UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 1-13136
HOME PROPERTIES, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 16-1455126
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
850 CLINTON SQUARE
ROCHESTER, NEW YORK 14604
(Address of principal executive offices)
Registrant's telephone number, including area code: (585) 546-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
-------------------------------- -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
_____________________________
(Title of class)
_____________________________
(Title of class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES X NO
------ ------
Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
YES NO X
------ ------
Indicate by checkmark 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.
YES X NO
------ ------
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (ss.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.
YES X NO
------ ------
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer / X / Accelerated filer / / Non-accelerated filer / /
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
YES NO X
------ ------
The aggregate market value of the shares of common stock held by non-affiliates
(based on the closing sale price on the New York Stock Exchange) on June 30,
2005, was approximately $1,365,193,884.
As of February 21, 2006, there were 31,209,603 shares of common stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to Part III
be held on May 4, 2006
HOME PROPERTIES, INC.
TABLE OF CONTENTS
Page
PART I.
Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 16
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 4A. Executive Officers 23
PART II.
Item 5. Market for the Registrant's Common Equity, Related Shareholder Matters, and
Issuer Purchases of Equity Securities 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 56
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 57
Item 9A. Controls and Procedures 57
Item 9B. Other Information 58
PART III.
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters 62
Item 13. Certain Relationships and Related Transactions 62
Item 14. Principal Accountant Fees and Services 62
PART IV.
Item 15. Exhibits, Financial Statement Schedules 63
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 1943. 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, included in the section entitled "Overview" on
page 30 of this Form 10-K.
Item 1. Business
-----------------
The Company
-----------
Home Properties, Inc. ("Home Properties" or the "Company") is a
self-administered and self-managed real estate investment trust ("REIT") that
owns, operates, acquires, develops and rehabilitates apartment communities. The
Company's properties are regionally focused in select Northeast, Mid-Atlantic,
Midwest and Southeast Florida markets of the United States. The Company was
formed in November 1993, to continue and expand the operations of Home Leasing
Corporation ("Home Leasing"). The Company completed an initial public offering
of 5,408,000 shares of common stock (the "IPO") on August 4, 1994.
The Company conducts its business through Home Properties, L.P. (the "Operating
Partnership"), a New York limited partnership in which the Company held a 65.2%
partnership interest as of December 31, 2005 (67.7% at December 31, 2004) (such
interest has been calculated as the percentage of outstanding common shares
divided by the total outstanding common shares and limited partnership units in
the Operating Partnership ("UPREIT Units") outstanding) and two management
companies (together, the "Management Companies") - Home Properties Management,
Inc. ("HP Management") and Home Properties Resident Services, Inc. ("HPRS"),
both of which are Maryland corporations.
Home Properties, through its affiliates described above, as of December 31,
2005, operated 158 communities with 47,001 apartment units. Of these, 43,432
units in 153 communities are owned outright (the "Owned Properties"), 868 units
in one community are managed and partially owned by the Company as general
partner, and 2,701 units in four communities are managed for other owners
(collectively, the "Managed Properties").
The Owned Properties and the Managed Properties (collectively, the "Properties")
are concentrated in the following market areas:
Apts. Apts. Managed As Apts. Apt.
Market Area Owned General Partner Fee Managed Totals
----------- ----- --------------- ----------- ------
Suburban New York City 8,432 - - 8,432
Suburban Washington, D.C. 8,192 - 1,387 9,579
Philadelphia, PA 5,948 - - 5,948
Baltimore, MD 5,842 - 1,314 7,156
Detroit, MI 5,046 - - 5,046
Upstate New York 4,567 - - 4,567
Chicago, IL 2,242 - - 2,242
Boston, MA 1,252 - - 1,252
Southeast FL 836 - - 836
Portland, ME 643 - - 643
Dover, DE 432 - - 432
Columbus, OH - 868 - 868
------ --- ----- ------
Total # of Units 43,432 868 2,701 47,001
====== === ===== ======
Total Number of Communities 153 1 4 158
The Company's mission is to maximize long-term shareholder value by acquiring,
repositioning, and managing market-rate apartment communities while enhancing
the quality of life for its 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, predominantly B class, typically with 150
units or more located in selected suburban markets of metropolitan areas with
substantial barriers to new development. The suburban areas we have targeted for
growth are around Baltimore, Boston, New York City, Philadelphia, Southeast
Florida and Washington, D.C. We expect to maintain or grow portfolios in markets
that profitably support our mission as economic conditions permit.
The Company's business strategies include: (i) aggressively managing and
improving its communities to achieve increased net operating income; (ii)
acquiring additional apartment communities with attractive returns at prices
that provide a positive spread over the Company's long-term blended cost of
capital; (iii) 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 the markets targeted for acquisition; and (iv) 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, 2005, it owned a
66.8% interest in the Operating Partnership (such interest has been calculated
as the percentage of outstanding common and preferred shares owned by the
Company divided by the total outstanding common shares, preferred shares, and
UPREIT Units outstanding) - one percent as sole general partner and the
remainder as a limited partner through its wholly owned subsidiary, Home
Properties I, LLC, which owns 100% of the limited partner, Home Properties
Trust. A portion of the limited partner interests held by Home Properties Trust
as of December 31, 2005 consisted of all of the Series F Limited Partnership
Units (2,400,000 units, or 4.8% of the total). Those preferred interests in the
Operating Partnership have rights and preferences that mirror the rights and
preferences of the holders of the related series of preferred shares in the
Company. The remaining units (30,68l,246 or 61.0% of the total) held by Home
Properties Trust have basically the same rights as the other holders of the
other UPREIT Units. Those other holders 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 and directors 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.
The Management Companies are wholly owned subsidiaries of the Company, and as a
result the accompanying consolidated financial statements include the accounts
of the Management Companies. Both of the Management Companies are Maryland
corporations and are taxable REIT subsidiaries under the Tax Relief Extension
Act of 1999. HP Management was formed in January 1994 and HPRS was formed in
December 1995. The Management Companies managed, for a fee, certain of the
commercial, residential and development activities of the Company and provided
construction, development and redevelopment services for the Company. With the
transfers of the affordable management properties and commercial management
contracts, the amount of activity in the Management Companies was minimal in
2005.
In September 1997, Home Properties Trust ("QRS") was formed as a Maryland real
estate trust and as a qualified REIT subsidiary, with 100% of its shares being
owned by the Company. The QRS has been admitted as a limited partner of the
Operating Partnership and the Company transferred all but one percent of its
interest in the Operating Partnership to the QRS. Effective December 30, 2002,
the Company transferred 100% of its ownership in the QRS to a newly formed
entity, Home Properties I, LLC. Home Properties I, LLC is a wholly owned
subsidiary of the Company.
The Company currently has approximately 1,500 employees and its executive
offices are located at 850 Clinton Square, Rochester, New York 14604. Its
telephone number is (585) 546-4900.
Operating Strategies
--------------------
The Company will continue to focus on enhancing the investment returns of its
properties by: (i) acquiring apartment communities and repositioning those
properties for long-term growth at prices that provide a positive spread over
the Company's long-term blended cost of capital; (ii) 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; (iii)
balancing its decentralized property management philosophy with the efficiencies
of centralized support functions and accountability including volume purchasing;
(iv) enhancing the quality of living for the Company's residents by improving
the service and physical amenities available at each community every year; (v)
adopting new technology so that the time and cost spent on administration can be
minimized while the time spent attracting and serving residents can be
maximized; (vi) continuing to utilize its written "Pledge" of customer
satisfaction that is the foundation on which the Company has built its brand
recognition; and (vii) focusing on reducing expenses while constantly improving
the level of service to residents.
Acquisition and Sale Strategies
-------------------------------
The Company's strategy is to grow primarily through acquisitions in the suburbs
of major metropolitan markets that have significant barriers to new
construction, easy access to the Company's headquarters, and enough apartments
available for acquisition to achieve a critical mass. Targeted markets also
possess other characteristics, including acquisition opportunities below
replacement costs, a mature housing stock and stable or moderate job growth. The
Company currently expects that its growth will be focused within suburban
sub-markets of select metropolitan areas within the Northeast, Mid-Atlantic and
Southeast Florida regions of the United States where it has already established
a presence. The largest metropolitan areas the Company will focus on include
Baltimore, Boston, New York City, Philadelphia, Southeast Florida, and
Washington, D.C. The Company may expand into new markets that possess the
characteristics described above. Continued geographic specialization is expected
to have a greater impact on operating efficiencies versus 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, such as joint ventures. The Company has anticipated closing
on acquisitions of $150 million in its budget for 2006.
During 2005, the Company acquired seven communities with a total of 2,430 units
for an aggregate consideration of approximately $283.4 million, or an average of
approximately $116,900 per apartment unit. The weighted average expected first
year capitalization rate for the acquired communities was 6.0%. Capitalization
rate ("cap rate") is defined as the rate of interest used to convert the first
year expected net operating income ("NOI") less a 3.0% management fee into a
single present value. NOI is defined by the Company as rental income and
property other income less operating and maintenance expenses. The acquisitions
were concentrated in Suburban New York City and Washington, D.C.
During 2005, the Company completed the sale of four communities with a total of
816 units for an aggregate consideration of approximately $142.6 million, at a
weighted average expected first-year cap rate of 4.0%. One property was sold to
a condominium converter and the other properties sold were either in slower
growth markets or less efficient to operate due to their remote locations and/or
smaller size. The Company recycled the proceeds from those properties that were
expected to produce a weighted average unleveraged internal rate of return
("IRR") of 5.5% with the purchase of properties expected to produce an
unleveraged IRR of 8.1%. 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. Several of the properties sold were originally acquired through
transactions where the sellers received UPREIT Units as consideration to provide
them with the opportunity to defer tax obligations. We refer to these
transactions as "UPREIT transactions." Generally, in UPREIT transactions, the
Company has made certain commitments to the sellers regarding the Company's sale
of the property. As a result, Section 1031 exchanges were used to defer taxable
gains of the UPREIT investor.
The Company will continue to contemplate the sale of certain of its communities.
In November 2005, the Company announced its intention to sell its Detroit
portfolio to focus on its target core markets. The Company has currently
identified twenty-one communities (nineteen in Detroit) for sale during 2006.
The total estimated fair market value of these communities is in excess of $250
million. It is management's opinion that these communities have reached their
potential. A certain number of these properties were originally acquired through
UPREIT transactions. Therefore, those sales will have to be matched with
suitable acquisitions of approximately $75 million using a tax deferred
exchange. The Company has anticipated closing on sales of $250 million in its
budget for 2006.
Financing and Capital Strategies
--------------------------------
The Company intends to adhere to the following financing policies: (i)
maintaining a ratio of debt-to-total market capitalization (total debt of the
Company as a percentage of the market value of outstanding diluted common stock
(including the common stock equivalents of the UPREIT Units) plus total debt) of
approximately 55% or less; (ii) utilizing primarily fixed rate debt; (iii)
varying debt maturities to avoid significant exposure to interest rate changes
upon refinancing; and (iv) maintaining a line of credit so that it can respond
quickly to acquisition opportunities.
On December 31, 2005, the Company's debt was approximately $1.8 billion and the
debt-to-total market capitalization ratio was 48.7% based on the year-end
closing price of the Company's stock of $40.80. This measurement would be 44.1%
using the closing stock price on February 21, 2006 of $49.21. The weighted
average interest rate on the Company's mortgage debt as of December 31, 2005 was
5.9% and the weighted average maturity was approximately seven years. Debt
maturities are staggered, ranging from May 2006, through January 2042. As of
December 31, 2005, the Company had an unsecured line of credit facility from M&T
Bank of $140 million. This facility is available for acquisition and other
corporate purposes and bears an interest rate at .75% over the one-month LIBOR
rate. As of December 31, 2005, the one-month LIBOR rate was 4.4% and there was
$82 million outstanding on the line of credit.
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. During 2005, the Company issued $55.6 million of
UPREIT Units as consideration for three acquired properties. During 2004, the
Company issued $12.1 million worth of UPREIT Units as consideration for two
acquired properties. It is difficult to predict the level of demand from sellers
for this type of transaction. The Company also intends to continue to pursue
other equity transactions to raise capital with limited transaction costs.
The Company's Board of Directors have approved a stock repurchase program under
which the Company may repurchase shares of its outstanding common stock and
UPREIT Units. Shares or units may be repurchased through the open market or in
privately-negotiated transactions. The Company's strategy is to
opportunistically repurchase shares at a discount to its underlying net asset
value, thereby continuing to build value for long-term shareholders. At December
31, 2003, there was approval remaining to purchase 3,135,800 shares. During
2004, the Company repurchased 1,135,800 shares of its outstanding common stock
at a cost of $47.4 million at a weighted average price of $41.72 per share.
During 2005, the Company repurchased 2,779,805 shares of its outstanding common
stock at a cost of $111.7 million at a weighted average price of $40.20 per
share. From January 1, 2006 through January 5, 2006, the Company repurchased
107,800 additional shares at a cost of $4.5 million. On each of February 16,
2005 and November 4, 2005, the Board of Directors approved a 2,000,000-share
increase in the stock repurchase program, resulting in a remaining authorization
level of 3,112,395 shares as of February 21, 2006.
Competition
-----------
The Company competes with other multifamily owners and operators, other real
estate companies, pension funds and private investors in seeking properties for
acquisition. The Company's properties are primarily in developed areas where
there are other properties of the same type which directly compete for
residents. The Company, however, believes that its focus on service and resident
satisfaction gives it a competitive advantage. The Company also believes that
the moderate level of new construction of multifamily properties in its markets
in 2005, generally requiring higher rental rates, will not have a material
adverse effect on its turnover rates, occupancies or ability to increase rents
and minimize operating expenses. During the past few years, the Company has
encountered competition as it seeks to acquire attractive properties in broader
geographic areas. Given the perceived depth of available opportunities, this
increased level of competition has not prevented the Company from being able to
meet its long-term growth expectations.
