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HME > SEC Filings for HME > Form 10-Q on 4-May-2012All Recent SEC Filings

Show all filings for HOME PROPERTIES INC

Form 10-Q for HOME PROPERTIES INC


4-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Forward-Looking Statements

This discussion contains forward-looking statements. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. The Company considers portions of the information to be "forward-looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company's expectations for future periods. Some examples of forward-looking statements include statements related to acquisitions (including any related pro forma financial information), future capital expenditures, potential development and redevelopment opportunities, projected costs and rental rates for development and redevelopment projects, financing sources and availability, and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Factors that may cause actual results to differ include general economic and local real estate conditions, the weather and other conditions that might affect operating expenses, the timely completion of repositioning activities and development within anticipated budgets, the actual pace of future development, acquisitions and sales, and continued access to capital to fund growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact should be considered to be forward-looking statements. Some of the words used to identify forward-looking statements include "believes", "anticipates", "plans", "expects", "seeks", "estimates", and any other similar expressions. Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and could materially affect the Company's actual results, performance or achievements.

Liquidity and Capital Resources

General

The Company's principal liquidity demands are expected to be distributions to the common stockholders and holders of UPREIT Units, capital improvements and repairs and maintenance for its properties, acquisition and development of additional properties and debt repayments. The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities.

The Company intends to meet its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank line of credit, described below. The Company considers its ability to generate cash to be adequate to meet all operating requirements, including availability to pay dividends to its stockholders and make distributions to its Unit holders in accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.

In 2000, the Company obtained an investment grade rating from Fitch, Inc. The rating in effect at March 31, 2012 is a corporate credit rating of "BBB" (Triple B).

Cash Flow Summary

The Company's net cash flow from operating activities was $61 million in the first three months of 2012 compared to $44 million in the first three months of 2011. The $17 million increase was primarily due to more profitable operations and the full period impact of properties acquired during 2011, as more fully described in the results of operations section below.


Liquidity and Capital Resources (continued)

Cash used in investing activities was $59 million during 2012 compared to $29 million in 2011. Cash outflows for capital improvements were $34 million in 2012 compared to $22 million in 2011. The increased investment in 2012 reflects management's strategy to continually reposition and perform selective rehabilitation in markets that are able to support rent increases. In addition, mild weather conditions during the first three months of 2012 made it possible to complete landscaping and roofing projects that typically would be completed later in the year. Cash outflows for additions to construction in progress were $17 million in 2012 as compared to $8 million in 2011. The increased spending on development in 2012 reflects the active construction of two communities in 2012 compared to one major project and the commencement of one new development during 2011. Additionally, there were $7 million in deposits for the pending purchase of properties in 2012.

Net cash used in financing activities totaled $2 million in 2012. Cash flows from the sale of common stock under the ATM offering of $11 million and proceeds from stock option exercises of $3 million combined with line of credit proceeds of $63 million during the period were used for net paydown of mortgages of $39 million, and dividends and distributions of $39 million. Net cash used in financing activities totaled $14 million in 2011. Cash flows from net proceeds of the ATM common stock offering of $47 million and proceeds from stock option exercises of $4 million were used for net paydown of mortgages of $20 million, net paydown on the line of credit of $14 million and dividends and distributions of $31 million.

Unsecured Line of Credit

As of March 31, 2012, the Company had a $275 million unsecured line of credit agreement with M&T Bank and U.S. Bank National Association, as joint lead banks, and nine other participating commercial banks, with an initial maturity date of December 8, 2015 and a one-year extension at the Company's option. The Company had $65.5 million outstanding under the credit facility as of March 31, 2012. The line of credit agreement provides the ability to issue up to $20 million in letters of credit. While the issuance of letters of credit does not increase the borrowings outstanding under the line of credit, it does reduce the amount available. At March 31, 2012, the Company had outstanding letters of credit of $7.8 million resulting in the amount available on the credit facility of $202 million. Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company's leverage ratio. As of March 31, 2012, based on the Company's leverage ratio, the LIBOR margin was 1.30%, and the one-month LIBOR was 0.25%; resulting in an effective rate of 1.55% for the Company.

Unsecured Term Loan

On December 9, 2011, the Company entered into a $250 million five-year unsecured term loan with M&T Bank as lead bank, and ten other participating lenders. The term loan generated net proceeds of $248 million, after fees and closing costs, which were used to pay off $135 million principal amount of exchangeable senior notes, purchase an unencumbered property and acquire land for future development. The loan bears monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company's leverage ratio. As of March 31, 2012, based on the Company's leverage ratio, the LIBOR margin was 1.30%, and the one-month LIBOR was 0.25%; resulting in an effective rate of 1.55% for the Company. The loan has covenants that align with the unsecured line of credit facility.

