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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER:  1-13136

HOME PROPERTIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

850 Clinton Square, Rochester, New York 14604

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:  (585) 546-4900

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.        þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

As of June 30, 2014, the aggregate market value of the 56,586,875 shares of common stock held by non-affiliates was $3,619,296,525 based on the last reported closing sale price of $63.96 per share on the New York Stock Exchange on June 30, 2014.

As of February 11, 2015, there were 57,789,541 shares of common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

HOME PROPERTIES, INC.

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PART I

Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our actual results could differ materially from those set forth in each forward-looking statement.  Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” on page 59 of this Form 10-K.

Item 1.   Business

The Company

Home Properties, Inc. (“Home Properties” or the “Company”) was formed in November 1993 as a Maryland corporation.  Home Properties is a self-administered and self-managed real estate investment trust (“REIT”) that owns, operates, acquires and repositions apartment communities in suburbs of major metropolitan areas, primarily along the East Coast of the United States.  The Company completed an initial public offering of 5,408,000 shares of common stock (the “IPO”) on August 4, 1994 and is traded on the New York Stock Exchange (“NYSE”) under the symbol “HME”.  The Company is included in S&P’s MidCap 400 Index.

The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership, and a management company, Home Properties Resident Services, Inc. (“HPRS”), a Maryland corporation.  At December 31, 2014, the Company held 85.2% (84.8% at December 31, 2013) of the limited partnership units in the Operating Partnership (“UPREIT Units”).

Home Properties, through its affiliates described above, owned and operated 121 communities with 42,107 apartment units (the “Communities” or the “Properties”) as of December 31, 2014:

The Company’s mission is to maximize long-term shareholder value by acquiring, repositioning, managing and owning market-rate apartment communities while enhancing the quality of life for our residents and providing employees with opportunities for growth and accomplishment.  Our vision is to be a prominent owner and manager of market-rate apartment communities located in high barrier, high growth markets.  We expect to maintain or grow portfolios in markets that profitably support our mission as economic conditions permit.

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The Company (continued)

The Company’s long-term business strategies include:

·                  proactively managing and improving our communities to increase net operating income;

·                  acquiring additional apartment communities with attractive returns at prices that provide a positive spread over the Company’s long-term cost of capital;

·                  disposing of properties that have reached their potential, are less efficient to operate, or are located in markets where growth has slowed to a pace below that of the markets targeted for acquisition; and

·                  maintaining a strong and flexible capital structure with cost-effective access to the capital markets.

Structure

The Company was formed in November 1993 as a Maryland corporation and is the general partner of the Operating Partnership.  On December 31, 2014, it held an 85.2% partnership interest in the Operating Partnership comprised of: a 1.0% interest as sole general partner; and an 84.2% limited partner interest through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, the actual limited partner of the Operating Partnership.  The holders of the remaining 14.8% of the UPREIT Units are certain individuals and entities who received UPREIT Units as consideration for their interests in entities owning apartment communities purchased by the Operating Partnership, including certain officers of the Company.

The Operating Partnership is a New York limited partnership formed in December 1993.  Holders of UPREIT Units in the Operating Partnership may redeem an UPREIT Unit for one share of the Company’s common stock or cash equal to the fair market value at the time of the redemption, at the option of the Company.  Management expects that it will continue to utilize UPREIT Units as a form of consideration for a portion of its acquisition properties when it is economical to do so.

HPRS is wholly owned by the Operating Partnership, and as a result, the accompanying consolidated financial statements include the accounts of both companies.  HPRS is a taxable REIT subsidiary under the Tax Relief Extension Act of 1999.

In September 1997, Home Properties Trust (“the QRS”) was formed as a Maryland real estate trust and as a qualified REIT subsidiary.  The QRS is wholly owned by Home Properties I, LLC which is owned 100% by the Company.  The QRS is a limited partner of the Operating Partnership and holds all of the Company’s interest in the Operating Partnership, except for the 1% held directly by the Company as sole general partner.

The Company currently has approximately 1,200 employees and its executive offices are located at 850 Clinton Square, Rochester, New York 14604.  Its telephone number is (585) 546-4900.

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Operating Strategies

The Company will continue to focus on enhancing long-term investment returns by:

·                  acquiring apartment communities and repositioning them for long-term growth at prices that provide a positive spread over the Company’s long-term cost of capital;

·                  recycling assets by disposing of properties in low-growth markets and those that have reached their potential or are less efficient to operate due to size or remote location;

·                  balancing a decentralized property management philosophy with the efficiencies of centralized support functions and accountability, including rent optimization and volume purchasing;

·                  enhancing the quality of living for residents by improving service and physical amenities at each community in an environmentally responsible manner;

·                  adopting new technology to minimize time and cost of administration and maximize efforts to attract and serve residents;

·                  utilizing its written “Pledge” of customer satisfaction, the foundation on which the Company’s brand was built; and

·                  focusing on expense control while improving the level of service to residents.

The Company has a strategy of acquiring mature C/B- apartment communities and repositioning them to B/B+ properties.  Since its 1994 IPO, the Company has acquired and redeveloped 224 communities, containing approximately 63,000 units.  The repositioning process targets a minimum 10% cash-on-cash return on investment.  It is expected that capital expenditures in 2015 for repositioning activities will be in-line with 2014 levels, as residents continue to prefer an upgraded apartment at a higher monthly rent in a recovering economic environment.

