent plus a pro-rata portion of real estate
taxes.
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 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 and nine months ended September
30, 2006 and 2005, approximately $131 per unit and $393 per unit, respectively,
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 and nine months ended September
30, 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 and nine months ended September 30, 2006 as
follows:
For the three months ended September 30,
(in thousands, except per unit data)
2006 2005
----------------------------------------------------------------- ---------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvements Unit(a) Improvements Unit(a)
------ ------- ------ ------- ------------ ------- ------------ -------
New buildings $ - $ - $ 322 $ 8 $ 322 $ 8 $ 1,374 $ 37
Major building improvements 881 23 2,585 67 3,466 90 5,926 161
Roof replacements 320 8 973 25 1,293 33 2,192 60
Site improvements 320 8 1,941 50 2,261 58 2,488 68
Apartment upgrades 639 16 4,062 105 4,701 121 5,374 146
Appliances 542 14 540 14 1,082 28 1,173 32
Carpeting/Flooring 1,656 43 1,454 38 3,110 81 2,925 80
HVAC/Mechanicals 494 13 3,350 86 3,844 99 3,606 98
Miscellaneous 232 6 551 14 783 20 753 20
------ ----- ------- ---- ------- ---- -------- ----
Totals $5,084 $ 131 $15,778 $407 $20,862 $538 $ 25,811 $702
====== ===== ======= ==== ======= ==== ======== ====
(a) Calculated using the weighted average number of units outstanding,
including 31,253 core units, 4,567 held for sale units, 2005 acquisition
units of 2,430 and 2006 acquisition units of 479 for the three months ended
September 30, 2006 and 31,253 core units, 4,567 held for sale units, and
2005 acquisition units of 948 for the three months ended September 30,
2005.
For the nine months ended September 30,
(in thousands, except per unit data)
2006 2005
------------------------------------------------------------------ ----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvements Unit(a) Improvements Unit(a)
------ ------- ------ ------- ------------ ------- ------------ -------
New buildings $ - $ - $ 1,858 $ 48 $ 1,858 $ 48 $ 3,678 $ 101
Major building improvements 2,624 68 10,145 264 12,769 332 12,324 338
Roof replacements 951 25 1,869 49 2,820 74 4,114 113
Site improvements 951 25 4,980 130 5,931 155 5,081 140
Apartment upgrades 1,903 49 10,453 272 12,356 321 14,267 392
Appliances 1,614 42 1,437 37 3,051 79 2,960 81
Carpeting/Flooring 4,930 128 2,770 72 7,700 200 7,172 197
HVAC/Mechanicals 1,470 38 7,730 201 9,200 239 8,061 221
Miscellaneous 692 18 1,858 48 2,550 66 2,538 70
------- ----- -------- ------ ------- ------ ------- ------
Totals $15,135 $ 393 $ 43,100 $1,121 $58,235 $1,514 $60,195 $1,653
======= ===== ======== ====== ======= ====== ======= ======
(a) Calculated using the weighted average number of units outstanding,
including 31,253 core units, 4,567 held for sale units, 2005 acquisition
units of 2,430 and 2006 acquisition units of 190 for the nine months ended
September 30, 2006 and 31,253 core units, 4,567 held for sale units, 2005
acquisition units of 597 for the nine months ended September 30, 2005.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the three months ended September 30,
(in thousands, except per unit data)
2006 2005
------------------------------------------------------------ ---------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvements Unit Improvements Unit