Market Environment
------------------
Except for the recent recession in parts of 2001 through mid-2004, the markets
in which Home Properties operates could be characterized as stable, with
moderate levels of job growth. For 2005, there continues to be the trend of
slightly lower job growth in the Company's markets of 1.1% compared to 1.5% for
the country.
The information on the Market Demographics and Multifamily Supply and Demand
tables on Pages 9 and 10 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 table will be consistent with future trends.
New construction in the Company's markets is low relative to the existing
multifamily housing stock and compared to other regions of the country. Most of
the existing housing stock in the Company's markets was built before 1980.
Zoning restrictions, a scarcity of land and high construction costs make new
development difficult to justify in many of the Company's markets. In 2005, Home
Properties' markets represented 30.0% of the total estimated existing U.S.
multifamily housing stock, but only 21.8% of the country's estimated net new
supply of multifamily housing units.
An analysis of future multifamily supply compared to projected 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 10 reflects current estimated net new multifamily supply as a
percentage of new multifamily demand for the Company's markets and the United
States. In 2005, net new multifamily supply as a percent of net new multifamily
demand in Home Properties' markets was approximately 71%, compared to a national
average of 81%. Home Properties' markets seem to be tightening and compare
favorably to the country as a whole on a measurement of supply/demand
equilibrium.
The third to the last column in the Multifamily Supply and Demand table on page
10 shows the net new multifamily supply as percent of existing multifamily
housing stock. In the Company's markets, net new supply only represents 0.6% of
the existing multifamily housing stock. This compares to the national average
net new multifamily supply estimates at 0.9% of the multifamily housing stock.
Market Demographics
December December 2005
Job Job Multifamily
% of Growth Growth 2005 Units as a % 2005
Home Properties 2005 Trailing Trailing December Median of Total Multifamily
Owned Number of 12 Months 12 Months Unemployment Home Housing Units Housing
MSA Market Area Units Households % Change Actual Rate Value Stock (4) Stock (5)
------------------------------------------------------- --------------------------------------------------------------------------
Suburban New York City (2) 19.4% 6,829,141 0.8% 64,300 4.8% 342,837 44.8% 3,254,142
Northern VA/DC 18.9% 1,966,150 2.8% 81,600 2.9% 287,232 31.0% 639,538
Eastern PA (1) 14.7% 2,502,438 1.1% 33,700 4.3% 166,893 19.4% 517,886
Baltimore, MD 13.4% 1,017,661 1.5% 19,200 3.8% 205,037 21.9% 239,714
Detroit, MI 11.6% 1,730,567 (0.6%) (13,300) 6.8% 160,952 17.9% 327,609
Chicago, IL 5.1% 3,398,018 1.1% 50,000 5.4% 214,102 32.4% 1,161,095
Rochester, NY 3.9% 402,406 (1.0%) (5,000) 4.8% 120,399 19.9% 86,158
Buffalo, NY 3.8% 467,256 (0.1%) (700) 5.3% 112,562 17.9% 91,268
Boston, MA 2.9% 1,714,334 0.5% 12,500 4.2% 311,676 33.1% 592,492
Syracuse, NY 2.9% 257,676 1.1% 3,600 4.9% 111,188 19.8% 56,318
Southeast Florida (3) 1.9% 2,032,724 2.4% 55,500 3.3% 190,117 41.7% 956,882
Portland, ME 1.5% 210,551 0.6% 1,200 3.3% 188,054 17.3% 43,150
------------------------------------------------------- --------------------------------------------------------------------------
Home Properties Markets 100.0% 22,528,922 1.1% 302,600 4.5% 230,111 33.1% 7,966,252
------------------------------------------------------- --------------------------------------------------------------------------
United States 111,006,738 1.5% 1,969,000 4.6% 149,314 21.8% 26,535,181
(1) Eastern Pennsylvania is defined for this report as
Philadelphia-Camden-Wilmington,PA-NJ-DE-MD MSA & Allentown-Bethlehem-Easton
PA-NJ MSA.
(2) Suburban New York City is defined for this report as New York-Northern New
Jersey-Long Island, NY-NJ-PA MSA.
(3) Southeast Florida is defined for this report as Miami-Fort Lauderdale-Miami
Beach, FL MSA.
(4) Based on Claritas 2005 estimates calculated from the 2000 U.S. Census
figures.
(5) 2005 Multifamily Housing Stock is from Claritas estimates based on the 2000
U.S. Census.
Sources: Bureau of Labor Statistics (BLS); Claritas, Inc.; US Census Bureau -
Manufacturing & Construction Div. Data collected is data available as of
February 15, 2006 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. Claritas Inc. is a leading provider of precision
marketing solutions and related products/services. U.S. Census Bureau's parent
federal agency is the U.S. Dept. of Commerce, which promotes American business
and trade.
Multifamily Supply and Demand
Estimated Estimated
Estimated Net New Net New
Estimated Estimated 2005 Multifamily Multifamily
2005 Estimated 2005 New Supply as a Supply as a Expected
New 2005 Net New Multifamily % of New % of Expected Excess
Supply of Multifamily Multifamily Household Multifamily Multifamily Excess Revenue
MSA Market Area Multifamily(6) Obsolescence(7) Supply(8) Demand(9) Demand Stock Demand(10) Growth (11)
------------------------------------------------------------------------------------------------------------------------------------
Suburban
New York City(2) 30,518 16,271 14,247 19,214 74.1% 0.4% 4,967 0.2%
Northern VA/DC 9,652 3,198 6,454 16,872 38.3% 1.0% 10,418 1.6%
Eastern PA (1) 4,729 2,589 2,140 4,361 49.1% 0.4% 2,221 0.4%
Baltimore, MD 2,623 1,199 1,424 2,805 50.8% 0.6% 1,381 0.6%
Detroit, MI 2,207 1,638 569 (1,588) (35.8%) 0.2% (2,157) (0.7%)
Chicago, IL 11,941 5,805 6,136 10,805 56.8% 0.5% 4,669 0.4%
Rochester, NY 22 431 (409) (664) 61.6% (0.5%) (255) (0.3%)
Buffalo, NY 193 456 (263) (84) 313.1% (0.3%) 179 0.2%
Boston, MA 7,319 2,962 4,357 2,760 157.9% 0.7% (1,597) (0.3%)
Syracuse, NY 122 282 (160) 475 (33.7%) (0.3%) 635 1.1%
Southeast Florida 20,316 4,784 15,532 15,437 100.6% 1.6% (95) 0.0%
Portland, ME 333 216 117 138 84.8% 0.3% 21 0.0%
------------------------------------------------------------------------------------------------------------------------------
HP Markets 89,975 39,831 50,144 70,531 71.1% 0.6% 20,387 0.3%
------------------------------------------------------------------------------------------------------------------------------
United States 363,349 132,676 230,673 286,304 80.6% 0.9% 55,631 0.2%
(1)-(5) see footnotes prior page
(6) Estimated 2005 New Supply of Multifamily = Multifamily permits (2005
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%).
(7) Estimated 2005 Multifamily Obsolescence = 0.5% of Estimated 2005
multifamily housing stock.
(8) Estimated 2005 Net New Multifamily Supply = Estimated 2005 New Supply of
Multifamily - Estimated 2005 multifamily obsolescence.
(9) Estimated 2005 New Multifamily Household Demand = Trailing 12 month job
growth (Nonfarm, not seasonally adjusted payroll employment figures)
(12/31/04-12/31/05) multiplied by the expected % of new household
formations resulting from new jobs (66.7%) and the % of multifamily
households in each market (based on Claritas estimates).
(10) Expected Excess Demand = Estimated 2005 New Multifamily Household Demand -
Estimated 2005 Net New Multifamily Supply.
(11) Expected Excess Revenue Growth = Expected Excess Demand divided by 2005
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.
Regulation
----------
Many laws and governmental regulations are applicable to the Properties and
changes in the laws and regulations, or their interpretation by agencies and the
courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all places of public accommodation are required to meet certain federal
requirements related to access and use by disabled persons. In addition, the
Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities
first occupied after March 13, 1990 to be accessible to the handicapped.
Non-compliance with the ADA or the FHAA could result in the imposition of fines
or an award of damages to private litigants. Management believes that the
Properties are substantially in compliance with present ADA and FHAA
requirements.
Under various laws and regulations relating to the protection of the
environment, an owner of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in its
property. These laws often impose liability without regard to whether the owner
was responsible for, or even knew of, the presence of such substances. The
presence of such substances may adversely affect the owner's ability to rent or
sell the property or use the property as collateral. Independent environmental
consultants have conducted "Phase I" environmental site assessments (which
involve visual inspection but not soil or groundwater analysis) on substantially
all of the Owned Properties. Phase I assessments did not reveal any
environmental liability that would have a material adverse effect on the
Company. In addition, the Company is not aware of any environmental liability
that management believes would have a material adverse effect on the Company.
There is no assurance that Phase I assessments would reveal all environmental
liabilities or that environmental conditions not known to the Company may exist
now or in the future which would result in liability to the Company for
remediation or fines, either under existing laws and regulations or future
changes to such requirements.
Under the Federal Fair Housing Act and state fair housing laws, discrimination
on the basis of certain protected classes is prohibited. Violation of these laws
can result in significant damage awards to victims. The Company has a strong
policy against any kind of discriminatory behavior and trains its employees to
avoid discrimination or the appearance of discrimination. There is no assurance,
however, that an employee will not violate the Company's policy against
discrimination and thus violate fair housing laws. This could subject the
Company to legal actions and the possible imposition of damage awards.
Company Web Site and Access to Filed Reports
--------------------------------------------
The Company maintains an Internet Web site at www.homeproperties.com. The
Company provides access to its reports filed with the Securities and Exchange
Commission ("SEC") through this Web site. These reports are available as soon as
reasonably practicable after the reports are filed electronically with the SEC
and are found under "Investors/Financials/SEC Filings." In addition, paper
copies of annual and periodic reports filed with the SEC may be obtained by
contacting the Corporate Secretary, Home Properties, Inc., 850 Clinton Square,
Rochester, New York 14604. The address is also included within the SEC filings
or under "Investors/Shareholder Services/Contact Information," on the Company's
Web site.
Current copies of the Company's Corporate Governance Guidelines and Charters for
the Audit, Compensation, Corporate Governance/Nominating and Real Estate
Investment Committees of the Board of Directors are also available on the
Company's website under the heading "Investors/Corporate Governance/Highlights."
Copies of the Corporate Governance Guidelines and the Committee Charters are
also available at no charge to stockholders upon request addressed to the
Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New
York 14604. Information on the Company's Web site, except as described above, is
for general information and does not form any part of this report.
Item 1A. Risk Factors
----------------------
As used in this section, references to "we" or "us" or "our" refer to the
Company, the Operating Partnership, and the Management Companies.
The following risks apply to Home Properties, the Operating Partnership, and the
Management Companies, in addition to other risks and factors set forth elsewhere
in this Form 10-K.
Assimilation of a Substantial Number of New Acquisitions
--------------------------------------------------------
Since our formation, we have undertaken a strategy of aggressive growth through
acquisitions. Our ability to manage our growth effectively requires that we,
among other things, successfully apply our experience in managing our existing
portfolio to an increased number of properties. In addition, we will be required
to successfully manage the integration of a substantial number of new personnel.
There can be no assurances that we will be able to integrate and manage these
operations effectively or maintain or improve on their historical financial
performance.
Real Estate Financing Risks
---------------------------
GENERAL. We are subject to the customary risks associated with debt financing
including the potential inability to refinance existing mortgage indebtedness
upon maturity on favorable terms. 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.
NO LIMITATION ON DEBT. The Board of Directors 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 net
asset value published by Home Properties in its most recent quarterly earnings
press release), but our organizational documents do not contain any limitation
on the amount or percentage of indebtedness, funded or otherwise, we may incur.
Accordingly, the Board of Directors 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 that could adversely affect
our ability to make expected distributions to stockholders and an increased risk
of default on our indebtedness. Our net asset value fluctuates based on a number
of factors. Our bank agreements and certain agreements with holders of our
preferred stock limit the amount of indebtedness we may incur.
EXISTING DEBT MATURITIES. We are subject to the risks normally associated with
debt financing, including the risk that our cash flow will be insufficient to
meet the required payments of principal and interest. Because much of the
financing is not fully self-amortizing, we anticipate that only a portion of the
principal of our indebtedness will be repaid prior to maturity. So, we will need
to refinance debt. Accordingly, 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. We aim to stagger
our debt maturities with the goal of minimizing the amount of debt which must be
refinanced in any year.
AVAILABILITY OF FINANCING AND POSSIBLE DILUTION. 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 to finance
developments and acquisitions instead of incurring debt, the interests of our
existing stockholders could be diluted.
Real Estate Investment Risks
----------------------------
GENERAL RISKS. Real property investments are subject to varying degrees of risk.
If our communities do not generate revenues sufficient to meet operating
expenses, including debt service and capital expenditures, Home Properties' cash
flow and ability to make distributions to its stockholders will be adversely
affected. A multifamily apartment community's revenues and value may be
adversely affected by the general economic climates; the local economic climate;
local real estate considerations (such as over supply of or reduced demand for
apartments); the perception by prospective residents of the safety, 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 the investment.
OPERATING RISKS. We are dependent on rental income to pay operating expenses and
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 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 the
Company is responsible.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid and,
therefore, we have limited ability to vary 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 significant number of our properties
were acquired using UPREIT Units and are subject to certain agreements, which
restrict our ability to sell such properties in transactions that would create
current taxable income to the former owners.
COMPETITION. We plan to continue to acquire additional multifamily residential
properties in the Northeast, Mid-Atlantic and Southeast Florida regions of the
United States. There are a number of multifamily developers and other real
estate companies that compete with us in seeking properties for acquisition,
prospective residents and land for development. Most of our properties are in
developed areas where there are other properties of the same type. Competition
from other properties may affect our ability to attract and retain residents, to
increase rental rates and to minimize expenses of operation. Virtually all of
the leases for the properties are short-term leases (generally, one year or
less).