As a result of the Company’s long and successful history in the redevelopment of apartment communities, our employees have significant design and construction management skills.  The complete repositioning of a community can take place over a five to seven year period.  The comprehensive process typically begins with improvements in landscaping, signage and common areas.  Exterior improvements increase curb appeal and marketability of the property.  Deferred maintenance is corrected, which can include new HVAC systems, roofs, balconies and windows.  At many properties, community centers and swimming pools are added or upgraded.  Apartment interiors are renovated when residents move out, with the most significant investments made in the upgrade of kitchens and baths.  Complete remodeling of dated kitchens and bathrooms typically includes new appliances, flooring, counters, cabinets, lighting, tile, fixtures, sinks, bathtubs and toilets.  It may include the removal of kitchen walls to create an open concept living space.  When feasible, in-unit washers and dryers are added.  Repositioning efforts significantly increase a property’s rental income, net operating income and market value.

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Acquisition, Disposition and Development Strategies

The Company’s strategy is to grow primarily through acquisitions in the suburbs of major metropolitan markets that are near public transportation and major highways and have significant barriers to new construction, limited new apartment supply, easy access to the Company’s headquarters and sufficient apartments available for acquisition to achieve a critical mass.  Other characteristics of targeted markets include:  acquisition opportunities below replacement costs, a mature housing stock, high average single-family home prices, a favorable supply/demand relationship, stable or moderate job growth, reduced vulnerability to economic downturns and large prime renter populations including immigrants and young adults in their twenties and early thirties.

The Company currently expects its growth to occur within its eight existing markets.  The Company’s largest markets include the suburbs of Baltimore, Boston, New York City, Philadelphia and Washington, D.C.  Continued geographic specialization is expected to have a greater impact on operating efficiencies as compared to the widespread accumulation of properties.  The Company will continue to pursue the acquisition of individual properties as well as multi-property portfolios.  It may also consider strategic investments in other apartment companies, as well as strategic alliances.

During 2014, the Company acquired three communities in suburban Philadelphia and Chicago with a total of 1,052 units for an aggregate consideration of $142 million, or an average of approximately $134,500 per apartment unit.  The weighted average expected first year capitalization rate for the acquired communities was 6.3%.  Capitalization rate (“cap rate”) is defined as the rate of interest used to convert the first year expected net operating income (“NOI”) less a 2.7% management fee into a single present value.  NOI is defined by the Company as rental income and property other income less operating and maintenance expenses.  For a reconciliation of NOI to income from continuing operations, please refer to Note 12 to Consolidated Financial Statements, under Part IV, Item 15 of this Form 10-K.

The Company believes that it will have the opportunity to make acquisitions during 2015 and has projected $250 million to $350 million in purchases for the year.

The Company sold three communities in 2014 with a total of 1,527 units for approximately $217 million, resulting in a weighted average unlevered internal rate of return (“IRR”) of 10.0%.  IRR is defined as the discount rate at which the present value of the future cash flows of the investment is equal to the cost of the investment.  The Company sold four communities in 2013 with a total of 1,013 units for approximately $192 million, resulting in a weighted average IRR of 11.3%.  The Company has identified additional communities for sale in 2015 and will continue to evaluate the sale of its communities.  The Company expects to dispose of between $100 million and $200 million of properties in 2015.  Typically, a property will be targeted for sale if management believes that it has reached its potential or if it is located in a slower growth market or is less efficient to operate.

The Company announced in July 2014 that it was exiting the business of developing new apartment communities. The two projects currently under construction will be completed - Eleven55 Ripley in Silver Spring, Maryland and The Courts at Spring Mill Station in Conshohocken, Pennsylvania. No additional new apartment communities will be started. Land parcels that will not be developed are being marketed for sale.

Management believes it is in the best interest of the Company’s stockholders to dissolve the new development platform and focus 100% on the Company’s core differentiating strategy of acquiring and redeveloping mature apartment communities. This change in strategy is a positive one as it simplifies the investment story for the Company, reduces risk, and allows management to spend more time on what the Company does best - own, operate, acquire, and reposition Class C/B apartment communities.

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Financing and Capital Strategies

The Company intends to continue to adhere to the following financing policies:

·                  maintaining a ratio of debt-to-total value (total debt of the Company as a percentage of the value (using the Company’s value as calculated under the terms of the line of credit facility)) of approximately 38.0% or less;

·                  utilizing primarily fixed rate debt;

·                  varying debt maturities to avoid significant exposure to interest rate changes upon refinancing; and

·                  maintaining a line of credit so that it can respond quickly to acquisition opportunities.

On December 31, 2014, the Company’s debt was approximately $2.5 billion and the debt-to-total market capitalization ratio was 35.6% based on the year-end closing price of the Company’s common stock of $65.60.  The weighted average interest rate on the Company’s mortgage debt as of December 31, 2014 was 5.17% and the weighted average maturity was approximately three and a half years.  Debt maturities are staggered.  Excluding the Company’s line of credit and 180-day bank term loan balance as of December 31, 2014, an average of 14.3% of loans mature each of the next seven years ranging from a high of 24.3% in 2018 to a low of 8.7% in 2017.  As of December 31, 2014, the Company had a $450 million unsecured line of credit facility with M&T Bank and U.S. Bank National Association (acting as joint lead banks) and nine other participating commercial banks with $269 million outstanding on the line of credit.

The Company further strengthened its balance sheet and increased its financial flexibility during 2014 as follows:

·    The Company received a published investment grade credit rating of BBB from Standard & Poor’s Ratings Services to complement its existing Baa2 rating from Moody’s Investor Services and BBB rating from Fitch Ratings.

·    The Company increased the value of unencumbered properties in relationship to the total property portfolio from 47.8% to 52.8%.  This higher level adds flexibility, allowing the Company to place additional unsecured financing or increase secured borrowing on unencumbered assets.

·    The Government Sponsored Enterprises (“GSEs”) Fannie Mae and Freddie Mac are still active lending to apartment owners.  However, no secured debt was added during 2014, except for one loan assumed in conjunction with a property acquisition.  The Company paid off approximately $180 million of mortgage debt in 2014 with a weighted average interest rate of 4.30%.