------ ---- ------ ---- ------------ ---- ------------ ----
Core Communities $ 4,105 $ 131 $ 13,578 $ 434 $ 17,683 $ 565 $ 22,498 $ 720
Held For Sale 598 131 538 118 1,136 249 2,493 546
-------- ----- -------- ------ -------- ------ -------- ------
Total Same Store 4,703 131 14,116 394 18,819 525 24,991 698
2006 Acquisition Communities 60 131 - - 60 121 - -
2005 Acquisition Communities 321 131 1,662 684 1,983 815 820 865
-------- ----- -------- ------ -------- ------ -------- ------
Sub-total 5,084 131 15,778 407 20,862 538 25,811 702
2006 Disposed Communities - - - - - - 1,475 287
2005 Disposed Communities - - - - - - 1,050 1,467
Corporate office expenditures(1) - - - - 970 - 293 -
------- ----- -------- ----- -------- ---- -------- -----
Totals $ 5,084 $ 131 $ 15,778 $ 407 $ 21,832 $538 $ 28,629 $ 665
======= ===== ======== ===== ======== ==== ======== =====
For the nine months ended September 30,
(in thousands, except per unit data)
2006 2005
------------------------------------------------------------ ----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvements Unit Improvements Unit
------ ---- ------ ---- ------------ ---- ------------ ----
Core Communities $ 12,310 $393 $36,536 $1,169 $ 48,846 $1,562 $ 53,262 $1,704
Held For Sale 1,795 393 1,584 347 3,379 740 5,778 1,265
-------- ----- -------- ------ -------- ------ -------- ------
Total Same Store 14,105 393 38,120 1,064 52,225 1,457 59,040 1,648
2006 Acquisition Communities 75 393 70 368 145 761 - -
2005 Acquisition Communities 955 393 4,910 2,021 5,865 2,414 1,155 1,935
-------- ----- -------- ------ -------- ------ -------- ------
Sub-total 15,135 393 43,100 1,121 58,235 1,514 60,195 1,653
2006 Disposed Communities 1,320 393 1,881 560 3,201 953 3,886 756
2005 Disposed Communities - - - - - - 3,152 4,030
Corporate office expenditures(1) - - - - 2,934 - 720 -
-------- ----- -------- ------ -------- ------ -------- ------
Totals $ 16,455 $ 393 $ 44,981 $1,076 $ 64,370 $1,469 $ 67,953 $1,588
======== ===== ======== ====== ======== ====== ======== ======
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office. Corporate office expenditures includes principally
computer hardware, software and office furniture and fixtures.
Results of Operations
Summary of Core properties
The Company had 106 apartment communities with 31,253 units which were owned
during the three and nine months being presented (the "Core Properties"). The
Company has acquired/developed an additional thirteen apartment communities with
3,489 units during 2006 and 2005 (the "Acquisition Communities"). The Company
disposed of four apartment communities with a total of 816 units and four VIE's
during 2005 (the "2005 Disposition Communities"). During 2006, the Company
disposed of twenty-one properties with a total of 5,138 units (the "2006
Disposition Communities"). During the third quarter of 2006, the Company placed
eighteen properties with a total of 4,567 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 Acquisition Communities generally accounted for the
significant changes in operating results for the three and nine months ended
September 30, 2006. In addition, the reported income from operations include the
results of one investment where the Company is the managing general partner that
has been determined to be a VIE.