Unsecured Senior Notes

On December 19, 2011, the Company issued $150 million of unsecured senior notes. The notes were offered in a private placement in two series: Series A: $90 million with a seven-year term due December 19, 2018 at a fixed interest rate of 4.46% ("Series A"); and, Series B: $60 million with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00% ("Series B"). The net proceeds of $89 million and $60 million for Series A and Series B, respectively, after fees and closing costs, were used to purchase an unencumbered property and pay off a maturing mortgage note. The notes require semiannual interest payments on June 19 and December 19 of each year until maturity and are subject to various covenants and maintenance of certain financial ratios. Although the covenants of the notes do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the notes and the line are identical.


Liquidity and Capital Resources (continued)

Exchangeable Senior Notes

On November 1, 2011, the Company repurchased at face value $135 million principal amount of exchangeable senior notes ("Senior Notes"), plus accrued interest of $2.8 million, that were presented by the holders for repurchase in accordance with the October 2006 Senior Notes Indenture Agreement (the "Indenture"). On December 21, 2011 the remaining outstanding balance of $5 million principal amount of the Senior Notes was repurchased by the Company at face value plus accrued interest at the Company's option in accordance with the Indenture. There were no outstanding Senior Notes as of December 31, 2011.

Indebtedness

As of March 31, 2012, the weighted average interest rate on the Company's total indebtedness of $2.7 billion was 4.66% with staggered maturities averaging approximately six years. Approximately 81% of total indebtedness is at fixed rates. This limits the exposure to changes in interest rates, minimizing the effect of interest rate fluctuations on the Company's results of operations and cash flows.

Unencumbered Assets

The Company increased the percentage of unencumbered assets of the total property pool from 33% at the end of 2011, to 35% as of March 31, 2012. Higher levels of unsecured assets add borrowing flexibility because more capacity is available for unsecured debt under the terms of the Company's unsecured line of credit agreement, and for the issuance of additional unsecured senior notes. It also permits the Company to place secured financing on unencumbered assets if desired.

UPREIT Units

The Company believes that the issuance of UPREIT Units for property acquisitions will continue to be a potential source of capital for the Company. During 2011 and continuing through March 31, 2012, there were no UPREIT Units issued for property acquisitions.

Universal Shelf Registration

On March 3, 2010, the Company filed a Form S-3 universal shelf registration statement with the SEC that registers the issuance, from time to time, of common stock, preferred stock or debt securities. The Company may offer and sell securities issued pursuant to the universal shelf registration statement after a prospectus supplement, describing the type of security and amount being offered, is filed with the SEC. Sales of common stock under the Company's ATM equity offering, as described below, were made under this registration statement.

At-the-Market Equity Offering Program

On September 17, 2010, the Company initiated an "At-the-Market" ("ATM") equity offering program through which it is authorized to sell up to 3.6 million shares of common stock from time to time in ATM offerings or negotiated transactions. During 2011, the Company issued 3,204,107 shares of common stock at an average price per share of $60.60, for aggregate gross proceeds of $194.2 million and aggregate net proceeds of $190.1 million after deducting commissions and other transaction costs of approximately $4.1 million. During the first quarter of 2012, the Company issued 188,393 shares of common stock at an average price per share of $59.22, for aggregate gross proceeds of $11.2 million and aggregate net proceeds of $10.9 million after deducting commissions and other transaction costs of approximately $0.3 million. The Company used the net proceeds from the offering primarily for acquisitions, development and redevelopment of apartment communities.


Liquidity and Capital Resources (continued)

Dividend Reinvestment and Direct Stock Purchase Plan ("DRIP")

The Company's DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in additional shares of common stock. In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock. The maximum monthly investment permitted without prior Company approval is currently $10,000. The Company can issue waivers to DRIP participants to provide for investments in excess of the $10,000 maximum monthly investment. No such waivers were granted during 2011 or 2012. The Company meets share demand under the DRIP through stock repurchases by the transfer agent in the open market on the Company's behalf or new stock issuances. Management monitors the relationship between the Company's stock price and its estimated net asset value ("NAV"). During times when the difference between these two values is small, resulting in little dilution of NAV by common stock issuances, the Company can choose to issue new shares. At times when the gap between NAV and stock price is greater, the Company has the flexibility to satisfy the demand for DRIP shares with stock repurchased by the transfer agent in the open market.