REPOSITIONING STRATEGY. A key component of our strategy is to acquire properties
and to reposition them for long-term growth. A variety of factors could
negatively impact our ability to timely complete repositioning activities within
anticipated budgets. These include delays in obtaining necessary governmental
permits and authorizations and increased costs of goods. Our inability to charge
rents that will be sufficient to offset the effects of these delays and increase
in costs may impair our profitability.
UNINSURED LOSSES. Certain extraordinary losses may not be covered by our
comprehensive liability, fire, extended and rental loss insurance. If an
uninsured loss occurred, we could lose our investment in, and cash flow from,
the affected property (but we would be required to repay any indebtedness
secured by that property and related taxes and other charges).
Federal Income Tax Risks
------------------------
GENERAL. 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 gain). 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.
REQUIRED DISTRIBUTIONS AND PAYMENTS. 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 gain). 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.
ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A REIT. If we fail to qualify
as a REIT, we will be subject to federal 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'S FAILURE TO QUALIFY AS A PARTNERSHIP. 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 its limited partners. 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).
Taxation of Dividends
---------------------
The tax rate applicable to qualifying corporate dividends received by
individuals prior to 2009 has been reduced to a maximum rate of 15%. This
special tax rate is generally not applicable to dividends paid by a REIT, unless
such dividends represent earnings on which the REIT itself had been taxed. As a
result, dividends (other than capital gain dividends) paid by us to individual
investors will generally be subject to the tax rates that are otherwise
applicable to ordinary income which, currently, are as high as 35%. This law
change may make an investment in our common stock comparatively less attractive
relative to an investment in the share of other corporate entities which pay
dividends that are not formed as REITs.
Limits on Ownership
-------------------
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 (as defined in the Code to include 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 8.0%
of the aggregate value of our outstanding shares. Shares of common stock held by
certain entities, such as qualified pension plans, are treated as if the
beneficial owners of such entities were the holders of the common stock. These
restrictions can be waived by the Board of Directors if it were satisfied, based
upon the advice of tax counsel or otherwise, that such action would be in our
best interests. Waivers were granted to certain institutional investors in
connection with the sale of our preferred stock. Shares acquired or transferred
in breach of the limitation may be redeemed by us for the lesser of the price
paid or the average closing price for the ten trading days immediately preceding
redemption or may be sold at our direction. A transfer of shares of common stock
to a person who, as a result of the transfer, violates the ownership limit will
be void and the shares will automatically be converted into shares of "excess
stock", which is subject to a number of limitations.
Change of Control
-----------------
Our Articles of Amendment and Restatement of the Articles of Incorporation, as
amended (the "Articles of Incorporation"), authorize the Board of Directors to
issue up to a total of 80 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.
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 of us 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 of us.
We have various agreements which may have the effect of discouraging a change of
control of us due to the costs involved. The Articles Supplementary to our
Articles of Incorporation under which our outstanding Series F preferred stock
were issued provide us the option of redeeming the outstanding Preferred Stock
after the fifth anniversary of its issue date.
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 certain benefit continuation in the event of a change of
control.
Potential Conflicts of Interest
-------------------------------
Unlike persons acquiring common stock, certain of our executive officers and
directors own a significant portion of their interest in us through Units. As a
result of their status as holders of Units, those executive officers, directors
and other limited partners may have interests that conflict with stockholders
with respect to business decisions affecting us and the Operating Partnership.
In particular, certain executive officers and directors may suffer different or
more adverse tax consequences than us upon the sale or refinancing of some of
the Properties as a result of unrealized gain attributable to those Properties.
Thus, those executive officers and directors and the stockholders may have
different objectives regarding the appropriate pricing and timing of any sale or
refinancing of Properties. In addition, those executive officers and directors,
as limited partners of the Operating Partnership, have the right to approve
certain fundamental transactions such as the sale of all or substantially all of
the assets of the Operating Partnership, merger or consolidation or dissolution
of the Operating Partnership and certain amendments to the Operating Partnership
Agreement.
Shares Available for Future Sale
--------------------------------
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. The Operating Partnership has issued approximately
16.7 million UPREIT Units through December 31, 2005, to persons other than us or
the Trust, which may be exchanged on a one-for-one basis for shares of Common
Stock under certain circumstances. We have issued and outstanding Series F
Cumulative Redeemable Preferred Stock. In addition, Home Properties has granted
options to purchase shares of stock to certain directors, officers and employees
of Home Properties, of which, as of December 31, 2005, 2,662,581 options
remained outstanding and unexercised.
Item 1B. Unresolved Staff Comments
-----------------------------------
None.
Item 2. Properties
-------------------
As of December 31, 2005, the Owned Properties consisted of 153 multifamily
residential communities containing 43,432 apartment units. At the time of the
IPO (August 4, 1994), Home Properties owned 11 communities containing 3,065
units and simultaneously with the closing of the IPO acquired an additional four
communities containing 926 units. From the time just prior to the IPO to
December 31, 2005, the Company experienced a compounded annualized growth rate
of 26.1% in the number of apartment units it owned. In 2005, Home Properties
acquired 2,430 apartment units in seven communities for a total purchase price
of approximately $283.4 million. Also in 2005, the Company sold four communities
with a total of 816 units for total consideration of $142.6 million.
The Owned Properties are generally located in established markets in suburban
neighborhoods and are well maintained and well leased. Average economic
occupancy at the Owned Properties was 93.3% for 2005. Occupancy is defined as
total possible rental income, net of vacancy and bad debt expense as a
percentage of total possible rental income. Total possible rental income is
determined by valuing occupied units at contract rates and vacant units at
market rents. The Owned 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
Owned Properties was approximately 45% for 2005, which is significantly below
the national average of 61.3% 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 Owned Properties secure mortgage loans. See Schedule III
contained herein (F-42 to F-46).
The table on the following pages illustrates certain of the important
characteristics of the Owned Properties as of December 31, 2005.
Communities Wholly Owned and Managed by Home Properties
(3)
(2) 2005 2004 2005 2004
Avg 2005 Average Average Avg Mo Avg Mo
# Age Apt % % % Rent Rent 12/31/2005
Of In Year Size Resident Occu- Occu- Rate Rate Total Cost
Regional Area Apts Years Acq (Sq Ft) Tumover pancy pancy per Apt per Apt (000)
------------- ---- ----- --- ------- ------- ----- ----- ------- ------- -----
Same Store Communities(1)
DE-Deleware HP of Newark 432 37 1999 860 47% 94% 94% $827 $785 $27,058
IL-Chicago Blackhawk Apt 371 44 2000 793 54% 91% 89% 827 856 22,702
IL-Chicago Courtyards Village 224 34 2001 674 51% 94% 96% 751 757 15,702
IL-Chicago Cypress Place 192 35 2000 852 41% 93% 94% 887 883 13,507
IL-Chicago The Colony 783 32 1999 704 55% 93% 93% 807 829 51,684
IL-Chicago The New Colonies 672 31 1998 657 53% 91% 92% 699 703 32,791
MA-Boston Gardencrest Apts 696 57 2002 847 36% 95% 93% 1,326 1,292 99,533
MA-Boston Stone Ends Apts 280 26 2003 815 50% 96% 95% 1,175 1,178 35,378
MD-Baltimore Bonnie Ridge Apts 960 39 1999 998 46% 92% 92% 984 989 70,591
MD-Baltimore Canterbury Apts 618 27 1999 934 47% 93% 93% 829 804 33,037
MD-Baltimore Country Village Apts 344 34 1998 776 45% 93% 93% 803 778 20,995
MD-Baltimore Falcon Crest Townhomes 396 36 1999 993 40% 91% 92% 883 855 20,764
MD-Baltimore Fenland Field 234 35 2001 934 40% 94% 93% 1,025 1,002 18,065
MD-Baltimore Gateway Village Apts 132 16 1999 963 41% 93% 93% 1,144 1,112 9,462
MD-Baltimore Mill Towne Village 384 32 2001 812 34% 95% 94% 787 759 26,387
MD-Baltimore Morningside Heights Apts 1,050 40 1998 864 42% 94% 94% 807 779 55,361
MD-Baltimore Owings Run Apts 504 10 1999 1,136 46% 94% 93% 1,008 962 41,402
MD-Baltimore Selford Townhomes 102 18 1999 987 50% 92% 94% 1,193 1,133 7,565
MD-Baltimore Shakespeare Park Apts 84 22 1999 793 30% 97% 96% 810 724 4,616
MD-Baltimore The Manor Apts (MD) 435 36 2001 1,004 36% 92% 93% 1,113 1,118 42,637
MD-Baltimore Timbercroft Townhomes 284 33 1999 998 7% 99% 99% 767 727 11,493
MD-Baltimore Village Square (MD) 370 37 1999 948 45% 96% 95% 1,034 987 22,171
MD-Baltimore Woodholme Manor Apts 176 36 2001 817 34% 91% 94% 733 699 9,322
ME-Portland Mill Company Gardens 95 54 1998 542 61% 95% 95% 747 711 3,137
ME-Portland Redbank Village Apts 500 61 1998 735 40% 92% 92% 793 768 23,829
MI-Detroit(4) Canterbury Square 336 33 1997 788 52% 88% 94% 746 753 18,343
MI-Detroit(4) Carriage Hill - MI 168 39 1998 783 36% 94% 95% 784 775 8,895
MI-Detroit(4) Carriage Park 256 38 1998 778 43% 92% 94% 732 737 12,906
MI-Detroit(4) Charter Square 492 34 1997 912 43% 92% 93% 856 851 31,018
MI-Detroit(4) Cherry Hill Club Apts 165 33 1998 879 47% 90% 88% 635 644 7,884
MI-Detroit(4) Cherry Hill Village 224 39 1998 742 59% 95% 97% 694 704 10,686
MI-Detroit(4) Deerfield Woods Apts 144 29 2000 950 38% 93% 92% 793 808 7,856
MI-Detroit(4) Fordham Green 146 29 1997 868 61% 86% 90% 883 891 9,033
MI-Detroit(4) Greentrees 288 34 1997 862 46% 86% 86% 625 654 13,436
MI-Detroit(4) Hampton Court Apts 182 33 2000 966 56% 87% 87% 674 674 9,492
MI-Detroit(4) Kingsley 328 35 1997 792 54% 93% 93% 667 669 17,913
MI-Detroit(4) Macomb Manor Apts 217 36 2000 829 34% 92% 92% 693 697 10,403
MI-Detroit(4) Oak Park 298 50 1997 886 48% 86% 89% 846 840 15,280
MI-Detroit(4) Scotsdale 376 30 1997 761 43% 92% 93% 656 671 17,813
MI-Detroit(4) Southpointe Square 224 34 1997 776 56% 89% 91% 642 644 8,277
MI-Detroit(4) Springwells Park 303 64 1999 971 59% 89% 89% 960 978 23,336
MI-Detroit(4) Stephenson House 128 38 1997 708 46% 93% 94% 671 667 4,406
MI-Detroit(4) The Lakes Apts 434 18 1999 949 50% 86% 88% 835 863 30,260
MI-Detroit(4) Woodland Gardens 337 39 1997 719 53% 94% 93% 719 731 16,765
NJ-Northern East Hill Gardens 33 47 1998 654 24% 96% 95% 1,386 1,331 2,860
NJ-Northern Lakeview Apts 106 56 1998 492 35% 97% 96% 1,195 1,139 7,844
NJ-Northern Oak Manor Apartments 77 49 1998 918 31% 97% 97% 1,682 1,625 7,097
NJ-Northern Pleasant View Gardens 1,142 37 1998 746 37% 93% 94% 1,022 997 71,969
NJ-Northern Pleasure Bay Apts 270 34 1998 685 34% 96% 96% 999 929 14,075
NJ-Northern Royal Gardens Apts 550 37 1997 874 33% 92% 93% 1,083 1,039 32,188
NJ-Northern Wayne Village 275 40 1998 760 40% 96% 96% 1,219 1,147 20,509
NJ-Northern Windsor Realty Company 67 52 1998 628 39% 95% 96% 1,101 1,048 5,352
NY-Alb/
Hudson Valley Carriage Hill Apts 140 32 1996 898 74% 93% 93% 1,211 1,210 7,703
NY-Alb/
Hudson Valley Cornwall Park 75 38 1996 1,320 65% 88% 90% 1,624 1,604 7,734
NY-Alb/
Hudson Valley Lakeshore Villa Apts 152 30 1996 952 52% 93% 93% 1,049 1,012 8,691
NY-Alb/
Hudson Valley Patricia Apts 100 31 1998 725 38% 95% 93% 1,345 1,305 7,257
NY-Alb/
Hudson Valley Sherwood Consolidation 224 36 2002 831 26% 97% 97% 1,090 995 17,385
NY-Alb/
Hudson Valley Sunset Garden Apts 217 34 1996 840 42% 95% 95% 912 879 9,405
NY-Buffalo Emerson Square 96 35 1997 570 37% 96% 97% 685 666 3,566
NY-Buffalo Idylwood Resort Apts 720 35 1995 712 55% 92% 93% 677 664 28,226
NY-Buffalo Paradise Lane Apts 324 33 1997 657 53% 90% 93% 702 691 12,506
NY-Buffalo Raintree Island Apts 504 33 1985 695 51% 90% 93% 725 719 19,726
NY-Long Island Bayview & Colonial 160 38 2000 884 28% 96% 96% 1,150 1,111 14,117