A summary of the net operating income from Core Properties is as follows (in
thousands):
Three Months Nine Months
------------ -----------
2006 2005 $ Change % Change 2006 2005 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Rent $ 95,042 $ 92,413 $2,629 2.8% $283,207 $273,161 $10,046 3.7%
-------- -------- ------ --- -------- -------- ------- ---
Utility recovery revenue 2,035 1,277 758 59.4% 5,496 1,556 3,940 253.2%
Other income 4,796 4,229 567 13.4% 13,371 11,780 1,591 13.5%
-------- -------- ------ --- -------- -------- ------- ---
Total property other income 6,831 5,506 1,325 24.1% 18,867 13,336 5,531 41.5%
-------- -------- ------ --- -------- -------- ------- ---
Total revenue 101,873 97,919 3,954 4.0% 302,074 286,497 15,577 5.4%
Operating and maintenance (41,355) (39,716) (1,639) (4.1%) (127,884) (123,901) (3,983) (3.2%)
-------- -------- ------ --- -------- -------- ------- ---
Net operating income $ 60,518 $ 58,203 $2,315 4.0% $174,190 $162,596 $11,594 7.1%
======== ======== ====== === ======== ======== ======= ===
A summary of the net operating income from continuing operations is as follows
(in thousands):
Three Months Nine Months
------------ -----------
2006 2005 $ Change % Change 2006 2005 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Rent $105,740 $96,316 $9,424 9.8% $311,721 $281,149 $30,572 10.9%
-------- ------- ------ --- -------- -------- ------- ----
Utility recovery revenue 2,250 1,301 949 72.9% 6,041 1,591 4,450 279.7%
Other income 5,020 4,335 685 15.8% 14,006 12,027 1,979 16.5%
-------- ------- ------ --- -------- -------- ------- ----
Total property other income 7,270 5,636 1,634 29.0% 20,047 13,618 6,429 47.2%
-------- ------- ------ --- -------- -------- ------- ----
Total revenue 113,010 101,952 11,058 10.8% 331,768 294,767 37,001 12.6%
Operating and maintenance (45,650) (42,105) (3,545) (8.4%) (141,064) (129,297) (11,767) (9.1%)
-------- ------- ------ --- -------- -------- ------- ----
Net operating income $67,360 $59,847 $7,513 12.6% $190,704 $165,470 $25,234 15.2%
======= ======= ====== ==== ======== ======== ======= ====
Net Operating Income ("NOI") may fall within the definition of "non-GAAP
financial measure" set forth in Item 10(e) of Regulation S-K and, as a result,
the Company may be required to include in this report a statement disclosing the
reasons why management believes that presentation of this measure provides
useful information to investors. The Company believes that NOI is helpful to
investors as a supplemental measure of the operating performance of a real
estate company because it is a direct measure of the actual operating results of
the Company's apartment properties. In addition, the apartment communities are
valued and sold in the market by using a multiple of NOI. The Company also uses
this measure to compare its performance to that of its peer group.
Comparison of three months ended September 30, 2006 to the same period in 2005
Of the $9,424 increase in rental income, $6,770 is attributable to the Acquired
Communities; and, $2,629 is from the Core Properties, as the result of an
increase of 3.4% in weighted average rental rates, partially offset by a
decrease in occupancy from 94.3% to 93.8%. 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 $1,634. Of this
increase, $341 is attributable to the Acquired Communities and $1,325 represents
a 24.1% increase from the Core Properties. Included in the Core increase is $758
which represents increased utility recovery charges compared to 2005
attributable to the Company's water & sewer and heat & electric recovery
programs, which were initiated in the second quarter of 2005 and are being
phased in through the second quarter of 2007; and, a $567 increase in Core
property other income resulting from increased emphasis on charging late fees
and early termination fees and an increase in corporate rentals compared to
2005.
Interest income increased $461 due to a portion of second quarter property
disposition proceeds being held by a 1031 exchange intermediary awaiting
reinvestment into replacement property.
Other income increased $1,216 due primarily to post closing consultation fees
earned in connection with second quarter property dispositions.
Of the $3,545 increase in operating and maintenance expenses, $2,409 is
attributable to the Acquired Communities, partially offset by a $503 decrease
attributable to the consolidation of the VIE. The balance, a $1,639 increase, is
attributable to the Core Properties and is primarily due to increases in repairs
& maintenance, personnel costs, electricity, property insurance and natural gas
heating costs partially offset by reductions advertising expenses. Repairs &
maintenance is up $545 or 7.6% over the prior year period due to favorable
weather conditions during the third quarter of 2006, enabling outside projects,
which is typical seasonality experienced between years. Personnel costs are up
$492 or 6.0%. The increase was due in part to favorable insurance reserve
adjustments in the 2005 quarter which did not occur in the 2006 quarter. Before
reserve adjustments, personnel costs were up only 4.4%. Electricity costs were
up $242 or 12.7%; however, with the phase in of the recovery program, any
reimbursements from residents are being reflected in utility recovery income.