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Financing and Capital Strategies (continued)

The capital market initiatives described above allowed the Company to achieve stronger key debt and credit metrics at December 31, 2014 versus December 31, 2013 as follows:

·                  total debt to value was reduced to 38.0% from 38.5%; (1)

·                  total secured debt to value was reduced to 25.3% from 28.4%; (1)

·                  net debt to EBITDA (net income before interest expense, income taxes, depreciation and amortization) was reduced to 6.0 times from 6.1 times;

·                  interest coverage ratio was increased to 4.0 times from 3.5 times;

·                  fixed charge coverage ratio increased to 3.7 times from 3.3 times; and

·                  the value of the unencumbered asset pool was increased to $3.4 billion from $3.0 billion; or to 52.8% from 47.7% of total value, respectively. (1)

(1)  Value as calculated under the terms of the line of credit facility.

For 2015, the Company plans to continue to increase the level of the value of unencumbered properties to approximately 58% of the portfolio, maintaining the debt-to-total value ratio at a level equal to or slightly less than the level at December 31, 2014 and utilizing more unsecured debt with minimal reliance on new secured debt.

Management expects to continue to fund a portion of its continued growth by taking advantage of its UPREIT structure and using UPREIT Units as currency in acquisition transactions.  It is difficult to predict the level of demand from sellers for this type of transaction.  In periods when the Company’s stock price is trading at a discount to estimated net asset value (“NAV”) per share, it is unlikely that management would engage in UPREIT transactions.

The Company’s strategy is to opportunistically repurchase shares at a discount to its estimated NAV, thereby continuing to build value for long-term shareholders.  The last year where the Company repurchased any shares under this program was 2008.  At December 31, 2014, there was approval remaining to purchase 2.3 million shares.  Management does not anticipate making share repurchases in 2015.

Competition

The Company’s properties are primarily located in developed areas where there are other multifamily properties which directly compete for residents.  There is also limited competition from single family homes and condominiums for sale or rent.  The competitive environment may have a detrimental effect on the Company’s ability to lease apartments at existing and newly developed properties, as well as on rental rates.

In addition, the Company competes with other real estate investors in seeking property for acquisition.  These competitors include pension and investment funds, insurance companies, private investors, local owners and developers, and other apartment REITs.  This competition could increase prices for properties that the Company would like to purchase and impact the Company’s ability to achieve its long-term growth targets.

The Company believes, however, that it is well-positioned to compete effectively for both residents and properties as a result of its:

·                  focus on service and resident satisfaction, as evidenced by both The Home Properties Pledge, which provides a money-back service guarantee and lease flexibility, and by its resident turnover ratio which is consistently below the industry average;

·                  ability to issue UPREIT Units in purchase transactions, which provides sellers with the opportunity to defer taxes; and

·                  unique repositioning strategy that differentiates the Company from its competitors.

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Market Environment

The markets in which Home Properties operates could be characterized long term as stable, with moderate levels of job growth.  After a recessionary period, starting in 2010 and expected to continue through 2015, many regions of the United States have been experiencing varying degrees of economic recovery resulting in improving job growth for both the country as a whole and the Company’s markets.

In 2013, job growth in the Company’s markets was slightly behind the U.S. average with 1.2% job growth versus 1.6%, respectively.  In 2014, job growth in the Company’s markets continued to lag the U.S. average with a 1.2% growth rate versus 2.3%.  However, the unemployment rate for the Company’s markets of 5.1% continues to compare favorably to the country average of 5.4%.  The Company’s Boston, MA market experienced the lowest unemployment rate of 4.2%.  This market represents 8.4% of the Company’s total apartment unit count.  Unemployment in the Company’s largest market, Northern VA/DC with 26.6% of the Company’s total apartment units, dropped from 4.6% at December 31, 2013 to 4.5% at December 31, 2014 and remains well below the country average.  These two markets represent a combined 35% of the Company’s total units with an unemployment rate below 5.0% as of December 31, 2014.

New construction in the Company’s markets is low relative to the existing multifamily housing stock and compared to other regions of the country.  In 2014, Home Properties’ markets represented 28.0% of the total estimated existing U.S. multifamily housing stock, but only 20.9% of the country’s estimated new supply of multifamily housing units.

The information on the “Market Demographics and Multifamily Supply and Demand” tables on pages 10 and 11 were compiled by the Company from the sources indicated on the tables.  The methods used include estimates and, while the Company feels that the estimates are reasonable, there can be no assurance that the estimates are accurate.  There can also be no assurance that the historical information included on the tables will be consistent with future trends.

An analysis of multifamily supply compared to multifamily demand can indicate whether a particular market is tightening, softening or in equilibrium.  The fourth to last column in the “Multifamily Supply and Demand” table on page 11 reflects current estimated net new multifamily supply as a percentage of new multifamily demand for the Company’s markets and the United States.  For both the Company’s markets and the country as a whole, net new supply is low compared to expected new demand.  For the country, net new supply represents 64.1% of net new demand, creating an environment where both pricing and/or occupancy are expected to remain stable with room for some improvement.  The relationship in the Company’s markets is even better, where net new supply after obsolescence is expected to meet only 55.8% of the expected increasing demand for rental housing.

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Market Demographics

(1)             Suburban New York City is defined for this report as New York-Northern New Jersey-Long Island, NY-NJ-PA Core Based Statistical Area (CBSA).

(2)             Eastern Pennsylvania is defined for this report as Philadelphia-Camden-Wilmington, PA-NJ-DE-MD CBSA & Allentown-Bethlehem-Easton PA-NJ CBSA.

(3)             Boston, MA is defined for this report as Boston-Cambridge-Quincy, MA CBSA & Portland-South Portland-Biddeford, ME CBSA.