NY-Long Island Cambridge Village Asso 82 38 2002 747 31% 97% 97% 1,454 1,349 7,464
NY-Long Island Coventry Village Apts 94 30 1998 831 38% 96% 94% 1,336 1,299 5,885
NY-Long Island Devonshire Hills 297 37 2001 803 41% 96% 94% 1,662 1,661 52,416
NY-Long Island East Winds Apts 96 39 2000 888 37% 93% 94% 1,117 1,089 8,595
NY-Long Island Hawthorne Court 434 37 2002 678 48% 94% 95% 1,331 1,270 46,118
NY-Long Island Heritage Square 80 56 2002 718 28% 97% 97% 1,441 1,326 8,583
NY-Long Island Holiday Square 144 26 2002 570 19% 95% 98% 1,033 961 10,785
NY-Long Island Lake Grove Apts 368 35 1997 836 51% 93% 93% 1,368 1,345 31,581
NY-Long Island Maple Tree 84 54 2000 936 30% 93% 92% 1,136 1,117 7,318
NY-Long Island Mid-Island Apts 232 40 1997 546 42% 95% 96% 1,227 1,165 15,575
NY-Long Island Rider Terrace 24 44 2000 825 33% 91% 96% 1,223 1,160 2,020
NY-Long Island South Bay Manor 61 45 2000 849 54% 93% 96% 1,519 1,466 6,786
NY-Long Island Southern Meadows 452 34 2001 845 40% 95% 94% 1,325 1,316 45,680
NY-Long Island Stratford Greens Asso 359 31 2002 725 40% 96% 94% 1,384 1,349 51,314
NY-Long Island Terry Apartments 65 29 2000 722 29% 96% 92% 1,107 1,091 4,925
NY-Long Island Westwood Village Apts 242 36 2002 829 32% 96% 96% 2,088 1,970 37,904
NY-Long Island Woodmont Village Apts 96 37 2002 704 37% 95% 95% 1,240 1,202 10,469
NY-Long Island Yorkshire Village Apts 40 36 2002 779 25% 97% 99% 1,489 1,386 3,897
NY-Rochester 1600 East Avenue 164 46 1997 768 35% 91% 93% 1,039 1,035 14,753
NY-Rochester 1600 Elmwood 210 45 1983 887 46% 92% 93% 928 921 14,075
NY-Rochester Brook Hill Village Apts 192 33 1994 1,008 44% 92% 92% 854 863 13,245
NY-Rochester Newcastle Apartments 197 30 1982 846 51% 92% 95% 763 769 11,919
NY-Rochester Perinton Manor Apts 224 35 1982 928 51% 94% 95% 821 810 13,467
NY-Rochester Riverton Knolls 240 31 1983 914 57% 93% 90% 839 835 15,053
NY-Rochester Spanish Gardens 220 31 1994 866 39% 92% 90% 690 708 14,373
NY-Rochester The Meadows Apartments 113 34 1984 880 48% 93% 96% 767 751 5,981
NY-Rochester Woodgate Place 120 32 1997 928 61% 92% 93% 824 828 6,651
NY-Syracuse Fairview Apartments 214 41 1985 565 47% 87% 91% 998 959 12,980
NY-Syracuse Harborside Manor 281 32 1995 705 51% 94% 96% 694 674 11,248
NY-Syracuse Pearl Street 60 34 1995 895 42% 93% 96% 616 588 2,121
NY-Syracuse Village Green Apts 448 19 1994 907 40% 90% 92% 708 697 20,969
NY-Syracuse Westminster Place 240 33 1996 913 67% 93% 94% 684 671 10,251
PA-Philadelphia Beechwood Gardens 160 38 1998 875 45% 94% 94% 826 801 6,570
PA-Philadelphia Castle Club Apts 158 38 2000 878 36% 95% 94% 807 870 12,625
PA-Philadelphia Chesterfield Apts 247 32 1997 812 46% 96% 95% 872 857 14,426
PA-Philadelphia Curren Terrace 318 34 1997 782 54% 93% 92% 906 894 19,086
PA-Philadelphia Executive House Apts 100 40 1997 700 52% 95% 94% 927 905 6,687
PA-Philadelphia Glen Brook Apartments 173 42 1999 707 45% 91% 92% 771 763 8,631
PA-Philadelphia Glen Manor Apartments 174 29 1997 667 48% 91% 93% 763 751 7,769
PA-Philadelphia Golf Club Apartments 399 36 2000 857 53% 91% 91% 1,009 1,003 35,994
PA-Philadelphia Hill Brook Place Apts 274 37 1999 699 47% 96% 97% 849 821 15,552
PA-Philadelphia Home Properties of
Bryn Mawr 316 54 2000 822 54% 93% 92% 1,037 1,038 30,247
PA-Philadelphia Home Properties
of Devon 629 42 2000 917 48% 90% 86% 1,062 1,083 61,513
PA-Philadelphia New Orleans Park 442 34 1997 685 44% 93% 94% 792 778 24,270
PA-Philadelphia Racquet Club East Apts 466 34 1998 911 41% 96% 96% 1,000 962 30,828
PA-Philadelphia Racquet Club South 103 36 1999 816 35% 96% 94% 858 840 5,990
PA-Philadelphia Ridley Brook Apts 244 43 1999 925 41% 95% 95% 842 814 12,627
PA-Philadelphia Sherry Lake Apts 298 40 1998 812 45% 94% 95% 1,132 1,100 26,119
PA-Philadelphia The Landings 384 32 1996 912 43% 93% 94% 961 979 26,799
PA-Philadelphia Trexler Park Apts 249 31 2000 921 47% 93% 89% 1,030 1,054 21,647
PA-Philadelphia Valley View Apts 177 32 1997 764 63% 91% 90% 807 777 9,978
PA-Philadelphia Village Square (PA) 128 32 1997 795 45% 93% 94% 909 895 7,604
PA-Philadelphia William Henry Apts 363 34 2000 938 53% 92% 93% 1,098 1,062 35,405
VA-Suburban DC Braddock Lee Apts 255 50 1998 757 33% 95% 97% 1,184 1,124 17,897
VA-Suburban DC Brittany Place 591 37 2002 922 47% 92% 93% 1,051 1,034 54,166
VA-Suburban DC Cider Mill 864 27 2002 834 47% 94% 94% 1,034 1,020 87,337
VA-Suburban DC East Meadow Apts 150 34 2000 1,034 53% 96% 97% 1,229 1,171 14,063
VA-Suburban DC Elmwood Terrace 504 32 2000 946 52% 90% 91% 831 821 25,687
VA-Suburban DC Falkland Chase Apts 450 68 2003 759 40% 93% 93% 1,162 1,123 61,242
VA-Suburban DC Orleans Village 851 37 2000 1,015 40% 94% 92% 1,193 1,150 81,600
VA-Suburban DC Park Shirlington Apts 294 50 1998 858 41% 93% 93% 1,159 1,132 21,534
VA-Suburban DC Seminary Hill Apts 296 45 1999 888 52% 93% 91% 1,172 1,156 20,354
VA-Suburban DC Seminary Towers Apts 539 41 1999 879 37% 93% 93% 1,186 1,145 37,610
VA-Suburban DC Tamarron Apartments 132 18 1999 1,075 36% 95% 95% 1,243 1,169 10,963
VA-Suburban DC The Manor Apts (VA) 198 31 1999 845 57% 94% 93% 973 914 10,791
VA-Suburban DC The Sycamores 185 27 2002 876 48% 97% 96% 1,200 1,130 21,754
VA-Suburban DC Virginia Village 344 38 2001 1,010 54% 95% 95% 1,204 1,186 33,193
VA-Suburban DC West Springfield Terrace 244 27 2002 1,019 50% 96% 94% 1,268 1,217 36,212
Same Store Total/
Weighted Avg 38,468 36 840 45% 93% 93% $967 $948 $2,770,572
2004 Acquisition Communities(5)
FL-Southeast The Hamptons 668 16 2004 1,052 47% 96% 90% $878 $849 $59,340
FL-Southeast Vinings at
Hampton Village 168 16 2004 1,207 48% 95% 93% 976 921 14,897
MA-Boston The Village at
Marshfield 276 33 2004 735 46% 94% 93% 1,099 1,082 32,089
NJ-Northern Chatham Hill Apts 308 38 2004 944 27% 95% 85% 1,503 1,453 51,564
NJ-Northern Fairmount Apts 54 62 2004 900 22% 98% 97% 783 771 2,397
NJ-Northern Kensington Apartments 38 62 2004 1,117 13% 97% 98% 904 900 1,973
NJ-Northern Northwood Apartments 134 40 2004 937 26% 97% 94% 1,139 1,130 15,547
NJ-Northern Regency Club Apartments 372 31 2004 941 44% 94% 98% 1,072 1,021 38,881
VA-Suburban DC The Apartments at
Wellington Trace 240 3 2004 1,106 63% 97% 94% 1,166 1,175 29,501
VA-Suburban DC Woodleaf Apartments 228 20 2004 709 34% 93% 94% 998 981 21,248
2004 Total/Weighted Avg 2,486 32 963 42% 95% 92% $1,067 $1,079 $267,437
2005 Acquisition Communities (5)
MD-Baltimore Ridgeview at
Wakefield Valley 204 8 2005 916 58% 93% N/A $1,007 N/A $20,606
NJ-Northern Barrington Gardens 148 32 2005 922 31% 95% N/A 792 N/A 8,473
NJ-Northern Hackensack Gardens 198 57 2005 636 17% 97% N/A 805 N/A 14,103
NY-Long Island Sayville Commons 342 4 2005 1,106 15% 97% N/A 1,333 N/A 63,459
PA-Philadelphia The Brooke at
Peachtree Village 146 19 2005 1,261 40% 97% N/A 972 N/A 16,241
VA-Suburban DC Cinnamon Run 511 45 2005 1,006 0% 98% N/A 1,041 N/A 67,378
VA-Suburban DC Peppertree Farm 881 51 2005 1,051 0% 92% N/A 1,050 N/A 96,324
2005 Total/
Weighted Avg 2,430 31 1,009 13% 96% N/A $996 N/A $286,584
2005 Construction Communities(6)
ME-Portland Liberty Commons 48 0 2005 998 10% 88% N/A $1,058 N/A $5,778
Owned Portfolio Total/
Weighted Avg 43,432 36 857 43% 93% 93% $974 $953 $3,330,371
(1) "Same Store Communities" represents the 38,468 apartment units owned consistently throughout 2004 and 2005.
(2) Resident Turnover" reflects, on an annual basis, the number of moveouts divided by the total number of apartment units.
(3) "Average % Occupancy" is the average economic occupancy for the 12 months ended December 31, 2004 and 2005.
(4) MI - Detroit region represents the 5,046 apartment units considered Held for Sale as of December 31, 2005.
(5) For communities acquired during 2004 and 2005, this is the average occupancy from the date of acquisition.
(6) Liberty Commons is under construction. As of December 31, 2005, 48 apartment units were in service.
Property Development
--------------------
For approximately five years, from 1996 to 2000, the Company actively
diversified its portfolio of market-rate communities with government assisted
multifamily housing developed or re-developed by the Company. Effective
December 31, 2000, the Company sold its affordable housing development
operations to Conifer, LLC. Conifer, LLC is led by Richard J. Crossed, a former
Executive Vice President and former director of the Company. At that time, the
Company retained general partner ownership interests in and property management
operations for 8,325 apartment units in 136 existing affordable communities.
In December 2002, the Company determined that it would market for sale virtually
all of the assets associated with its interests in various affordable property
limited partnerships. At that time, the Company announced its intention to sell
the assets which include the equity interest in the affordable housing
partnerships, loans, advances and management contracts.
During 2003, the Company was successful in selling its interest in entities that
own in the aggregate 84 properties containing 2,590 units. During 2004, the
Company closed on the sale of its general partner interests in an additional 26
entities that owned in the aggregate 1,952 units. During 2005, the Company sold
12 entities that owned in the aggregate 868 units. In addition, the Company
completed the disposal of 1,057 units through a default on the non-recourse
financing. The Company still holds an interest in one affordable limited
partnership with 868 units. The Company will retain its ownership interest and
will continue to manage this property located in Columbus, Ohio.
The Company has retained the ability to develop new market rate communities. It
plans to engage in development activity only on a selective basis. The Company
anticipates the development activity to be in the markets in which it currently
is doing business, on land adjacent to existing properties or by increasing
density of units at communities currently owned. Currently, the Company is
developing a 120-unit apartment community in South Portland, Maine adjacent to a
market-rate property the Company acquired in 1998. The first phase of the
project, which consists of 48 units, was completed in the summer of 2005. The
second and third phases, which consist of 72 units, are expected to be completed
in the summer of 2006. The total construction cost at this community is
anticipated to be $13.6 million upon completion. In addition, the Company is
developing a 216-unit apartment community in Allentown, Pennsylvania, adjacent
to a market-rate community purchased in 2000. The project is expected to be
completed in the spring of 2008. The total construction cost for this
development is anticipated to be $27.1 million upon completion. The construction
in progress for these two development projects amounted to $4.5 million as of
December 31, 2005.
Property Management
-------------------
As of December 31, 2005, the Managed Properties consist of: (i) 868 apartment
units where Home Properties is the general partner of the entity that owns the
property; and (ii) 2,701 apartment units managed for others.
On January 1, 2004, the Company sold certain assets of its commercial property
management division to Home Leasing LLC, which is owned by Nelson and Norman
Leenhouts, who were the founders of Home Leasing, former Co-Chief Executive
Officers of the Company, and current Co-Chairs of the Company's Board of
Directors (the "Leenhoutses"). This division managed approximately 2.2 million
square feet of gross leasable area, as well as certain planned communities. The
majority of the managed commercial properties are and have been owned in whole
or in part by the Leenhoutses since before the Company's IPO in 1994. The sale
was completed in order to permit the Company to focus solely on the direct
ownership and management of market-rate apartment communities. The contribution
from the commercial property management division to Home Properties' 2003
earnings was significantly less than one-half of one percent. The initial amount
paid was $82,000. In addition, the Company is entitled to receive a percentage
of the management fee received by Home Leasing LLC and its assigns in connection
with the management of one of the commercial properties for a period not to
exceed 36 months. If Home Leasing LLC or its assigns continues to manage that
property for three years, the Company is expected to receive an additional
deferred purchase price of $135,000, for a total consideration of $217,000. If
the management of this property is retained for the entire three years, the gain
on sale will be approximately $104,000.
The Company may pursue the management of additional properties not owned by the
Company, but will only do so when such additional properties can be effectively
and efficiently managed in conjunction with other properties owned or managed by
Home Properties, or where the Company views the properties as potential
acquisitions in desirable markets.
The following table details managed multifamily communities broken down by
market area.
Communities Fee Managed by Home Properties by Market Area as of December 31,
--------------------------------------------------------------------------------
2005
----
Community Name City # of Apts.