Property insurance increased $195, or 15.0%, due to the inclusion of our Florida
properties (which are relatively more expensive to insure) in Core Properties,
and also due to an 11.4% general increase in our property and general liability
premiums. Natural gas heating costs were up $105 or 6.6% from a year ago, due to
higher costs per decatherm, partially offset by the savings realized from the
conservation measures implemented during 2006. Our actual cost for the third
quarter of 2006 was $9.26 per decatherm compared to $7.37 in the quarter of
2005. Advertising expense continues to provide positive comparisons as we target
our dollar spend in ways that produce results, netting a $98 or 8.4% savings
versus 2005.
For the upcoming 2006/2007 heating season we now have fixed contracts for 97.3%
of our expected natural gas usage at a weighted average cost of $9.64 per
decatherm. The cost for the 2005/2006 heating season was approximately $10.16
per decatherm, or 5.1% higher than what is expected this year.
General and administrative expense increased in 2006 by $713. General and
administrative expenses as a percentage of total revenues were 4.5% for 2006 as
compared to 3.9% for 2005. The recently enacted accounting rules affecting stock
options and restricted stock, SFAS 123R, required the Company to recognize
compensation costs for near-retirement-eligible employees and directors over a
shorter vesting period than 2005, which coupled with a significantly higher
stock price, resulting in $198 higher expense for the quarter. The balance of
the increase is the direct result of the increase in corporate incentive
compensation bonus accrued in 2006, plus increases in external costs incurred
for auditing, tax and consultation expense and external costs associated with
the implementation of a property management software system.
Interest expense increased in 2006 by $2,666 as a result of the increased
borrowings in connection with the Acquisition Communities and additional
mortgage debt and refinanced mortgage debt incurred during 2006.
Depreciation and amortization expense increased $3,903 due to the depreciation
on the Acquisition Communities and the capital additions to the Core Properties,
offset by $1,600 in depreciation expense taken in the second quarter of 2006 but
not in the third quarter of 2006 related to the discontinued operations of the
Upstate portfolio..
Included in discontinued operations for the three months ended September 30,
2006 are the operating results, net of minority interest, of the Held for Sale
Communities. Included in discontinued operations for the three months ended
September 30, 2005 are the operating results, net of minority interest, of the
Held for Sale Communities, the 2006 Disposition Communities and the 2005
Disposition Communities. For purposes of the discontinued operations
presentation, the Company only includes interest expense and losses from early
extinguishment of debt associated with specific mortgage indebtedness of the
properties that are sold or held for sale.
Comparison of nine months ended September 30, 2006 to the same period in 2005
Of the $30,572 increase in rental income, $20,247 is attributable to the
Acquired Communities and $279 is attributable to the VIE. The balance of this
increase, or $10,046 which is from the Core Properties, was the result of an
increase of 3.1% in weighted average rental rates, plus an increase in occupancy
from 93.7% to 94.2%. Occupancy is defined as total possible rental income, net
of vacancy and bad debt expense, as a percentage of total possible rental
income. Total possible rental income is determined by valuing occupied units at
contract rates and vacant units at market rents.
Property other income, which consists primarily of income from 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 $6,429. Of this
increase, $953 is attributable to the Acquired Communities and $5,531 represents
a 41.5% increase from the Core Properties, partially offset by a $55 decrease
attributable to the VIE. Included in the Core increase is $3,940 which
represents increased utility recovery charges compared to 2005 and $1,591
increase in Core property other income resulting from increased emphasis on
charging late fees and early termination fees and an increase in corporate
rentals compared to 2005.
Interest income increased $530 due to a portion of the 2006 Disposition
Communities proceeds being held by a 1031 exchange intermediary awaiting
reinvestment into replacement property.
Other income increased $1,210 due primarily to the post closing consultation
fees earned in connection with the 2006 Disposition Communities.