(4)             Southeast Florida is defined for this report as Miami-Fort Lauderdale-Miami Beach, FL CBSA.

(5)             Based on The Nielsen Company 2014 estimates calculated from the 2010 U.S. Census figures.

(6)             2014 Multifamily Housing Stock is from The Nielsen Company estimates of five or more units based on the 2010 U.S. Census.

Sources:  Bureau of Labor Statistics (BLS); The Nielsen Company (Nielsen); US Census Bureau - Manufacturing & Construction Div.

Data collected is data available as of February 5, 2015 and in some cases may be preliminary.

BLS is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics.

Nielsen is a leading provider of precision marketing solutions and related products and services.

U.S. Census Bureau’s parent Federal agency is the U.S. Dept. of Commerce, which promotes American business and trade.

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Multifamily Supply and Demand

(1)-(6) see footnotes on prior page

(7)             Estimated 2014 New Supply of Multifamily =  Multifamily permits (2014 figures U.S. Census Bureau, Mfg. & Constr. Div., 5+ permits only) adjusted by the average % of permits resulting in a construction start (estimated at 95%).

(8)             Estimated 2014 Multifamily Obsolescence = Estimated 2014 Multifamily Housing Stock multiplied by the estimated % of obsolescence (0.5%).

(9)             Estimated 2014 Net New Multifamily Supply = Estimated 2014 New Supply of Multifamily - Estimated 2014 Multifamily Obsolescence.

(10)        Estimated 2014 New Multifamily Household Demand = 2014 job growth (Nonfarm, not seasonally adjusted payroll employment figures) (12/31/2013-12/31/2014) multiplied by the expected % of new household formations resulting from new jobs (66.7%) and the % of multifamily households in each market (based on Nielsen estimates).

(11)        Expected Excess Demand = Estimated 2014 New Multifamily Household Demand - Estimated 2014 Net New Multifamily Supply.

(12)        Expected Excess Revenue Growth = Expected Excess Demand divided by 2014 Multifamily Housing Stock.  This percentage is expected to reflect the relative impact that changes in the supply and demand for multifamily housing units will have on occupancy rates and/or rental rates in each market, beyond the impact caused by broader economic factors, such as inflation and interest rates.

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Environmental Matters

As a current or prior owner, operator and developer of real estate, the Company is subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties as a result of environmental contamination or noncompliance at its properties.  See the discussion under the caption, “We may incur costs due to environmental contamination or non-compliance that could adversely affect our financial results and reputation” in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on the Company’s operations.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (collectively, the “Reports”), are electronically filed with the Securities and Exchange Commission (“SEC”).  The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549-2521.  Please call the SEC at 1-800-732-0330 for further information on the operation of the Public Reference Room.  The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which are available without charge.

Company Website

The Company maintains an Internet website at www.homeproperties.com.  The Company provides free-of-charge access to its Reports filed with the SEC, and any amendments thereto, through this website.  These Reports are available as soon as reasonably practicable after the Reports are filed electronically with the SEC and are found under “Investors/SEC Filings.”  In addition, a paper copy of the Reports filed with the SEC may be obtained at no charge by contacting the Corporate Secretary, Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.

Current copies of the Company’s Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers with Certification, Corporate Governance Guidelines and Charters for the Audit, Compensation, Corporate Governance/Nominating and Real Estate Investment Committees of the Board are also available on the Company’s website under the heading “Investors/Corporate Overview/Governance Documents Highlights.”  A copy of these documents is also available at no charge upon request by contacting the Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.

The reference to our website does not incorporate by reference the information contained in the website and such information should not be considered a part of this report.

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Item 1A.  Risk Factors

As used in this section, references to “we” or “us” or “our” refer to the Company, the Operating Partnership, and HPRS, taken as a whole.

Our business is subject to uncertainties and risks.  Please carefully consider the risk factors described below, which apply to Home Properties, the Operating Partnership, and HPRS, in addition to other risks set forth in this Form 10-K.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or prospects.  The risk factors we describe contain or refer to certain forward-looking statements.  You should review the explanation of the limitations of forward-looking statements contained in the section entitled “Forward-Looking Statements” on page 59 of this Form 10-K.

Real Estate Investment Risks

We are subject to risks that are part of owning residential real estate.

Real property investments are subject to varying degrees of risk.  If our communities do not generate revenues sufficient to meet operating expenses, debt service and capital expenditures, our cash flow and ability to make distributions to our stockholders will be adversely affected.  A multifamily apartment community’s revenues and value may be adversely affected by general economic conditions (including unemployment and erosion in the credit quality of the renter pool); local and regional economic conditions (including population shifts); local and regional real estate considerations (such as oversupply of or reduced demand for apartments); changes in home ownership or condominium affordability; the perception by prospective residents of the convenience and attractiveness of the communities or neighborhoods in which they are located and the quality of local schools and other amenities; and increased operating costs (including real estate taxes and utilities). Certain significant fixed expenses are generally not reduced when circumstances cause a reduction in income from a community.

We depend on rental income for cash flow to pay expenses and make distributions.

We are dependent on rental income from our multifamily properties to pay operating expenses, debt service and capital expenditures, and in order to generate cash to enable us to make distributions to our stockholders.  If we are unable to attract and retain residents or if our residents are unable, due to an adverse change in the economic condition of the region or otherwise, to pay their rental obligations, our financial results and our ability to make expected distributions will be adversely affected.  In addition, the weather and other factors outside of our control can result in an increase in the operating expenses for which we are responsible.

An increase in operating expenses, including real estate taxes, would negatively affect our financial results.

Unanticipated increases in real estate taxes and other unanticipated or increased operating expenses cannot always be passed through to residents in the form of higher rents and may adversely affect financial results and our ability to make expected distributions.

Attractive acquisitions may not be available and acquisitions we may be able to make may fail to meet expectations.