MARYLAND
--------
Annapolis Roads Apartments Annapolis 282
Dunfield Townhomes Baltimore 312
Fox Hall Baltimore 720
NORTHERN VIRGINIA
-----------------
Mount Vernon Square Alexandria 1,387
Total 2,701
Supplemental Property Information
---------------------------------
At December 31, 2005, none of the Properties have an individual net book value
equal to or greater than ten percent of the total assets of the Company or would
have accounted for ten percent or more of the Company's aggregate gross revenues
for 2005. There is no tenant who has one or more leases which, in the aggregate,
account for more than 10% of the aggregate gross revenues for the year ended
December 31, 2005.
Item 3. Legal Proceedings
--------------------------
The Company is a party to certain legal proceedings. In March 2005, the Company
agreed to pay $3.5 million in settlement of an action commenced in 2000 against
the Company, the Operating Partnership and Home Leasing. The essence of the
complaint was that the entity in which the plaintiffs were investors was
wrongfully excluded from the Company's initial public offering. The Company is
subject to a variety of legal actions for personal injury or property damage
arising in the ordinary course of its business, most of which are covered by
liability insurance. Various claims of employment and resident discrimination
are also periodically brought. While the resolution of these matters cannot be
predicted with certainty, management believes that the final outcome of such
legal proceedings and claims will not have a material adverse effect on the
Company's liquidity, financial position or results of operations.
Item 4. Submission of Matters to Vote of Security Holders
----------------------------------------------------------
None.
Item 4A. Executive Officers
---------------------------
The following table sets forth, as of February 21, 2006, the eight executive
officers of the Company, together with their respective ages, positions and
offices.
Name Age Position
---- --- --------
Edward J. Pettinella 54 President and Chief Executive Officer of Home Properties, HP Management
and HPRS
David P. Gardner 50 Executive Vice President and Chief Financial Officer of Home Properties,
HP Management and HPRS
Ann M. McCormick 49 Executive Vice President, General Counsel and Secretary of
Home Properties, HP Management and HPRS
Scott A. Doyle 44 Senior Vice President, Property Management of Home Properties, HP
Management and HPRS
Johanna A. Falk 41 Senior Vice President and Chief Administrative/Information Officer of Home
Properties, HP Management and HPRS
Robert J. Luken 41 Senior Vice President, Chief Accounting Officer and Treasurer of
Home Properties, HP Management and HPRS
Janine M. Schue 43 Senior Vice President, Human Resources of Home Properties, HP Management
and HPRS
John E. Smith 55 Senior Vice President and Chief Investment Officer of Home Properties, HP
Management and HPRS
Information regarding Edward Pettinella is set forth below under "Directors" in
Item 10.
David P. Gardner has served as Executive Vice President of the Company since
2004 and a Vice President and Chief Financial Officer of the Company since its
inception. He holds the same titles in HP Management and HPRS. Mr. Gardner
joined Home Leasing Corporation in 1984 as Vice President and Controller. In
1989, he was named Treasurer of Home Leasing and Chief Financial Officer in
December 1993. From 1977 until joining Home Leasing, Mr. Gardner was an
accountant at Cortland L. Brovitz & Co. Mr. Gardner is a graduate of the
Rochester Institute of Technology and is a Certified Public Accountant.
Ann M. McCormick has served as Executive Vice President since 2004 and a Vice
President, General Counsel and Secretary of the Company since its inception. She
holds the same titles in HP Management and HPRS. Mrs. McCormick joined
Home Leasing in 1987 and was named Vice President, Secretary and General Counsel
in 1991. Prior to joining Home Leasing, she was an associate with the law firm
of Nixon Peabody LLP. Mrs. McCormick is a graduate of Colgate University and
holds a Juris Doctor from Cornell University. She is on the Board of Directors
of Greater Rochester Housing Partnership, the Alzheimer's Association of the
Finger Lakes, and St. Ann's of Greater Rochester, Inc.
Scott A. Doyle has served as a Senior Vice President since 2000, and, from 1997
until 2000, was a Vice President of the Company. He holds the same title in HP
Management and HPRS. He joined Home Properties in 1996 as a Regional Property
Manager. Mr. Doyle has been in property management for 20+ years and is a
Certified Property Manager (CPM) as designated by the Institute of Real Estate
Management. Prior to joining Home Properties, he worked with CMH Properties,
Inc., Rivercrest Realty Associates and Arcadia Management Company. Mr. Doyle
serves on the Advisory Board of the Residential Property Management Program at
Virginia Tech. He is a graduate of State University at Plattsburgh, New York.
Johanna A. Falk has served as Senior Vice President since 2000 and as Chief
Administrative/Information Officer since 2003. She had been a Vice President of
the Company since 1997. She holds the same titles in HP Management and HPRS. She
joined the Company in 1995 as an investor relations specialist, was responsible
for the Information Systems Department through 2002, and was promoted to Chief
Administrative/Information Officer in February 2003. Prior to joining the
Company, Mrs. Falk was employed as a marketing manager at Bausch & Lomb
Incorporated and Champion Products, Inc. and as a financial analyst at Kidder
Peabody. She is a graduate of Cornell University and holds an MBA from the
Wharton School of The University of Pennsylvania.
Robert J. Luken has served as Senior Vice President since 2004, and as Chief
Accounting Officer since January, 2005. He has been the Company's Treasurer
since 2000 and became a Vice President in 1997. He holds the same titles in HPRS
and HP Management. He joined the Company in 1996, serving as its Controller.
Prior to joining the Company, he was the Controller of Bell Corp. of Rochester
and an Audit Supervisor for PricewaterhouseCoopers LLP. Mr. Luken is a graduate
of St. John Fisher College and is a Certified Public Accountant. He is on the
Board of Directors of St. Joseph's Villa of Rochester and the Finance Committee
of Ronald McDonald House Charities.
Janine M. Schue has served as Senior Vice President of the Company since 2004,
after joining the Company in October of 2001. She holds the same title in HPRS
and HP Management. Prior to joining the Company, she was employed by NetSetGo as
Vice President of Human Resources and prior to that by Wegmans Food Markets,
Inc. as Director of Human Resources. Ms. Schue is a graduate of and holds a
Masters of Education from the State University of New York at Albany.
John E. Smith has served as Chief Investment Officer of the Company since
January, 2006, and as Senior Vice President since 2001. From 1998 until 2001, he
was a Vice President of the Company. He holds the same title in HP Management
and HPRS. Prior to joining the Company in 1997, Mr. Smith was general manager
for Direct Response Marketing, Inc. and Executive Vice President for The Equity
Network, Inc. Mr. Smith was Director of Investment Properties at Hunt Commercial
Real Estate for 20 years. He has been a Certified Commercial Investment Member
(CCIM) since 1982, a New York State Certified Instructor and has taught
accredited commercial real estate courses at various institutions in
four states.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
--------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
The Common Stock has been traded on the New York Stock Exchange ("NYSE") under
the symbol "HME" since July 28, 1994. The following table sets forth for the
previous two years the quarterly high and low sales prices per share reported on
the NYSE, as well as all distributions paid with respect to the common stock.
High Low Distribution
---- --- ------------
2005
First Quarter $42.39 $38.75 $.63
Second Quarter $43.15 $38.78 $.63
Third Quarter $46.27 $38.50 $.63
Fourth Quarter $42.45 $36.05 $.64
2004
First Quarter $41.74 $38.45 $.62
Second Quarter $41.30 $36.25 $.62
Third Quarter $41.10 $36.83 $.62
Fourth Quarter $43.96 $39.46 $.63
As of February 21, 2006, the Company had approximately 4,400 shareholders of
record, 31,209,603 common shares (plus 16,657,780 UPREIT Units convertible into
16,657,780 common shares) were outstanding, and the closing price was $49.21. It
is the Company's policy to pay dividends. The Company has historically paid
dividends on a quarterly basis in the months of February, May, August and
November.
Issuer Purchases of Equity Securities
--------------------------------------
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action does not establish a specific target stock price or a specific
timetable for share repurchase. In addition, participants in the Company's Stock
Benefit Plan can use common stock of the Company that they already own to pay
all or a portion of the exercise price payable to the Company upon the exercise
of an option. In such event, the common stock used to pay the exercise price is
returned to authorized but unissued status, and for purposes of this table is
deemed to have been repurchased by the Company. At December 31, 2004 the Company
had authorization to repurchase 2,000,000 shares of common stock and UPREIT
Units under the stock repurchase program. During 2005, the Company repurchased
2,779,805 shares at a cost of $111,738,000, and in January, 2006, an additional
107,800 shares at a cost of $4,468,000. On each of February 16, 2005 and
November 4, 2005, the Board of Directors approved a 2,000,000-share increase in
the stock repurchase program, resulting in a remaining authorization level of
3,112,395 shares as of February 21, 2006.
The following table summarizes the total number of shares (units) repurchased by
the Company during the year ended December 31, 2005:
Board
approved
Total increase to
shares/units shares Maximum
purchased available shares/units
Total Average under under available under
shares/units price per Company Company the Company
Period purchased (1) share/unit program program program
------ ------------- ---------- ------- ------- -------
Balance January 1, 2005: 2,000,000
January, 2005 717,792 $40.85 716,000 - 1,284,000
February, 2005 599,975 $41.06 584,700 2,000,000 2,699,300
March, 2005 1,796 $40.38 - - 2,699,300
April, 2005 1,885 $39.21 - - 2,699,300
May, 2005 8,569 $42.35 - - 2,699,300
June, 2005 12,947 $41.08 - - 2,699,300
July, 2005 1,199 $45.09 - - 2,699,300
August, 2005 11,981 $40.84 - - 2,699,300
September, 2005 208,289 $38.93 205,900 - 2,493,400
October, 2005 579,910 $38.08 578,205 - 1,915,195
November, 2005 331,697 $40.51 319,600 2,000,000 3,595,595
December, 2005 377,328 $41.49 375,400 - 3,220,195
--------- ------ --------- --------- ---------
Balance December 31, 2005: 2,853,368 $40.24 2,779,805 4,000,000 3,220,195
========= ====== ========= ========= =========
(1) During 2005, and as permitted by the Company's stock option plans, 7,038
shares of common stock already owned by option holders were used by those
holders to pay the exercise price associated with their option exercise.
These shares were returned to the status of authorized but unissued shares.
In addition, the Company repurchased 66,525 shares of common stock through
share repurchase by the transfer agent in the open market in connection
with the Company's Dividend Reinvestment Plan.
Item 6. Selected Financial and Operating Information
The following table sets forth selected financial and operating data on a
historical basis for the Company and should be read in conjunction with the
financial statements appearing elsewhere in this Form 10-K (amounts in
thousands, except per share data).
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Revenues:
Rental Income $417,607 $388,084 $348,895 $304,478 $265,024
Other Income (1) 26,194 21,985 20,936 17,621 17,739 ------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL REVENUES 443,801 410,069 369,831 322,099 282,763
------- ------- ------- ------- -------
Expenses:
Operating and maintenance 198,974 181,206 158,740 133,146 117,545
General & administrative 19,652 23,978 22,607 12,649 10,542
Interest 97,898 83,078 75,926 65,640 52,604
Depreciation & amortization 90,232 79,683 66,186 53,943 49,693
Prepayment penalties - - - 3,275 116
Impairment of assets held as General Partner 400 1,116 2,518 3,533 -
------- ------- ------- ------- -------
TOTAL EXPENSES 407,156 369,061 325,977 272,186 230,500
------- ------- ------- ------- -------
Income from operations 36,645 41,008 43,854 49,913 52,263
Equity in earnings (losses) of unconsolidated affiliates - (538) (1,892) (17,493) 123
------- ------- ------- ------- -------
Income before minority interest, discontinued operations
and extraordinary item 36,645 40,470 41,962 32,420 52,386
Minority interest in limited partnership - 441 - - -
Minority interest in operating partnerships (10,015) (10,702) (10,867) (4,882) (14,492)
------- ------- ------- ------- -------
Income from continuing operations 26,630 30,209 31,095 27,538 37,894
Discontinued operations, net of minority interest 54,882 17,201 10,712 17,603 11,356
------- ------- ------- ------- -------
Income before gain (loss) on disposition of property and
business and
cumulative effect of change in accounting principle 81,512 47,410 41,807 45,141 49,250
Gain (loss) on disposition of property and business, net
of minority
interest - (67) (9) (202) 15,256
------- ------- ------- ------- -------
Income before cumulative effect of change in accounting
principle 81,512 47,343 41,798 44,939 64,506
Cumulative effect of change in accounting principle, net
of minority interest - (321) - - -
------- ------- ------- ------- -------
Net Income 81,512 47,022 41,798 44,939 64,506
Preferred dividends (6,279) (7,593) (11,340) (14,744) (17,681)
Premium on Series B preferred stock repurchase - - - (5,025) -
------- ------- ------- ------- -------
Net income available to common shareholders $75,233 $39,429 $30,458 $25,170 $ 46,825
======= ======= ======= ======= =========
Basic earnings per share data:
Income from continuing operations $ 0.63 $ 0.69 $ 0.67 $ 0.29 $ 1.61
Discontinued operations 1.72 0.52 0.37 0.68 0.51
Cumulative effect of change in accounting principle - (0.01) - - -
------- ------- ------- ------- -------
Net income available to common shareholders $ 2.35 $1.20 $ 1.04 $ 0.97 $ 2.12
======= ======= ======= ======= =========
Diluted earnings per share data:
Income from continuing operations $0.63 $0.67 $0.67 $0.29 $1.60
Discontinued operations 1.70 0.52 0.36 0.67 0.51
Cumulative effect of change in accounting principle - (0.01) - - -
Net income available to common shareholders $2.33 $1.18 $1.03 $0.96 $2.11
======= ======= ======= ======= =========
Cash dividends declared per common share $2.53 $2.49 $2.45 $2.41 $2.31
======= ======= ======= ======= =========
Balance Sheet Data:
Real estate, before accumulated depreciation $3,330,918 $3,123,901 $2,752,992 $2,597,278 $2,135,078
Total assets 2,977,870 2,816,796 2,513,317 2,456,266 2,063,789
Total debt (including held for sale) 1,924,086 1,702,722 1,380,696 1,335,807 992,858
Series B convertible cumulative preferred stock - - - - 48,733
Redeemable preferred stock ((2)) 60,000 85,000 85,000 167,680 114,000
Stockholders' equity 656,812 720,422 741,263 726,242 620,596
Other Data:
Net cash provided by operating activities $132,947 $161,691 $150,693 $140,612 $148,505
Net cash used in investing activities (179,696) (165,466) (112,025) (295,181) (139,106)
Net cash provided by (used in) financing activities 44,215 5,747 (42,347) 152,632 (9,129)
Funds from Operations ((3)) 137,606 126,953 132,803 121,745 136,604
Adjusted Funds From Operations((4)) 115,720 104,787 111,020 100,654 120,994
Weighted average number of shares outstanding:
Basic 31,962,082 32,911,945 29,208,242 26,054,535 22,101,027
Diluted 32,328,105 33,314,038 29,575,660 26,335,316 22,227,521
Total communities owned at end of period 153 150 147 152 143
Total apartment units owned at end of period 43,432 41,776 40,946 41,776 39,007
(1) Other income includes property other income, interest income and other
income.