Of the $11,767 increase in operating and maintenance expenses, $7,763 is
attributable to the Acquired Communities; and $3,983 is attributable to the Core
Properties and is primarily due to increases in natural gas heating costs,
repairs & maintenance and property insurance expense partially offset by
reductions in personnel costs, advertising and snow removal costs. Natural gas
heating costs were up $1,788 or 14.5% over 2005. The natural gas costs in the
first quarter of 2006 were up $2,374 or 28.0% over the same period of 2005, due
primarily to significant increases in the cost of natural gas per decatherm. In
last year's first quarter we had a weighted average cost of $6.23 per decatherm
versus this year's first quarter average cost of $9.65. In the second quarter of
2006 we realized a savings versus the second quarter of 2005, due to a
combination of milder weather and conservation measures put in place during
2006. In the third quarter of 2006, natural gas heating costs were up $105 or
6.6% from a year ago, due to higher costs per decatherm, partially offset by the
continued savings realized from the conservation measures implemented during
2006. Repairs & maintenance spending was up $813 or 4.4% partially due to the
seasonality influenced by favorable weather conditions during the third quarter
of 2006 enabling more outside projects to be completed. Property insurance
increased $1,119 or 29.2%, 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. Personnel expenses were down $576 or
2.2%, due to favorable experience with workers compensation and health
insurance, which resulted in a cost savings year over year. Advertising expense
continues to provide positive comparisons as we target our dollar spend in ways
that produce results, netting a $483 or 13.5% savings versus 2005. Snow removal
costs were down $491 or 51.8%. The first half of 2006 produced below normal
snowfalls compared to normal snowfall in 2005.
General and administrative expense increased in 2006 by $2,260. General and
administrative expenses as a percentage of total revenues were 4.3% for 2006 as
compared to 3.9% for 2005. The recently enacted accounting rules effecting stock
options and restricted stock, SFAS 123R, required the Company to recognize
compensation costs for retirement-eligible and near-retirement-eligible
employees and directors over a shorter vesting period than 2005, coupled with a
significantly higher stock price, resulting in $868 higher expense for 2006. The
balance of the increase is the direct result of the increase in corporate
incentive compensation bonus accrued in 2006, partially offset by a $1,043
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
Section 404 compliance.
Interest expense increased in 2006 by $11,231 as a result of the increased
borrowings in connection the Acquisition Communities and additional mortgage
debt and refinanced mortgage debt incurred during 2006.
Depreciation and amortization expense increased $11,547 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 nine months ended September 30, 2006
are the operating results, net of minority interest, of the 2006 Disposition
Communities and the Held for Sale Communities. Included in discontinued
operations for the nine months ended September 30, 2005 are the operating
results, net of minority interest, of the 2006 Disposition Communities, the 2005
Disposition Communities and the Held for Sale Communities. For purposes of the
discontinued operations presentation, the Company only includes interest expense
and losses from early extinguishment of debt associated with specific mortgage
indebtedness of the properties that are sold or held for sale.
Included in the $2,161 net gain on disposition of property for the nine months
ended September 30, 2006 is the sale of two apartment communities in New Jersey,
where the Company recorded a gain on sale in the second quarter, net of minority
interest, of approximately $3,112. This gain was partially offset by the loss on
sale of 19 properties located in southeast Michigan, also in the second quarter,
where the Company recorded a loss, net of minority interest, of $951.
Included in the $6,290 net gain on disposition of property for the nine months
ended September 30, 2005 is the sale of an apartment community in Philadelphia,
PA, where the Company recorded a gain on sale, net of minority interest, of
$1,187; and a gain of sale of $5,180, net of minority interest, from the
disposal of two VIE's through a transfer of deed in lieu of foreclosure, which
is further discussed in the section entitled "Variable Interest Entities,".