We plan to continue to selectively acquire apartment communities that meet our investment criteria.  We expect that other real estate investors, including insurance companies, pension funds, other REITs and other well-capitalized private investors will compete with us to acquire multifamily properties.  This competition could increase prices for properties of the type we would likely pursue and adversely affect our growth, profitability and current strategy of targeting a similar range of acquisitions and dispositions.  If we are able to make acquisitions, there are risks that those acquisitions will perform less favorably than we expect.  Our estimates of future income, expenses and the costs of improvements or redevelopment that are necessary to allow us to operate an acquired property as originally intended may prove to be inaccurate.  Other acquisition risks include environmental issues, tax reassessments, structural issues, competition, economic submarket changes and employment variables.

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Real Estate Investment Risks (continued)

Real estate investments are relatively illiquid, and we may not be able to respond to changing conditions quickly.

Real estate investments are relatively illiquid and, therefore, we have limited ability to adjust our portfolio quickly in response to changes in economic or other conditions.  In addition, the prohibition in the Internal Revenue Code (the “Code”) on REITs holding property for sale and related regulations may affect our ability to sell properties without adversely affecting distributions to stockholders.  A number of our properties were acquired using UPREIT Units and four of those properties are still subject to certain agreements which may restrict our ability to sell such properties in transactions that would create current taxable income to the former owners.

Possible difficulties in selling apartment communities could limit our flexibility.

We have identified certain of our communities that we intend to sell in 2015. We may encounter difficulty in finding buyers in a timely manner who are willing to pay acceptable prices for these communities. If we are unable to sell apartment communities or if we can only sell them at prices lower than are expected, then we may have to take on additional leverage in order to provide adequate capital to execute our strategies.

Competition could limit our ability to lease apartments or increase or maintain rents.

Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments, condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale.  Competitive residential housing in a particular area could adversely affect our ability to lease apartment units and to increase or maintain rental rates.  The recent challenges in the credit and housing markets have increased single-family housing inventory that may compete with our properties.

Repositioning and development risks could affect our profitability.

A key component of our strategy is to acquire properties and to reposition them for long-term growth.  In addition, while we have made a decision to no longer include development of new properties as a strategy, we have one new development property that is in the process of being completed and another new development property that is substantially completed but has not achieved full lease up.  Repositioning activities may require various governmental and other approvals, which have no assurance of being received.  Our repositioning and limited remaining development activities generally entail certain risks, including the following:

·                  funds may be expended and management’s time devoted to projects that may not be completed due to a variety of factors, including without limitation, the inability to obtain necessary zoning or other approvals;

·                  construction costs of a project may exceed original estimates, possibly making the economic return on a repositioned or developed property less than anticipated;

·                 occupancy rates and rents at a completed development project or at a repositioned property may be less than anticipated; and

·                  the operating expenses may be higher than anticipated.

If any of these risks materialized, the effect may negatively impact our financial results and reduce the funds available for distribution to our stockholders.  Further, the repositioning and development of properties is also subject to the general risks associated with real estate investments.

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Real Estate Investment Risks (continued)

Short-term leases expose us to the effects of declining market conditions.

Virtually all of the leases for our properties are short-term leases (generally, one year or less).  Typically, our residents can leave after the end of a one-year lease term.  As a result, our rental revenues are impacted by declines in market conditions more quickly than if our leases were for longer terms.

A significant uninsured property or liability loss could have a material adverse effect on our financial condition and results of operations.

The Company carries commercial general liability, property and business interruption insurance with respect to our properties on terms we consider commercially reasonable.    There are however certain types of extraordinary losses, such as losses for certain natural catastrophes and relating to environmental contamination, that are not insured, in full or part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical.  If an uninsured loss occurred, we could incur significant expense.  As a result of a catastrophic uninsured event impacting an entire property, we could lose our investment in and cash flow from, the affected property, and could be required to repay any indebtedness secured by that property and related taxes and other charges.  If an uninsured liability to a third party were to occur, we would incur the cost of defense and/or settlement with or court ordered damages to, that third party.

Insurance costs and policy deductibles expose us to unpredictable expenses which may be material.

As of December 31, 2014, the Company’s property insurance policies provide for a per occurrence deductible of $50,000 until exhaustion of $2.25 million annual aggregate self-insured retention, and then $100,000 per occurrence deductible.  Earthquake, named windstorm, and flood losses are subject to higher deductibles but are not subject to the aggregate self-insured retention.  Should a covered claim exceed these deductibles and self-insured retention, it would be 100% covered by insurance.   The Company’s general liability policies provide for a self-insured retention of $100,000 per occurrence and its workers’ compensation policies contains a $250,000 per claim deductible.  These large deductible and self-insured retention amounts expose the Company to greater potential uninsured losses.  Management believes that this exposure is justified by savings in insurance premium amounts and, in some cases, was necessary for the Company to secure coverage.  However, the potential impact of poor claims experience could cause a significant increase in insurance premiums and deductibles or a decrease in the availability of coverage, either or which could expose the Company to even greater uninsured losses.

The Company also maintains a $50 million stand-alone terrorism policy with a $25,000 per occurrence deductible in regard to property damage and business interruption combined.

The Company is subject to increased exposure to economic and other competitive factors due to concentration of its Properties in certain markets.

At December 31, 2014, approximately 26.6%, 24.9%, 14.0%, 8.5% and 8.5% (on an apartment unit basis) of the Company’s Properties are located in the Washington, D.C., Baltimore, Philadelphia, Long Island and Northern New Jersey markets, respectively.  The Company’s current strategy is to reduce its concentration in the Washington, D.C. market to approximately 25%.  If any one or more of such core markets is adversely affected by local or regional deteriorating economic conditions or other factors, the adverse impact on our results of operations could be greater than if our portfolio was more geographically diverse.