(2) Redeemable preferred stock is redeemable solely at the option of the
Company.
(3) Pursuant to the revised definition of Funds From Operations ("FFO")
adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"), FFO is defined as net income (computed
in accordance with accounting principles generally accepted in the United
States of America ("GAAP")) excluding gains or losses from sales of
property, minority interest and extraordinary items plus depreciation from
real property including adjustments for unconsolidated partnerships and
joint ventures less dividends from non-convertible preferred shares. In
2003, the Company added back debt extinguishment costs which are incurred
as a result of repaying property specific debt triggered upon sale as a
gain or loss on sale of the property. Because of the limitations of the FFO
definition as published by NAREIT as set forth above, the Company has made
certain interpretations in applying the definition. The Company believes
all adjustments not specifically provided for are consistent with the
definition.
FFO falls within the definition of "non-GAAP financial measure" set forth in
Item 10(e) of Regulation S-K and as a result the Company is required to include
in this report a statement disclosing the reasons why management believes that
presentation of this measure provides useful information to investors.
Management believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO should be considered
in conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management believes that by excluding
gains or losses related to dispositions of property and excluding real estate
depreciation (which can vary among owners of similar assets in similar condition
based on historical cost accounting and useful life estimates), FFO can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. The Company also uses this measure to
compare its performance to that of its peer group. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs. FFO should not be considered as an alternative to net income as
an indication of the Company's performance or to cash flow as a measure of
liquidity.
The following table sets forth the calculation of FFO and Adjusted Funds from
Operations for the previous five years, beginning with "net income available to
common shareholders" from the Company's audited financial statements prepared in
accordance with GAAP:
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net income available to common shareholders $75,233 $ 39,429 $ 30,458 $ 25,170 $ 46,825
Convertible Preferred dividends(a) 880 2,194 5,939 10,589 17,681
Depreciation from real property(b) 97,686 91,564 79,577 67,919 64,589
Impairment on General Partner Investment - 945 1,785 1,470 -
(Gain) loss from sale of property - 50 260 202 ( 15,256)
Minority interest 10,015 10,702 13,965 9,451 17,890
Minority interest - discontinued operations 442 2,855 1,385 2,775 4,759
Impairment of real property - - 423 1,565 -
(Gain) loss from sale of discontinued operations (46,650) (21,107) 2,599) 5,696) -
Prepayment penalties - - - 3,275 116
Loss from early extinguishment of debt in connection with
sale of real estate - - 1,610 - -
Cumulative effect of change in accounting principle - 321 - - -
FFO as defined above 137,606 126,953 132,803 116,720 136,604
Premium paid on Series B repurchased(c) - - - 5,025 -
-------- -------- -------- -------- --------
FFO as adjusted by the Company 137,606 126,953 132,803 121,745 136,604
Reserve(3) (21,886) (22,166) (21,783) (21,091) (15,610)
-------- -------- -------- -------- --------
Adjusted Funds From Operations $115,720 $104,787 $111,020 $100,654 $120,994
======== ======== ======== ======== ========
Weighted average common shares/units outstanding:
Basic 47,714.3 48,675.0 45,276.7 42,062.1 37,980.0
======== ======== ======== ======== ========
Diluted(a) 48,411.3 49,077.1 47,873.8 46,466.4 45,063.6
======== ======== ======== ======== ========
FFO as adjusted by the Company per share diluted (a) $2.84 $2.54 $2.77 $2.62 $3.03
======== ======== ======== ======== ========
(a)The calculation of FFO and FFO per share assumes the conversion of dilutive
common stock equivalents and convertible preferred stock. Therefore, the
convertible preferred dividends are added to FFO, and the common stock
equivalent is included in both the basic and diluted weighted average
common shares/units outstanding. The convertible preferred stock had an
anti-dilutive effect in 2004 on the per-share calculation; therefore, the
convertible preferred dividends of $2,194 are not included in FFO for the
2004 diluted calculation. The weighted average common shares/units
outstanding assumes conversion of all UPREIT Units to common shares.
(b)Includes amounts passed through from unconsolidated investments.
(c)FFO for 2002 includes adding back the premium on the Series B preferred stock
repurchase of $5,025.
All REITs may not be using the same definition for FFO. Accordingly, the
above presentation may not be comparable to other similarly titled measures
of FFO of other REITs.
(4) Adjusted Funds From Operations is defined as Funds from Operations less an
annual reserve for anticipated recurring, non-revenue generating
capitalized costs ("Reserve") of $525 for 2005, 2004, 2003 and 2002 ($400
used for 2001) per apartment unit (weighted average units owned during the
year). The adjustment from FFO to AFFO only takes into account this reserve
level as previously described. The NAREIT definition of FFO or AFFO does
not take into account any additional costs of capital improvements and
capitalized interest that also are incurred. The total level of capital
improvements and capitalized interest (including the amount defined as
reserve) for the five years are as follows: 2005 - $100,013; 2004 -
$102,700; 2003 - $106,346; 2002 - $115,692; and 2001 - $130,648. Please see
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for an expanded discussion on capital improvements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
--------
The following discussion should be read in conjunction with the consolidated
financial statements, the notes thereto, and the selected financial data
appearing elsewhere in this Form 10-K. 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, 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 within anticipated budgets, the actual pace of future acquisitions
and sales, and continued access to capital to fund growth. For this purpose, any
statements contained in this report 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 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.
The Company is engaged primarily in the ownership, management, acquisition,
rehabilitation and development of residential apartment communities in selected
Northeast, Mid-Atlantic, Midwest and Southeast Florida markets. As of December
31, 2005, the Company operated 158 apartment communities with 47,001 apartments.
Of this total, the Company owned 153 communities, consisting of 43,432
apartments, managed as general partner one partnership that owned 868
apartments, and fee managed four properties with 2,701 apartments for third
parties.
Executive Summary
-----------------
The Company operated during 2005 in an improving economic environment. The
recession, which started in 2001, continued through mid-2004 resulting in job
losses in many parts of the country. For historical reference, Home Properties'
markets experienced negative job growth of -0.4% in 2001 and -0.9% in 2002. For
2003, the Company's markets, as well as the country as a whole, experienced flat
job growth. For 2004 and 2005, both the Company's markets and the country as a
whole experienced positive job growth; 1.0% and 1.1% for the Company, and 1.7%
and 1.5% for the country, respectively. An increase in job growth leads to
household formations, which creates an increase in demand for rental housing. In
addition, the increasing home mortgage interest rate environment made it more
challenging for potential residents who considered making the switch to home
ownership. Home ownership continues to be the number one reason our residents
give for moving out of our communities. In 2001, home purchases represented
17.8% of our move-outs, growing to 18.8% in 2002, 19.6% in 2003, and leveling
off at 19.5% for 2004 and 19.4% in 2005. A continued increase in home mortgage
rates could push this level down, which would positively affect our turnover
rates and improve occupancy. As referenced in our Market Demographics table on
page 9 of this report, job growth for our markets improved in 2005 with 1.1%
growth over 2004, on top of the 1.0% growth in 2004 over 2003. As there is
usually a lag between job growth and household formation, this recovery did not
create a measurable increased demand for our apartments until the second half of
2005. During the first six months of 2005, same property rent was up 1.4% and
total property revenue was up 1.8%. These improved to 2.5% for rent and 4.0% for
total revenue for the second six months of 2005.
The reason for using rent concessions, and the ultimate level of those
concessions, has changed over the past few years. Concessions for 2003 were 119
basis points of rental revenue, which dropped to 87 basis points for all of
2004, and increased to 105 basis points for 2005. In 2003, the Company
positioned itself to improve occupancy, which resulted in less aggressive rental
rate increases and a greater use of rent concessions. In 2004, we were able to
maintain and improve occupancies while reducing concessions as the economy
improved. In 2005, the overall level of concessions increased to help soften the
much more aggressive rental increases and significant use of water and sewer
expense recovery which the Company started to pass through to the residents
during 2005.
The Company owned 116 communities with 33,422 apartment units throughout 2004
and 2005 where comparable operating results are available for the years
presented (the "2005 Core Properties"). Occupancies at the 2005 Core Properties
increased slightly by 10 basis points, from 93.4% to 93.5%. Occupancies in the
fourth quarter of 2005 averaged 93.7%, compared to 92.7% a year ago. The Company
uses a measurement referred to as Available to Rent, or ATR. This is a leading
indicator to assess future occupancy rates by reference to units which will be
available for rent, based upon leases signed or termination notices received
relating to future move in/move out dates. As of the middle of February, 2006,
our ATR was 7.0%, compared to the same time period a year ago when ATR was 7.8%.
The fact that ATR is 0.8% better than 2005 is not surprising, given the fact
that the fourth quarter of 2005 was 1.0% ahead the previous year in occupancy.
This is a positive trend as we enter 2006.
Total Same Store Properties (including Detroit) rental revenue growth for 2005
was projected to be 3.3%, consisting of 2.5% in rental rate growth, 0.3% in
occupancy improvement, and 0.5% in reduction to concessions. Actual results were
2.2% in rental rate growth, 0.1% drop in occupancy, and 0.2% increase to
concessions, totaling 1.9% total rental revenue growth. It is difficult to
compare rental growth without including the utility recovery revenue which is
classified as property other income. The Company recorded $3.2 million of
recovery revenue in 2005 verses only $100,000 in 2004. This put pressure on the
ability to raise base rent, as this initiative was not originally budgeted at
the beginning of 2005. Actual results, including utility recovery revenue, were
3.0% in rental rate growth, 0.1% drop in occupancy, and 0.2% increase to
concessions, totaling 2.7% total rental revenue growth including utility
recovery income.
In November 2005, the Company announced its intention to sell its Detroit
portfolio to focus on its target core markets. The operating results for Detroit
produced negative year over year growth in 2005. This was a large contributing
factor in results not achieving the 2005 revenue growth of 3.3% that had been
projected. If Detroit results are left out, as those properties are classified
as held for sale, the balance of the 2005 Core Properties achieved the following
(including utility recovery revenue): 3.2% in rental rate growth, 0.1% increase
in occupancy, and 0.2% increase to concessions, netting out to 3.1% total rental
revenue growth.
The guidance for 2006 Same Store Properties (apartment units owned throughout
2005 and 2006) revenue growth is 4.8%. Rental rates are projected to increase
3.4%, including above-average rental increases at certain communities resulting
from the continued efforts to upgrade the properties. The effect from the
utility recovery revenue program is included in rental rate growth, which adds
0.4% of the 3.4% increase. Occupancies are expected to increase 0.3% for the
year, and concessions are projected to slow down slightly, adding 0.1% to net
rental income, such that rental revenues are projected to increase 3.8%.
Property other income is expected to increase substantially year over year,
increasing the 3.8% rental revenue growth to 4.8% total revenue growth. The
items driving the property other income growth are a $3.9 million marginal
increase in water and sewer recovery revenue and a $1.3 million marginal
increase in heating cost recovery revenue from the utility recovery initiatives.
Expenses for 2006 Same Store Properties are projected to increase 5.3%. See
below under "Results of Operations" for more details on expense comparisons.
These revenue and expense projections result in 2006 Same Store Properties net
operating income ("NOI") growth of 4.3% at the mid-point of 2006 guidance.
Markets where the Company expects above average NOI growth include: Florida
(+9.0%); Washington, D.C. (+7.5%); Baltimore (+5.9%); Philadelphia (+5.5%).
Average growth is expected in the New York City Metro area (+4.0%). Markets with
below average expectations include: Upstate New York (+3.0%); Boston (+2.7%);
Chicago (0.0%); and Detroit (-1.5%). Certain historical demographic information
for these markets may be found in the tables on pages 9 and 10 of this report.
Of the two items making up NOI - revenue and operating expenses, the revenue
component is likely to be more volatile. An improving economy could create
higher demand for rental housing above that projected. An economic recovery that
stumbles or creates little new job growth could put pressure on the Company's
ability to reach the mid-point of guidance. The Company has given FFO guidance
for 2006 with a range of $2.88 to $3.00 per share.
The Company has anticipated closing on acquisitions of $150 million in its
budget for 2006. The Company is committed to a disciplined approach to
acquisitions, but at the same time recognizes that the continued long term low
interest rate levels allow the Company flexibility to adjust hurdle rates and
bids to reflect market conditions. The Company is also targeting $250 million in
dispositions, mostly from the sale of its entire Detroit portfolio. While the
acquisition market will likely continue to be very competitive, the Company is
confident that the 2006 acquisition goal of $150 million is achievable.