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 Improvements"
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 and nine months ended September 30, 2006 and 2005 are
presented below (in thousands):
Three Months Nine Months
------------ -----------
2006 2005 2006 2005
---- ---- ---- ----
Net income available to common shareholders $ 10,361 $ 15,353 $ 25,502 $ 21,521
Real property depreciation and amortization 24,477 24,997 74,016 72,524
Minority interest 3,381 3,219 7,344 6,939
Minority interest - income from discontinued operations 873 1,130 3,013 524
Loss (gain) on disposition of discontinued operations 200 958 (2,161) 1,036
-------- -------- -------- --------
FFO - Basic as defined above 39,292 45,657 107,714 102,544
Loss from early extinguishment of debt in connection with sale of real
estate - - 2,970 -
-------- -------- -------- --------
FFO - Basic as adjusted by the Company 39,292 45,657 110,684 102,544
Convertible preferred dividends (2) - - - 879
-------- -------- -------- --------
FFO - Diluted $ 39,292 $ 45,657 $107,714 $103,423
======== ======== ======== ========
Weighted average common shares/units outstanding (1):
- Basic 46,765.2 48,255.2 47,495.8 47,828.7
======== ======== ======== ========
- Diluted (2) 47,532.5 48,686.3 48,114.6 48,680.2
======== ======== ======== ========
(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 a dilutive effect; therefore, the
convertible preferred dividends are included in FFO diluted for the nine
months ended September 30, 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
------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31,
2006 2006 2006 2005
---- ---- ---- ----
EBITDA
Total revenues $115,255 $121,947 $119,416 $114,835
Net operating income (loss) from discontinued operations 5,125 4,950 5,017 5,677
Operating and maintenance (45,650) (49,397) (58,135) (51,801)
General and administrative (5,607) (6,057) (5,039) (5,209)
-------- -------- -------- --------
$ 69,123 $ 71,443 $ 61,259 $63,502
Fixed Charges
Interest expense $ 26,637 $ 27,717 $ 27,195 $25,793
Interest expense on discontinued operations 1,279 4,246 1,286 1,578
Preferred dividends 1,350 1,350 1,350 1,350
Capitalized interest 349 346 313 312
-------- -------- -------- --------
$ 29,615 $ 33,659 $ 30,144 $29,033
Coverage ratio: 2.33x 2.12x 2.03x 2.19x
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 by
short-term use of the line of credit, with long-term secured financing or other
sources of capital replenishing the line of credit availability.
Economic Conditions
Substantially all of the leases at the Company's apartment communities are for a
term of one year or less, which enables the Company to seek increased rents upon
renewal of existing leases or commencement of new leases. These short-term
leases minimize the potential adverse effect of inflation on rental income,
although residents may leave without penalty at the end of their lease terms and
may do so if rents are increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing intensities and at different times. Starting in 2001 and continuing
into 2004 many regions of the United States had experienced varying degrees of
economic recession and certain recessionary trends, such as a temporary
reduction in occupancy and reduced pricing power limiting the ability to
aggressively raise rents. Starting in the second half on 2004 and continuing
into 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 October 27, 2006, the Board of Directors approved a dividend of $0.65 per
share on its common stock for the quarter ended September 30, 2006. This is the
equivalent of an annual distribution of $2.60 per share. The dividend is payable
November 28, 2006 to shareholders of record on November 17, 2006.
On October 27, 2006, the Company also declared a regular dividend of $0.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending November 30, 2006. The dividend on the preferred shares is payable on
November 30, 2006 to shareholders of record on November 17, 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 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.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and measurement of
assets and liabilities associated with tax positions taken or expected to be
taken in a tax return. The Company reviewed its current tax positions for any
potential uncertain tax positions that would qualify under FIN 48. Based on its
review, the Company does not anticipate that the adoption of FIN 48 in January
2007 will have a material impact on the Company's cash flows, results of
operations, financial position or liquidity.
In September 2006, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements ("SAB 108"). In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company's financial statements and
the related financial statement disclosures. This model is commonly referred to
as the "dual approach" because it requires quantification of errors under both
the iron curtain and the roll-over methods. The roll-over method focuses
primarily on the impact of a misstatement on the income statement, including the
reversing effect of prior year misstatements but its use can lead to the
accumulation of misstatements in the balance sheet. The iron-curtain method
focuses primarily on the effect of correcting the period-end balance sheet with
less emphasis on the reversing effects on the prior year errors on the income
statement. The Company will initially apply the provisions of SAB 108 in
connection with the preparation of our annual financial statements for the year
ending December 31, 2006. The Company does not expect that the provisions of SAB
108 will have any impact on its financial statements.