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Real Estate Investment Risks (continued)

Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.

We must operate our properties in compliance with numerous federal, state and local laws and regulations, including landlord tenant laws and other laws generally applicable to business operations.  Noncompliance with laws could expose us to liability.

Compliance with changes in:  (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions; (ii) rent control or rent stabilization laws; or (iii) other governmental rules and regulations or enforcement policies affecting the use and operation of our communities, including changes to building codes and fire and life-safety codes, may result in lower revenue growth or significant unanticipated expenditures.

We may incur costs and increased expenses to repair property damage resulting from inclement weather.

In every market we are exposed to risks associated with inclement weather, including increased costs for the removal of snow and ice.  In addition, in all of our markets, we have exposure to severe storms which also could increase the need for maintenance and repair of our communities.

We may incur increased costs resulting from the climate change regulations and the occurrence of climate change could adversely affect our financial results.

Various treaties, laws and regulations result in increased capital expenditures to improve the energy efficiency of our properties and may have been adopted relating to climate change.   The Company believes these laws being enacted or proposed may cause energy and waste removal costs at our properties to increase.  We do not expect the direct impact of these increases to be material to our results of operations.  Increased costs relating to energy either would be the responsibility of our residents directly or in large part may be passed through by us to our residents through the utility recovery programs.  We may be able to pass increased waste removal costs on to our residents directly or in the form of increased rental rates.  If this is not possible, it is still not expected that these additional costs would affect the Company’s financial performance in any material way.  To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for properties located in these areas or affected by these conditions.  Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.

We may incur costs due to environmental contamination or non-compliance that could adversely affect our financial results and reputation.

Under various federal, state and local environmental laws, regulations and ordinances, we may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances at our properties and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination.  These damages and costs may be substantial.  The presence of such substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, sell or rent the affected property.

The operation of our communities is subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge.  Noncompliance with such laws and regulations may subject us to fines and penalties.  We do not currently anticipate that we will incur any material liabilities as a result of noncompliance with these laws.

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Real Estate Investment Risks (continued)

We may incur costs due to environmental contamination or non-compliance that could adversely affect our financial results and reputation (continued).

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building.  These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs.  ACMs are present at some of our communities.  We implement an operations and maintenance program at each of the communities at which ACMs are detected.  We do not currently anticipate that we will incur any material liabilities as a result of the presence of ACMs at our communities.

We are aware that some of our communities have or may have lead paint and have implemented an operations and maintenance program at each of those communities to contain, remove or test for lead paint to limit the exposure of our residents.  At some of our properties, we are required by federal law to provide lead-based paint disclosures to our residents.  Failure to comply with the federal notification requirement can result in a penalty.  We do not currently anticipate that we will incur any material liabilities as a result of the presence of lead-based paint at our communities or the failure to provide disclosures.

Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.  Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions.  This has resulted in an increasing number of lawsuits against owners and managers of multifamily properties.  Insurance companies have reacted by excluding mold-related claims from existing policies and pricing mold endorsements at prohibitively high rates.  We have adopted programs designed to minimize any impact mold might have on our residents and our properties.  However, if mold should become an issue in the future, our financial condition or results of operations may be adversely affected.

All of our communities have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or ground water sampling.  These assessments, together with subsurface assessments conducted on some of our properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operation.  However, there is no assurance that Phase I assessments would reveal all environmental liabilities.  In addition, environmental conditions not known to the Company may exist now or in the future which could result in liability to the Company for remediation or fines or to third parties for property or personal injury damages, either under existing laws and regulations or future changes to such requirements.

On a limited basis, we previously were involved in managing, leasing and operating various properties for third parties.  Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which could relate to hazardous or toxic substances.  We are not aware of any material environmental liabilities with respect to properties managed by us for such third parties.

Financing Risks

We are subject to general risks related to debt.

We are subject to the customary risks associated with debt financing.  For example, if a property is mortgaged to secure payment of indebtedness and we are unable to meet its debt service obligations, the property could be foreclosed upon.  This could adversely affect our cash flow and, consequently, the amount available for distributions to stockholders.

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Financing Risks (continued)

We may not be able to obtain refinancing at favorable rates.

Because a significant amount of our financing is not fully self-amortizing, we anticipate that only a portion of the principal of our indebtedness will be repaid prior to maturity.  Accordingly, we will need to refinance debt and there is a risk that we will not be successful in refinancing existing indebtedness or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness.  If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our operating cash flow will not be sufficient in all years to repay all maturing debt.  As a result, certain of our other debt may cross default, we may be forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property.  Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations.

Financing may not be available and issuing equity could dilute our stockholders’ interests.

Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.  Debt or equity financing may not be available in sufficient amounts, or on favorable terms or at all.  If we issue additional equity securities instead of incurring debt, the interests of our existing stockholders could be diluted.

Disruptions in the financial markets could adversely affect our ability to obtain debt financing and impact our acquisitions and dispositions.

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected.  We primarily use external financing to fund acquisitions, our re-positioning program and to refinance indebtedness as it matures.  If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our planned activity and/or take other actions to fund our business activities and repayment of debt such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income.  To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flows could be adversely affected.  Uncertainty in the credit markets also could negatively impact our ability to make acquisitions and make it more difficult or not possible for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.

Potential continued disruptions in the financial markets could also have other unknown adverse effects on us or the economy generally and may cause the price of our securities to fluctuate significantly and/or to decline.

Failure to maintain our current credit ratings could adversely affect our cost of funds, liquidity and access to capital markets.

There are three rating agencies that have assigned an issuer credit rating to the Company.  These ratings are based on a number of factors, which include their assessment of our financial strength, liquidity, capital structure, and sustainability of cash flow and earnings, among other factors.  If market conditions change, we may not be able to maintain our current ratings, which could adversely affect our cost of funds, liquidity and access to capital markets.