Stock Repurchase Program

In 1997, the Company's Board of Directors (the "Board") approved a stock repurchase program under which the Company may repurchase shares of its common stock or UPREIT Units ("Company Program"). The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board's action did not establish a target stock price or a specific timetable for repurchase. There were no repurchases under the Company Program during 2011 and through March 31, 2012. The remaining authorization level as of March 31, 2012 is 2,291,160 shares and UPREIT Units, collectively. The Company will continue to monitor stock prices relative to the NAV to determine the current best use of capital among our major uses of capital: stock buybacks, debt paydown to increase the unencumbered pool, acquisitions, rehabilitation and redevelopment of owned properties and development of new properties.

Property Development

Current development projects

During the first quarter of 2011, the Company started construction on The Apartments at Cobblestone Square, a project located in Fredericksburg, Virginia, consisting of eight four-story buildings and a refurbished rail depot, for a total of 314 apartment units. Construction of three of the four-story apartment buildings, along with the rail depot renovation and amenities, was complete as of March 31, 2012. Initial occupancy commenced in the fourth quarter of 2011. As of March 31, 2012, there were 95 units occupied and 60 units preleased. Construction of the other buildings has begun and the entire project is expected to be completed in the first half of 2012 for a total cost of $49 million.

Eleven55 Ripley, a 379-unit high rise development consisting of two buildings, a 21 story high-rise and a 5 story mid-rise, is located in Silver Spring, Maryland. Construction commenced in the fourth quarter of 2011, and is expected to continue through 2014 with initial occupancy in the third quarter of 2013 for a total projected cost of $111 million.

Courts at Spring Mill Station, located in Conshohocken, Pennsylvania, is on entitled land which the Company purchased in the fourth quarter of 2011 and plans to develop a combination donut/podium style project with 385 units. The contract for the land acquisition was $11 million. Construction is expected to begin in the second quarter of 2012 and is expected to continue through 2014 with initial occupancy in the second half of 2013 for a total projected cost of $89 million.


Property Development (continued)

Redevelopment

Arbor Park, located in Alexandria, Virginia, currently has 851 garden apartments in fifty-two buildings built in 1967. The Company is part way through a four-year project to extensively renovate all of the apartment units on a building by building basis. As of March 31, 2012, there were five buildings with 93 units under renovation and sixteen buildings with 180 units completed and 171 units occupied. Rents in the renovated units averaged $1,690 during the first quarter of 2012, compared to $1,380 for the existing non-renovated units.

Pre-redevelopment

Falkland Chase, located in Silver Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939. The Company is planning on redeveloping the North parcel, which will be renamed Falkland North. The Company is making progress on the design and obtaining the necessary approvals to redevelop this parcel into approximately 1,100 units. Construction is expected to start at the earliest during early 2013, with a total projected cost in excess of $300 million. As this is a large project, the Company may decide to pursue a joint venture partner.

Land under contract

The Company also has land under contract in Fairfax County, Virginia (Westpark Tysons). This project involves an entitled land parcel on which the Company is working with the seller to process a rezoning application for development of a podium style project with a total of approximately 600 wood-framed mid-rise and concrete high-rise units. Closing will occur after the seller obtains final zoning approval for the project. Construction may begin as early as the first half of 2014 with a total projected cost of $205 million.

Contractual Obligations and Other Commitments

The primary obligations of the Company relate to its borrowings under the unsecured line of credit, unsecured notes and mortgage notes. The Company's line of credit matures in December 2015 (not including a one-year extension at the option of the Company), and had $65.5 million in loans and letters of credit totaling $7.8 million outstanding at March 31, 2012. The $400 million in unsecured notes have maturities ranging from five to ten years. The $2.2 billion in mortgage notes payable have varying maturities ranging from 3 months to 22 years. The weighted average interest rate of the Company's secured debt was 5.10% at March 31, 2012. The weighted average rate of interest on the Company's total indebtedness of $2.7 billion at March 31, 2012 was 4.66%.

The Company leases its corporate office space from an affiliate and the office space for its regional offices from non-affiliated third parties. The rent for the corporate office space is a gross rent that includes real estate taxes and common area maintenance. The regional office leases are net leases which require an annual base rent plus a pro-rata portion of real estate taxes.