HOME PROPERTIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At September
30, 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 6.4 and 6.9 years, respectively, and a weighted average interest
rate of approximately 5.80% 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 17 and 12 years, respectively, and a
weighted average interest rate of 5.25% and 4.54%, respectively, at September
30, 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 September 30, 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 September 30, 2006 and December 31, 2005, the fair value of the Company's
fixed and variable rate debt, including the $28 million and $29 million,
respectively, which was swapped to a fixed rate, amounted to a liability of
$1.90 billion and $1.89 billion, respectively, compared to its carrying amount
of $1.88 billion and $1.84 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at September 30, 2006 would
have changed the fair value of the Company's fixed and variable rate debt to a
liability of $1.81 billion.
The Company intends to continuously monitor and actively manage interest costs
on its variable rate debt portfolio and may enter into swap positions based upon
market fluctuations. In addition, the Company believes that it has the ability
to obtain funds through additional debt and/or equity offerings and/or the
issuance of UPREIT Units. Accordingly, the cost of obtaining such interest rate
protection agreements in relation to the Company's access to capital markets
will continue to be evaluated. The Company has not, and does not plan to, enter
into any derivative financial instruments for trading or speculative purposes.
As of September 30, 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
September 30, 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 third
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 nine months ended September 30, 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, 2005, the
Company had authorization to repurchase 3,220,195 shares of common stock and
UPREIT Units under the stock repurchase program. During 2006, the Company
repurchased 1,680,521 shares at a cost of $84,532,601. The following table
summarizes the total number of shares (units) repurchased by the Company during
the three months ended September 30, 2006.
Total shares (units) Maximum shares
Total shares Average Purchased as part of (units) that may
(units) price per publicly-announced yet be purchased
Period purchased(1) share (unit) program under the program
------ ------------ ------------ ------- -----------------
Balance June 30, 2006 1,539,674
July 1, 2006 to July 31, 2006 2,651 $55.94 - 1,539,674
August 1, 2006 to August 31, 2006 1,582 $57.00 - 1,539,674
September 1, 2006 to September 30, 2006 8,802 $ 56.04 - 1,539,674
------ -------- ---------
13,035 $ 56.13 - 1,539,674
====== ======== === =========
(1) During the three months ended September 30, 2006, the Company repurchased
7,701 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 1.0 Underwriting Agreement, dated May 9, 2006, between Home Properties,
Inc., UBS Securities LLC and the selling shareholders named therein -
incorporated by reference to the Form 8-K filed by Home Properties, Inc. on
May 10, 2006
Exhibit 4.1 Seventh Amended and Restated Dividend Reinvestment and Direct Stock
Purchase Plan - incorporated by reference to the Form 8-K filed by Home
Properties, Inc. on September 28, 2006
Exhibit 10.1 Development Agreement, dated March 27, 2006 between Nelson
Leenhouts and Home Properties, Inc. - incorporated by reference to the Form
8-K filed by Home Properties, Inc. on March 27, 2006
Exhibit 10.2 Agreement for Purchase and Sale of Interests Southeast Michigan
Portfolio, dated April 26, 2006, together with Second Amendment thereto -
incorporated by reference to the Form 8-K filed by Home Properties, Inc. on
June 30, 2006
Exhibit 10.3 Amendment Nos. Eighty-Three and Eighty-Four to the Second Amended
and Restated Limited Partnership Agreement*
Exhibit 31.1 Section 302 Certification of Chief Executive Officer*
Exhibit 31.2 Section 302 Certification of Chief Financial Officer*
Exhibit 32.1 Section 906 Certification of Chief Executive Officer**
Exhibit 32.2 Section 906 Certification of Chief Financial Officer**
*Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME PROPERTIES, INC.