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Financing Risks (continued)

Potential reduction or elimination of the role that Fannie Mae and Freddie Mac play in the multifamily financing sector may negatively impact the multifamily sector and our ability to obtain financing.

Fannie Mae and Freddie Mac (the “GSEs”) are a major source of financing for secured multifamily real estate.  We have used the GSEs for a portion of our financing needs.  There is significant uncertainty surrounding the future of the GSEs.  A final decision by the government to eliminate the GSEs or to change their mandate may adversely affect interest rates and capital availability and the value of multifamily communities.

The Company in part relies on its line of credit to meet its short-term liquidity requirements.

As of December 31, 2014, the Company had an unsecured line of credit agreement of $450 million with an initial maturity date of August 18, 2017, and a one-year extension, at the Company’s option.  The Company had $269 million outstanding under the credit facility on December 31, 2014.  We believe that the lenders under our line of credit will fulfill their obligations thereunder, but if economic conditions deteriorate or the financial condition of our lenders is otherwise negatively affected, there can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely affected.

The credit agreement relating to the line of credit requires the Company to maintain certain financial covenants, ratios and measurements.  Maintaining compliance with these covenants could limit our flexibility.  In addition, a default in these requirements, if uncured, could result in a termination of the line of credit and a requirement that we repay outstanding amounts, which could adversely affect our liquidity and increase our financing costs.

Failure to comply with the financial covenants relating to our unsecured debt could result in a default and early repayment of the loans.

In addition to the line of credit, as of December 31, 2014, the Company had $550 million of unsecured debt outstanding.  These loans require the Company to maintain some of the same covenants, ratios and measurements as under the line of credit.  A default in any of these requirements could result in a default of these unsecured loans and a requirement that the loan be repaid early.  This could adversely affect our liquidity and result in increased financing costs.

Rising interest rates could adversely affect operations and cash flow.

As of December 31, 2014, approximately 84% of our debt was at fixed rates.  This limits our exposure to changes in interest rates.  Prolonged interest rate increases, however, could negatively affect our ability to make acquisitions, dispose of properties at favorable prices, or reposition properties and refinance existing borrowings at acceptable rates.

Failure to hedge effectively against interest rates may adversely affect results of operations.

We have in the past and may in the future manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap agreements and rate swap agreements.  These agreements involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements and that these arrangements may reduce the benefits to us if interest rates decline.  Failure to hedge effectively against interest rate changes could have a negative impact on our financial performance and our ability to make distributions to our shareholders and pay amounts due on our debt.

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Financing Risks (continued)

There is no legal limit on the amount of debt we can incur.

The Board has adopted a policy of limiting our indebtedness to approximately 55% of our total market capitalization (with the equity component of total market capitalization based on the per share NAV presented to our Board at its most recent Board meeting), but our organizational documents do not contain any limitation on the amount or percentage of indebtedness we may incur.  Accordingly, the Board could alter or eliminate its current policy on borrowing. If this policy were changed, we could become more highly leveraged, resulting in an increase in debt service costs that could adversely affect our ability to make expected distributions to stockholders and increase the risk of default on our indebtedness.  Our NAV fluctuates based on a number of factors.  Our line of credit agreement limits the amount of indebtedness we may incur.

Other Risks

The loss of members of key personnel could negatively affect the Company’s performance.

Our success depends in part on our ability to attract and retain the services of executive officers and other personnel.  Our executive officers make important capital allocation and other significant decisions or recommendations to our Board of Directors.  There is substantial competition for qualified personnel in the real estate industry, and the loss of several of our key personnel could adversely affect the Company.

Breaches of our data security could materially harm our business and reputation.

Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks.  We collect and retain certain personal information provided by our residents and employees.  In addition, we engage third party service providers that may have access to such personal information in connection with providing necessary information technology and security and other business services to us.  We have implemented a variety of security measures to protect the confidentiality of this information and periodically test and verify the proper and secure operation of these measures.  However, there can be no assurance that we will be able to prevent unauthorized access to this information.  A failure in or breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks or information security breaches could result in a wide range of potentially serious harm to our business operations and financial prospects, including (among others) disruption of our business and operations, disclosure or misuse of confidential or proprietary information (including personal information of our residents and/or employees), damage to our reputation, and/or potentially significant legal and/or financial liabilities.

Emerging technologies, if not adopted properly, and internet viruses could negatively impact our business.

Despite a robust governance structure developed around the use of technology, adoption of emerging technologies in an improper or inefficient manner might place Company data, systems and productivity at risk, as well as potentially introduce legal and regulatory compliance issues.  This could be related to new technology that is configured or deployed incorrectly or is not managed appropriately (whether by us or by a vendor).  In addition, the Company could suffer internet interruptions due to malicious software or viruses.  This could temporarily negatively affect various operations and productivity.

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Other Risks (continued)

The ability of our stockholders to effect a change of control is limited by certain provisions of our Articles of Incorporation as well as by Maryland law and our executive retention plan.

Our Amended and Restated Articles of Incorporation, as amended (the “Articles of Incorporation”), authorize the Board to issue up to a total of 160 million shares of common stock, 10 million shares of excess stock and 10 million shares of preferred stock and to establish the rights and preferences of any shares issued.  Further, under the Articles of Incorporation, the stockholders do not have cumulative voting rights.

In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (including certain entities) at any time during the last half of its taxable year.  We have limited ownership of the issued and outstanding shares of common stock by any single stockholder to 8% of the aggregate value of our outstanding shares.