During 2005, the Company increased its level of stock buy-back activity
substantially, repurchasing approximately 2.8 million shares at a weighted price
slightly in excess of $40.00 per share. The Company's strategy is to
opportunistically repurchase shares at a discount to its underlying net asset
value, thereby continuing to build value for shareholders. The Company estimates
its net asset value per share at December 31, 2005 to be $52.45, based on
capitalizing at 6.3% the annualized and seasonally adjusted fourth quarter
property net income, plus a 3% growth factor, minus a management fee. With the
difficult and competitive acquisition environment described above, the Company
believes buying back stock is a logical use of funds. The Company will continue
to monitor stock prices, the published net asset value and acquisition
alternatives to determine the current best use of capital between stock buyback
and acquisitions.
During 2006, the Company anticipates increasing leverage to a level of
approximately 49% of debt-to-total market capitalization in order to meet the
above-described acquisition goals. Finally, although not contemplated based on
the announced level of acquisitions of $150 million, if the acquisition pace
were to increase, the Company would consider a combination of increased sales of
under-performing or isolated apartment communities and issuance of cumulative
redeemable preferred stock to raise additional capital.
Results of Operations
---------------------
Comparison of year ended December 31, 2005 to year ended December 31, 2004.
The Company owned 116 communities with 33,422 apartment units throughout 2004
and 2005 where comparable operating results are available for the years
presented (the "2005 Core Properties"). For the year ended December 31, 2005,
the 2005 Core Properties showed an increase in rental revenues of 2.4% and a net
operating income increase of 2.9% over the 2004 year-end period. Property level
operating expenses increased 3.8%. Average economic occupancy for the 2005 Core
Properties increased from 93.4% to 93.5%, with average monthly rental rates
increasing 2.4% to $1,000 per apartment unit.
A summary of the 2005 Core Property NOI is as follows:
2005 2004 $ Change % Change
---- ---- -------- --------
Rental Income $374,816,000 $366,085,000 $8,731,000 2.4%
------------ ------------ ---------- ---
Utility Recovery Revenue 2,756,000 95,000 2,661,000 2801.1%
Other Income 19,150,000 17,918,000 1,232,000 6.9%
------------ ------------ ---------- ---
Total Property Other Income 21,906,000 18,013,000 3,893,000 21.6%
------------ ------------ ---------- ---
Total Revenue 396,722,000 384,098,000 12,624,000 3.3%
Operating and Maintenance (176,339,000) (169,954,000) (6,385,000) (3.8%)
------------ ------------ ---------- ---
Net Operating Income $220,383,000 $214,144,000 $6,239,000 2.9%
============ ============ ========== ===
NOI may fall within the definition of "non-GAAP financial measure" set forth in
Item 10(e) of Regulation S-K and, as a result, Home Properties may be required
to include in this report a statement disclosing the reasons why management
believes that presentation of this measure provides useful information to
investors. Home Properties believes that NOI is helpful to investors as a
supplemental measure of the operating performance of a real estate company
because it is a direct measure of the actual operating results of the Company's
apartment properties. In addition, the apartment communities are valued and sold
in the market by using a multiple of NOI. The Company also uses this measure to
compare its performance to that of its peer group.
During 2005, the Company acquired a total of 2,430 apartment units in seven
communities (the "2005 Acquisition Communities"). In addition, the Company
experienced full-year results for the 2,486 apartment units in ten apartment
communities (the "2004 Acquisition Communities") acquired during 2004. The
inclusion of these acquired communities generally accounted for the significant
changes in operating results for the year ended December 31, 2005. In addition,
effective April 1, 2004, the reported income from operations include the
consolidated results of one investment where the Company is the managing general
partner that has been determined to be a Variable Interest Entity ("VIE").
A summary of the NOI from continuing operations for the Company as a whole is as
follows:
2005 2004 $ Change % Change
---- ---- -------- --------
Rental Income $417,607,000 $388,084,000 $29,523,000 7.6%
------------ ------------ ----------- ---
Utility Recovery Revenue 3,128,000 133,000 2,995,000 2251.9%
Other Income 20,462,000 18,589,000 1,873,000 10.1%
------------ ------------ ----------- ---
Total Property Other Income 23,590,000 18,722,000 4,868,000 26.0%
------------ ------------ ----------- ---
Total Revenue 441,197,000 406,806,000 34,391,000 8.5%
Operating and Maintenance (198,974,000) (181,206,000) (17,768,000) (9.8%)
------------ ------------ ----------- ---
Net Operating Income $242,223,000 $225,600,000 $16,623,000 7.4%
============ ============ =========== ===
During 2005, the Company disposed of four properties with a total of 816 units,
which had partial results for 2005 (the "2005 Disposed Communities"). Also
during 2005, the Company placed nineteen properties with a total of 5,046 units
into held for sale status, which had full year results for 2005 and 2004 (the
"2005 Held for Sale Communities"). The results of these disposed and held for
sale properties have been reflected in discontinued operations and are not
included in the table above.
For the year ended December 31, 2005, income from operations (income before
equity in earnings (losses) of unconsolidated affiliates, minority interest,
discontinued operations and gain (loss) on disposition of property and business)
decreased by $4,363,000 when compared to the year ended December 31, 2004. The
decrease was primarily attributable to the following factors: an increase in
rental income of $29,523,000, an increase in property other income of
$4,868,000, a decrease in general and administrative expense of $4,326,000 and a
decrease in impairment of assets held as general partner of $716,000. These
changes were more than offset by an increase in operating and maintenance
expense of $17,768,000, an increase in interest expense of $14,820,000, an
increase in depreciation and amortization of $10,549,000 and a decrease in
interest and other income of $659,000. Each of the items are described in more
detail below.
Of the $29,523,000 increase in rental income, $11,545,000 is attributable to the
2004 Acquisition Communities, $8,180,000 is attributable to the 2005 Acquisition
Communities and $1,067,000 is attributable to the consolidation of the VIE. The
balance of $8,731,000 relates to a 2.4% increase from the 2005 Core Properties
due primarily to an increase of 2.4% in weighted average rental rates,
accompanied by an increase in average economic occupancy from 93.4% to 93.5%.
In the current improving economic environment, it is very difficult to project
rental rate and occupancy results. The Company has provided guidance for 2006,
which, at the mid-point of the range, anticipates same store revenue growth of
4.8%, including above-average rental increases from the continued efforts to
upgrade the properties. Occupancy levels are expected to slowly improve from the
level at the end of the fourth quarter of 2005, producing an expected average
for 2006 Same Store Properties of 93.7%, 30 basis points higher than all of
2005.
Property other income, which consists primarily of income from utility recovery
charges, operation of laundry facilities, late charges, administrative fees,
garage and carport rentals, revenue from corporate apartments, cable revenue,
pet charges, and miscellaneous charges to residents, increased in 2005 by
$4,868,000. Of this increase, $669,000 is attributable to the 2004 Acquisition
Communities, $287,000 is attributable to the 2005 Acquisition Communities and
$19,000 is attributable to the VIE. The balance of $3,893,000 represents a 21.6%
increase attributable to the 2005 Core Properties. Included in the 2005 Core
Properties increase is $2,661,000 which represents increased utility recovery
revenue compared to 2004.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased in 2005 by $759,000. This is due
primarily to a decrease in the level of management activity as a result of the
sale of the affordable limited partnerships partially offset by increases in
other fee managed properties.
Of the $17,768,000 increase in operating and maintenance expenses, $6,547,000 is
attributable to the 2004 Acquisition Communities, $3,750,000 is attributable to
the 2005 Acquisition Communities and $1,086,000 is attributable to the VIE. The
balance for the 2005 Core Properties, a $6,385,000 increase in operating
expenses or 3.8%, is primarily a result of increases in utilities, personnel and
real estate taxes, offset in part by reductions in advertising, repairs and
maintenance, and property insurance.
The breakdown of operating and maintenance costs for the 2005 Core Properties by
line item is listed below (in thousands):
2005 2004 $ Variance % Variance
---- ---- ---------- ----------
Electricity $ 7,114 $ 6,934 $( 180) (2.6%)
Gas 20,839 17,423 (3,416) (19.6%)
Water & Sewer 10,244 9,644 (600) (6.2%)
Repairs & Maintenance 25,394 25,622 228 0.9%
Personnel Expense 36,925 36,427 (498) (1.4%)
Site Level Incentive Compensation 2,501 1,544 (957) (62.0%)
Advertising 7,058 7,309 251 3.4%
Legal & Professional 1,292 1,308 16 1.2%
Office & Telephone 4,998 5,252 254 4.8%
Property Insurance 5,120 6,230 1,110 17.8%
Real Estate Taxes 40,166 38,404 (1,762) (4.6%)
Snow 1,280 1,099 (181) (16.5%)
Trash 2,515 2,441 (74) (3.0%)
Property Management G&A 10,893 10,317 (576) (5.6%)
-------- -------- ------- ----
Total $176,339 $169,954 $(6,385) (3.8%)
======== ======== ======= ====
The natural gas heating cost variance of 19.6% reflects significant increases in
the cost of natural gas per decatherm. As of December 31, 2005, the Company had
fixed-price contracts covering approximately 75% of its natural gas exposure for
the balance of the 2005/2006 heating season. The Company has fixed-price
contracts covering approximately 49% of its natural gas exposure for calendar
year 2006. Risk is further diversified by staggering contract term expirations.
For the balance of the 2005/2006 heating season, the Company estimates the
average price per decatherm will be approximately $9.64. For calendar year 2006,
where the Company has coverage for 49% of its exposure, the Company's negotiated
average price per decatherm was approximately $8.47. A year ago, the average
commodity cost for the season's contracts was $6.40. The Company has provided
guidance for 2006 which anticipates a 23% increase (or $5,900,000) in natural
gas heating costs. This is based on the thirty-year average for the number of
degrees days for 2006. For guidance, the portion of the calendar year not
covered by fixed price contracts is assumed to be priced at a level that
reflects twelve month strip pricing as of February, 2006. During 2006, the
Company plans on increasing the percentage of fixed price contracts before
entering the 2006/2007 winter heating season.
The over 6% increase in water and sewer costs is a function of municipalities
across all regions looking at ways to increase revenues. The Company initiated a
program to allocate water and sewer costs to residents at a majority of the
Owned Properties in March 2005.
The decrease in repairs and maintenance of 0.9% is mainly attributed to a
$919,000 decrease in sales tax charges between periods. Included in contract
repairs in 2004 is $805,000 of sales tax expense, compared to a reduction in
sales tax expense of $111,000 in 2005. See discussion on page 39 in section
titled Comparison of year ended December 31, 2004 compared to year ended
December 31, 2003. The Company has provided guidance for 2006 which anticipates
a 3.6% increase in repairs and maintenance.
Personnel expense was up 1.4% in 2005 versus 2004. Significant variances were in
workers compensation, up $421,000, or 27%, and health insurance, down $867,000,
or 33%. For 2006 guidance, personnel costs are anticipated to increase 2.5%.
Site level incentive compensation was up $957,000, or 62.0%. This represents an
increased focus on creating a higher level of property management compensation
coming from incentive based performance measures.
Advertising costs were down 3.4% as a result of property management decreasing
spending on major newspaper ads and focusing instead on internet advertising and
resident referral programs.
Property insurance costs were down 17.8% over 2004. The Company renewed the
property and general liability insurance policy for the year beginning November,
2004 at significantly reduced rates, due to a reduced number of claims and
better management of those claims. The guidance for 2006 reflects a 1.6%
decrease in insurance costs.
Real estate taxes were up 4.6% in 2005, reflecting increased assessments and
rates as tax authorities struggle to raise revenues in many regions of the
country. The Company expects real estate taxes to increase only 1.0% in 2006
reflecting successful initiatives to challenge assessments and obtain cost
reductions.
Snow removal costs were up 16.5%. The year 2005 produced normal snowfalls
compared to below normal snowfall in 2004. Snow removal costs are anticipated to
remain at normal levels in 2006.
The operating expense ratio (the ratio of operating and maintenance expense
compared to rental and property other income) for the 2005 Core Properties was
44.4% and 44.2% for 2005 and 2004, respectively. This 0.2% increase resulted
from the 3.3% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential being offset by the 3.8%
increase in operating and maintenance expense. In general, the Company's
operating expense ratio is higher than that experienced in other parts of the
country due to relatively high real estate taxes in its markets and the
Company's practice, typical in its markets, of including heating expenses in
base rent. This ratio could change as the Company rolls out its heating cost
recovery program in 2006 and 2007, charging residents for their share of heating
costs.
General and administrative expenses ("G&A") decreased in 2005 by $4,326,000 or
18% from $23,978,000 in 2004 to $19,652,000 in 2005. Of this decrease,
$3,800,000 is attributable to an accrued liability recorded in the fourth
quarter of 2004 relating to the March 2005 settlement of a lawsuit and the
payment of certain related legal fees, as described on page 40 in the section
titled Comparison of year ended December 31, 2004 to year ended December 31,
2003. After taking into account the settlement expense, all other items of G&A
decreased $526,000 year over year. Of this net variance, there was a $481,000
decrease in the level of corporate incentive compensation and a $573,000
decrease in other items of G&A; partially offset by $528,000 increased external
costs incurred specifically to comply with Section 404 of Sarbanes-Oxley. The
total direct external costs incurred during 2005 for Section 404 compliance
totaled approximately $2,300,000. A significant portion of this related to costs
incurred in 2005 to satisfy the first year efforts for Section 404 compliance.
G&A is expected to decrease 2.6% for 2006, based on an expectation of a lower
level of Section 404 costs.
Interest expense increased in 2005 by $14,820,000 as a result of the increased
borrowings in connection with acquisition of the 2005 Acquisition Communities,
and a full year of interest expense for the 2004 Acquisition Communities. In
addition, amortization from deferred charges relating to the financing of
properties totaled $1,975,000 and $1,766,000, and was included in interest
expense for 2005 and 2004, respectively.
Included in interest expense are prepayment penalties which decreased in 2005 by
$158,000 as compared to 2004. During 2005, the Company incurred a total of
$147,000 in prepayment penalties in connection with the refinancing or payoff of
certain mortgages compared to $305,000 in 2004.