(Registrant)
Date: November 9, 2006
-------------------------------------
By: /s/ Edward J. Pettinella
-------------------------------------
Edward J. Pettinella
President and Chief Executive Officer
Date: November 9, 2006
-------------------------------------
By: /s/ David P. Gardner
-------------------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer
EXHIBIT 10.3
Home Properties, L.P.
Amendment No. Eighty-Three to
Second Amended and Restated
Agreement of Limited Partnership
The Second Amended and Restated Agreement of Limited Partnership of Home
Properties, L.P. (the "Partnership Agreement") is hereby amended effective
August 15, 2006 to substitute the "Schedule A" attached hereto for the "Schedule
A" currently attached to the Partnership Agreement. "Schedule A" is hereby
amended to reflect various changes.
GENERAL PARTNER
Home Properties, Inc.
/s/ Ann M. McCormick
--------------------
Ann M. McCormick
Secretary
LIMITED PARTNERS LISTED ON ATTACHED SCHEDULE A
By: Home Properties, Inc.
as attorney-in-fact
/s/ Ann M. McCormick
--------------------
Ann M. McCormick
Secretary
(Schedule A setting forth the names, addresses, number of units held and
percentage interest of the partners has been omitted and will be furnished upon
request).
Home Properties, L.P.
Amendment No. Eighty-Four to
Second Amended and Restated
Agreement of Limited Partnership
The Second Amended and Restated Agreement of Limited Partnership of Home
Properties, L.P. (the "Partnership Agreement") is hereby amended effective
October 4, 2006 to substitute the "Schedule A" attached hereto for the "Schedule
A" currently attached to the Partnership Agreement. "Schedule A" is hereby
amended to reflect various changes, including the issuance of limited
partnership interests to the former partners of Heritage Woods Limited
Partnership, Clearfield Estates Limited Partnership and Topfield Limited
Partnership.
GENERAL PARTNER
Home Properties, Inc.
/s/ Ann M. McCormick
--------------------
Ann M. McCormick
Secretary
LIMITED PARTNERS LISTED ON ATTACHED SCHEDULE A
By: Home Properties, Inc.
as attorney-in-fact
/s/ Ann M. McCormick
--------------------
Ann M. McCormick
Secretary
(Schedule A setting forth the names, addresses, number of units held and
percentage interest of the partners has been omitted and will be furnished upon
request).
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Edward J Pettinella, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Properties,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Edward J. Pettinella
------------------------
Edward J. Pettinella
President and Chief Executive Officer
November 9, 2006
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, David P. Gardner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Properties,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David P. Gardner
--------------------
David P. Gardner
Executive Vice President and Chief Financial Officer
November 9, 2006
Exhibit 32.1
The following certification is furnished as provided by Rule 13a-14(b)
promulgated under the Securities Act of 1934 and Item 601(b)(32)(ii) of
Regulation S-K.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Home Properties, Inc. (the "Company")
on Form 10-Q for the quarter ended September 30, 2006, as filed with the
Securities and Exchange Commission on November 9, 2006 (the "Report"), I, Edward
J. Pettinella, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Edward J. Pettinella
-------------------------------------
Edward J. Pettinella
President and Chief Executive Officer
November 9, 2006
A signed original of this written statement required by Section 906 has been
provided to Home Properties, Inc. and will be retained by Home Properties, Inc.
and furnished to the Securities and Exchange Commission or its staff
upon request.
Exhibit 32.2
The following certification is furnished as provided by Rule 13a-14(b)
promulgated under the Securities Act of 1934 and Item 601(b)(32)(ii) of
Regulation S-K.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Home Properties, Inc. (the "Company")
on Form 10-Q for the quarter ended September 30, 2006, as filed with the
Securities and Exchange Commission on November 9, 2006 (the "Report"), I, David
P. Gardner, Executive Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ David P. Gardner
-----------------------------------
David P. Gardner
Executive Vice President and
Chief Financial Officer
November 9, 2006
A signed original of this written statement required by Section 906 has been
provided to Home Properties, Inc. and will be retained by Home Properties, Inc.
and furnished to the Securities and Exchange Commission or its staff
upon request.