The Company, through its former general partnership interest in an affordable property limited partnership, has a secondary guarantee through 2015 on certain low income housing tax credits to limited partners in this partnership totaling approximately $3 million. With respect to the guarantee of the low income housing tax credits, the new unrelated general partner assumed operating deficit guarantee and primary tax credit guarantee positions. The Company believes the property's operations conform to the applicable requirements and does not anticipate any payment on the guarantee; therefore, no liability has been recorded in the financial statements.


Capital Improvements (dollars in thousands, except unit and per unit data)

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 and bath cabinets, new roofs, site improvements and various exterior building improvements. Non-recurring revenue generating upgrades include community centers, new windows, and kitchen and bath apartment upgrades. Revenue generating capital improvements are expected to directly result in increased rental earnings or expense savings. The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.

The Company estimates, that on an annual basis, $848 and $800 per unit is spent on recurring capital expenditures in 2012 and 2011, respectively. During the three months ended March 31, 2012 and 2011, approximately $212 and $200 per unit, respectively, was spent on recurring capital expenditures.

The table below summarizes the actual total capital improvements incurred by major categories for the three months ended March 31, 2012 and 2011 and an estimate of the breakdown of total capital improvements by major categories between recurring, and non-recurring revenue generating, capital improvements for the three months ended March 31, 2012 as follows:

                                                                                    For the three months ended March 31,
                                                                                    2012                                                           2011
                                                                           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                             $        -      $      -      $       172     $       4     $          172     $       4     $          197     $       5
Major building improvements                     1,320            33           1,813            45              3,133            78              3,102            82
Roof replacements                                 376             9              63             2                439            11                200             5
Site improvements                                 609            15           1,880            46              2,489            61              1,210            32
Apartment upgrades                              1,270            31          10,424           257             11,694           288              6,472           171
Appliances                                      1,828            45              68             2              1,896            47              1,168            31
Carpeting/flooring                              2,214            55           1,118            28              3,332            83              2,356            62
HVAC/mechanicals                                  792            19           2,367            58              3,159            77              1,732            46
Miscellaneous                                     203             5           1,071            26              1,274            31              1,235            33

Totals                                    $     8,612     $     212     $    18,976     $     468     $       27,588     $     680     $       17,672     $     467

(a) Calculated using the weighted average number of units owned, including 37,811 core units and 2011 acquisition units of 2,817 for the three months ended March 31, 2012; and 37,811 core units for the three months ended March 31, 2011.


Capital Improvements (continued)



The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:



                                                                                  For the three months ended March 31,
                                                                                 2012                                                           2011
                                                                         Non-                           Total                           Total
                                         Recurring         Per         Recurring         Per           Capital           Per           Capital            Per
                                          Cap Ex         Unit(a)        Cap Ex         Unit(a)       Improvements      Unit(a)       Improvements       Unit(a)
Core Communities                        $     8,015     $     212     $    16,204     $     429     $       24,219     $    641     $       17,672     $     467
2011 Acquisition Communities                    597           212           2,772           984              3,369        1,196                 -             -

Sub-total                                     8,612           212          18,976           468             27,588          680             17,672           467
Corporate office expenditures(b)                 -             -               -             -                 798           -                 678            -

Totals                                  $     8,612     $     212     $    18,976     $     468     $       28,386     $    680     $       18,350     $     467

(a) Calculated using the weighted average number of units owned, including 37,811 core units, 2011 acquisition units of 2,817 for the three months ended March 31, 2012; and 37,811 core units for the three months ended March 31, 2012.

(b) No distinction is made between recurring and non-recurring expenditures for corporate office. Corporate office expenditures include principally computer hardware, software, office furniture, fixtures and leasehold improvements.

Results of Operations (dollars in thousands, except unit and per unit data)

Net operating income ("NOI") may fall within the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K and, as a result, the Company may be required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company's apartment communities. In addition, the apartment communities are valued and sold in the market by using a multiple of NOI. The Company uses this measure to compare its performance to that of its peer group. For a reconciliation of NOI to income from continuing operations, please refer to Note 8 to the consolidated financial statements of this Form 10-Q.

Summary of Core Properties

The Company had 113 apartment communities with 37,811 units which were owned during the three months ended March 31, 2012 and 2011 (the "Core Properties"). The Company has one property with 851 units undergoing significant renovations that began in 2011 and, therefore, the operating results for 2012 are not comparable to 2011 due to those units being taken out of service during the redevelopment period (the "Redevelopment Property"). The Company, therefore, has . . .

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