The percentage ownership limit described above, the issuance of preferred stock in the future and the absence of cumulative voting rights could have the effect of:  (i) delaying or preventing a change of control even if a change in control were in the stockholders’ interest; (ii) deterring tender offers for our common stock that may be beneficial to the stockholders; or (iii) limiting the opportunity for stockholders to receive a premium for their common stock that might otherwise exist if an investor attempted to assemble a block of our common stock in excess of the percentage ownership limit or otherwise to effect a change of control.

As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law.  Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders’ best interests.  In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for re-election annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.

Also, to assure that our management has appropriate incentives to focus on our business and properties in the face of a change of control situation, we have adopted an executive retention plan which provides some key employees with salary, bonus and some benefits continuation in the event of a change of control.

The future sale of shares under our At-The-Market offering may negatively impact our stock price.

Beginning in 2009, the Company made the necessary filings with the Securities and Exchange Commission to institute the sale of its common shares from time to time in “at the market offerings” or negotiated transactions (the “ATM”).  As of December 31, 2014, approximately 2.0 million shares remain available under the current filings relating to the ATM.  If authorized by its Board of Directors, the Company, in the future could affect additional filings to register additional common shares for sale under the ATM.  Sales of substantial amounts of shares of common stock in the public market or the perception that such sales might occur could adversely affect the market price of the common stock.

Federal Income Tax Risks

There is no assurance that we will continue to qualify as a REIT.

We believe that we have been organized and have operated in such manner so as to qualify as a REIT under the Code, commencing with our taxable year ended December 31, 1994.  A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders as long as it distributes currently at least 90% of its taxable income (excluding net capital gains).  No assurance can be provided, however, that we have qualified or will continue to qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification.

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Federal Income Tax Risks (continued)

We are required to make certain distributions to qualify as a REIT, and there is no assurance that we will have the funds necessary to make the distributions.

In order to continue to qualify as a REIT, we currently are required each year to distribute to our stockholders at least 90% of our taxable income (excluding net capital gains).  In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions made by us with respect to the calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income for that year, and any undistributed taxable income from prior periods.  We intend to make distributions to our stockholders to comply with the 90% distribution requirement and to avoid the nondeductible excise tax and will rely for this purpose on distributions from the Operating Partnership.  However, differences in timing between taxable income and cash available for distribution could require us to borrow funds or to issue additional equity to enable us to meet the 90% distribution requirement (and, therefore, to maintain our REIT qualification) and to avoid the nondeductible excise tax.  The Operating Partnership is required to pay (or reimburse us, as its general partner, for) certain taxes and other liabilities and expenses that we incur, including any taxes that we must pay in the event we were to fail to qualify as a REIT.  In addition, because we are unable to retain earnings (resulting from REIT distribution requirements), we will generally be required to refinance debt that matures with additional debt or equity.  There can be no assurance that any of these sources of funds, if available at all, would be available to meet our distribution and tax obligations.

Our failure to qualify as a REIT would have adverse consequences.

If we fail to qualify as a REIT, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.  In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification is lost.  The additional tax burden on us would significantly reduce the cash available for distribution by us to our stockholders.  Our failure to qualify as a REIT could reduce materially the value of our common stock and would cause all our distributions to be taxable as ordinary income to the extent of our current and accumulated earnings and profits (although, subject to certain limitations under the Code, corporate distributees may be eligible for the dividends received deduction with respect to these distributions).

The Operating Partnership intends to qualify as a partnership but there is no guarantee that it will qualify.

We believe that the Operating Partnership qualifies as a partnership for federal income tax purposes.  No assurance can be provided, however, that the Internal Revenue Service (the “IRS”) will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge.  If the IRS were to be successful in treating the Operating Partnership as an entity that is taxable as a corporation, we would cease to qualify as a REIT because the value of our ownership interest in the Operating Partnership would exceed 5% of our assets and because we would be considered to hold more than 10% of the voting securities of another corporation.  Also, the imposition of a corporate tax on the Operating Partnership would reduce significantly the amount of cash available for distribution to our limited partners and stockholders.  Finally, the classification of the Operating Partnership as a corporation would cause its limited partners to recognize gain (upon the event that causes the Operating Partnership to be classified as a corporation) at least equal to their “negative capital accounts” (and possibly more, depending upon the circumstances).

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Item 1B.  Unresolved Staff Comments

None.

Item 2.   Properties

As of December 31, 2014, the Properties consisted of 121 multifamily residential communities containing a total of 42,107 apartment units.  In 2014, the Company acquired three communities with a total of 1,052 units in three transactions for total consideration of $141.5 million.  Also in 2014, the Company sold three communities with a total of 1,527 units in separate transactions for total consideration of $216.8 million.  In 2013, the Company acquired two communities with a total of 457 units in two transactions for total consideration of $55.8 million.  Also in 2013, the Company sold four communities with a total of 1,013 units in separate transactions for total consideration of $192.1 million.

The Properties are generally located in established markets in suburban neighborhoods.  Average physical occupancy at the Properties was 94.3% for 2014.  “Physical occupancy” is defined as total possible rental income, net of vacancy, 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.  Average economic occupancy at the Properties was 93.0% for 2014.  “Economic occupancy” is defined as total possible rental income, net of vacancy and bad debt expense as a percentage of total possible rental income.  The Properties are typically two- and three-story garden style apartment buildings in landscaped settings and a majority are of brick or other masonry construction.  The Company believes that its strategic focus on appealing to middle income residents and the quality of the services it provides to such residents results in lower resident turnover.  Average turnover at the Properties was approximately 40% for 2014, which is significantly below the national average of approximately 50% for garden style apartments.

Resident leases are generally for a one year term.  Security deposits equal to one month’s rent or less are generally required.

Certain of the Properties collateralize mortgage loans.  See Schedule III contained herein (pages 103 to 105).

The table on the following pages illustrates certain of the important characteristics of the Properties as of December 31, 2014.

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