Depreciation and amortization expense increased $10,549,000 due to the
additional depreciation expense on the 2005 Acquisition Communities and a full
year of depreciation expense for the 2004 Acquisition Communities, as well as
the incremental depreciation on the capital expenditures for additions and
improvements to the Core Properties in 2005 and 2004 of $71,481,000 and
$81,379,000, respectively.
Impairment of assets held as General Partner decreased from $1,116,000 in 2004
to $400,000 in 2005. During 2005, the Company recorded impairment charges of
$400,000 relating to the Company's estimate of fair market value of the one
remaining VIE. During 2004, the Company recorded impairment charges of
$1,116,000 (all in the first quarter). Of this total, $171,000 represented
advances made during the first quarter of 2004 to certain of the affordable
property limited partnerships which the Company believed would not be repaid
upon the sale of the loans. The remaining $945,000 pertained to an additional
net impairment charge taken on the 38 properties included in the Company's
planned disposition of its affordable portfolio to reduce the investment in the
partnerships based upon the revisions to the sale contract in the first quarter.
In connection with FIN 46R, the Company was required to consolidate the majority
of the affordable limited partnerships results of operations beginning April 1,
2004.
The equity in earnings (losses) of unconsolidated affiliates of ($538,000) in
2004 is primarily the result of the general partner recording a greater share of
the underlying investment's losses due to the loans and advances to certain of
the affordable property limited partnerships where the limited partner had no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses."
Minority interest decreased $555,000 as a direct result of the decrease in
income from operations over the prior year.
Included in discontinued operations for the year-ended December 31, 2005, are
the Disposition Communities and Held for Sale Communities. The Company generally
considers assets to be held for sale when all significant contingencies
surrounding the closing have been resolved, which often corresponds with the
actual closing date. However, the Company has classified as held for sale the
entire Detroit region portfolio of nineteen apartment communities containing
5,046 apartment units. The Company has announced its intention to sell the
portfolio and has met all of the requirements under SFAS 144.
Included in the $53,975,000 gain on disposition of property reported for the
year 2005 is the sale of four apartment communities where the Company has
recorded a combined gross gain on sale of $73,022,000, net of minority interest
of $24,227,000. In addition, the Company recorded a $7,686,000 gain, net of
minority interest of $2,506,000, during the year related to the disposal of two
affordable partnerships.
In connection with the adoption of FIN 46R, the Company recorded a $321,000
cumulative effect charge of a change in accounting principle in the first
quarter of 2004. This charge was the result of negative capital accounts of
minority interest partners that were absorbed by the Company.
Net income increased $34,490,000 primarily due to the increase in gain on sale
of discontinued operations of $42,558,000 in 2005 compared to 2004; partially
offset by $5,145,000 lower income from the operation of discontinued operations
in 2005 compared to 2004.
Comparison of year ended December 31, 2004 to year ended December 31, 2003.
The Company owned 114 communities with 32,708 apartment units throughout 2003
and 2004 where comparable operating results are available for the years
presented (the "2004 Core Properties"). For the year ended December 31, 2004,
the 2004 Core Properties showed an increase in rental revenues of 3.7% and a net
operating income increase of 2.2% over the 2003 year-end period. Property level
operating expenses increased 6.6%. Average economic occupancy for the 2004 Core
Properties increased from 93.0% to 93.4%, with average monthly rental rates
increasing 3.3% to $973 per apartment unit.
A summary of the 2004 Core Property NOI is as follows:
2004 2003 $ Change % Change
---- ---- -------- --------
Rental Income $356,738,000 $343,921,000 $12,817,000 3.7%
Property Other Income 17,585,000 15,563,000 2,022,000 13.0%
------------ ------------ ----------- ----
Total Revenue 374,323,000 359,484,000 14,839,000 4.1%
Operating and Maintenance (166,530,000) (156,150,000) (10,380,000) (6.6%)
------------ ------------ ----------- ----
Net Operating Income $207,793,000 $203,334,000 $4,459,000 2.2%
============ ============ ========== ===
During 2004, the Company acquired a total of 2,486 apartment units in ten
newly-acquired communities (the "2004 Acquisition Communities"). In addition,
the Company experienced full-year results for the 730 apartment units in two
apartment communities (the "2003 Acquisition Communities") acquired during 2003.
The inclusion of these acquired communities generally accounted for the
significant changes in operating results for the year ended December 31, 2004.
In addition, effective April 1, 2004, the reported income from operations
include the consolidated results of one investment where the Company is the
managing general partner that has been determined to be a VIE.
A summary of the NOI from continuing operations for the Company as a whole is as
follows:
2004 2003 $ Change % Change
---- ---- -------- --------
Rental Income $388,084,000 $348,895,000 $39,189,000 11.2%
Property Other Income 18,722,000 15,994,000 2,728,000 17.1%
------------ ------------ ----------- -----
Total Revenue 406,806,000 364,889,000 41,917,000 11.5%
Operating and Maintenance (181,206,000) (158,740,000) (22,466,000) (14.2%)
------------ ------------ ----------- -----
Net Operating Income $225,600,000 $206,149,000 $19,451,000 9.4%
============ ============ =========== ===
During 2004, the Company also disposed of five properties with a total of 1,646
units, which had partial results for 2004 (the "2004 Disposed Communities"). The
results of these disposed properties have been reflected in discontinued
operations.
For the year ended December 31, 2004, income from operations (income before
equity in earnings (losses) of unconsolidated affiliates, minority interest,
discontinued operations and gain (loss) on disposition of property and business)
decreased by $2,846,000 when compared to the year ended December 31, 2003. The
decrease was primarily attributable to the following factors: an increase in
rental income of $39,189,000, an increase in property other income of $2,728,000
and a decrease in impairment of assets held as general partner of $1,402,000.
These changes were more than offset by an increase in operating and maintenance
expense of $22,466,000, an increase in general and administrative expense of
$1,371,000, an increase in interest expense of $7,152,000, an increase in
depreciation and amortization of $13,497,000 and a decrease in interest and
other income of $1,679,000. Each of the items are described in more detail
below.
Of the $39,189,000 increase in rental income, $4,410,000 is attributable to the
2003 Acquisition Communities, $18,936,000 is attributable to the 2004
Acquisition Communities and $3,026,000 is attributed to the VIE. The balance of
$12,817,000 relates to a 3.7% increase from the 2004 Core Properties due
primarily to an increase of 3.3% in weighted average rental rates, accompanied
by an increase in average economic occupancy from 93.0% to 93.4%.
The Company focused more on improving occupancy during 2003 and therefore was
less aggressive with rent increases at its Core Properties. The Company reverted
back in 2004 to focusing on rent increases, as seen by the quarter over quarter
trend of more aggressive rents. An additional component of the 3.3% increase in
weighted average rent results from the significant upgrading and repositioning
efforts discussed under "Capital Improvements" below. The Company seeks a
minimum 9% internal rate of return for these revenue-enhancing upgrades, down
from the 12% goal referenced in 2003.
Property other income, which consists primarily of income from operation of
laundry facilities, late charges, administrative fees, garage and carport
rentals, revenue from corporate apartments, cable revenue, pet charges, utility
recovery charges and miscellaneous charges to residents, increased in 2004 by
$2,728,000. Of this increase, $229,000 is attributable to the 2003 Acquisition
Communities, $412,000 is attributable to the 2004 Acquisition Communities and
$65,000 is attributable to the VIE. The balance of $2,022,000 represents a 13%
increase attributable to the 2004 Core Properties. A significant portion of the
increase (47%) for the 2004 Core Properties is from telephone revenue and cable
revenue, in particular, revenue recognized in the amount of $500,000 associated
with the termination of a contract with a telephone service provider. In
addition, 12% of the increase is from increased laundry revenue as we continue
to increase the percentage of owned laundry equipment at the properties.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased in 2004 by $1,644,000. This is due
primarily to a decrease in the level of management activity as a result of the
sale of the affordable limited partnerships.
Of the $22,466,000 increase in operating and maintenance expenses, $1,730,000 is
attributable to the 2003 Acquisition Communities, $8,274,000 is attributable to
the 2004 Acquisition Communities and $2,082,000 is attributable to the VIE. The
balance for the 2004 Core Properties, a $10,380,000 increase in operating
expenses or 6.6%, is primarily a result of increases in utilities, repairs and
maintenance, personnel, property insurance and real estate taxes, offset in part
by reductions in advertising and snow removal costs.
The breakdown of operating and maintenance costs for the 2004 Core Properties by
line item is listed below (in thousands):
2004 2003 $ Variance % Variance
---- ---- ---------- ----------
Electricity $ 6,839 $ 6,361 $ (478) (7.5%)
Gas 17,173 15,963 (1,210) (7.6%)
Water & Sewer 9,400 8,482 (918) (10.8%)
Repairs & Maintenance 25,083 22,081 (3,002) (13.6%)
Personnel Expense 35,491 32,972 (2,519) (7.6%)
Site Level Incentive Compensation 1,507 1,003 (504) (50.2%)
Advertising 7,206 7,863 657 8.4%
Legal & Professional 1,279 1,216 (63) (5.2%)
Office & Telephone 5,161 5,403 242 4.5%
Property Insurance 6,099 5,242 (857) (16.3%)
Real Estate Taxes 37,838 35,654 (2,184) (6.1%)
Snow 1,042 1,746 704 40.3%
Trash 2,373 2,423 50 2.1%
Property Management G&A 10,039 9,741 (298) (3.1%)
-------- -------- -------- ----
Total $166,530 $156,150 $(10,380) (6.6%)
======== ======== ======== ====
The increase in electric of 7.5% continues a trend of above 5% increases for the
past two years, reflective of market increases versus any substantial shift in
usage.
The natural gas heating cost variance of 7.6% was all a fourth quarter event, as
this line item was breakeven through the third quarter of 2004. The fourth
quarter of 2003 was relatively mild, plus there have been significant increases
in the cost of natural gas per decatherm. As of December 31, 2004, the Company
had fixed-price contracts covering approximately 99% of its natural gas exposure
for the 2004/2005 heating season. The Company has fixed-price contracts covering
approximately 59% of its natural gas exposure for calendar year 2005. Risk is
further diversified by staggering contract term expirations. For the 2004/2005
heating season, where the Company has coverage for approximately 99% of its
exposure, the Company's negotiated average price per decatherm is approximately
$6.08.
The over 10% increase in water and sewer costs are a function of municipalities
across all regions looking at ways to increase revenues. The Company was
focusing on a program to allocate water and sewer costs to residents at a
majority of the Owned Properties.
The increase in repairs and maintenance of 13.6% occurred in contract repairs,
painting and cleaning. Included in contract repairs is $805,000 of sales tax
expense, as described below, which accounted for 27% of the total increase in
repairs and maintenance. Cleaning costs are up $634,000, or 21% of the total
increase in repairs and maintenance. A significant portion of this represents a
shift between personnel costs and repairs and maintenance as more of this
function was performed by outside contractors versus in-house personnel.
During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861,000 (including $173,000 of interest expense) for sales tax not charged to
the Company by its vendors. This was included in the first quarter results and
allocated $312,000 to expense for property repairs, $136,000 (before minority
interest) to loss on disposition of property, and $413,000 capitalized to real
estate assets for improvements.
As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance and
had recorded a liability of $1,712,000. This was allocated $493,000 to expense
for property repairs, $233,000 to interest expense, $35,000 (before minority
interest) to loss on disposition of property, and $951,000 capitalized to real
estate assets. The liability recorded related to the period beginning on the
later of: (i) the date the Company first purchased property in the applicable
state; or (ii) January 1, 1997 and ending on June 30, 2004. The Company
recognizes that the liability recorded was an estimate and that the actual tax
liability paid in 2005 was approximately $1,430,000.
The Company determined that the amount of liability which it failed to record
with respect to sales and use tax did not have a material impact on its results
of operations or reported earnings for the prior periods in which the items
subject to tax were purchased and that the expense recorded in the first and
second quarters of 2004 were one-time adjustments. The Company does not believe
that the additional sales and use tax it will record and pay will have a
material impact on its results of operations in future periods. As a result of
the sales tax audit, the Company initiated procedures to ensure that sales and
use tax on expenditures were properly collected by its vendors or accrued and
paid by the Company.
Personnel expense was up 7.6% in 2004 versus 2003. Payroll tax expense was up
6.7%, mostly fueled by significant increases in workers compensation and health
insurance costs. The balance represents a 4.8% increase in wages.
Site level incentive compensation was up $504,000, or 50.2%. This represents an
increased focus on creating a higher level of property management compensation
coming from incentive based performance measures.
Advertising costs were down 8.4% as a result of a comparison to higher than
normal levels in 2003. Advertising costs were up substantially in 2003
consistent with increased efforts to attract traffic and increase occupancy. The
advertising level in 2004 reflected a more normalized run rate.
Property insurance costs were up 16.3% over 2003. The insurance expense for 2003
reflects the impact of a legal settlement which reduced the expense by $500,000.
Without the benefit of this settlement, insurance costs would have been up 6.8%.
The Company renewed the property and general liability insurance policy for the
year beginning November, 2004 at significantly reduced rates.
Real estate taxes were up 6.1% in 2004, reflecting increased assessments and
rates as tax authorities struggle to raise revenues in many regions of the
country.
Snow removal costs were down 40.3%. The first quarter of 2003 produced
significant snowfalls compared to historical norms. Most of the $704,000
decrease in snow removal costs occurred during the first quarter, due to this
comparison, and below normal snowfall in 2004.
The operating expense ratio (the ratio of operating and maintenance expense
compared to rental and property other income) for the 2004 Core Properties was
44.5% and 43.4% for 2004 and 2003, respectively. This 1.1% increase resulted
from the 4.1% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential being offset by the 6.6%
increase in operating and maintenance expense. In general, the Company's
operating expense ratio is higher than that experienced in other parts of the
country due to relatively high real estate taxes in its markets and the
Company's practice, typical in its markets, of including heating expenses in
base rent.
G&A increased in 2004 by $1,371,000 or 6% from $22,607,000 in 2003 to
$23,978,000 in 2004. Of this increase, $3,800,000 is attributable to an accrued
liability recorded in the fourth quarter of 2004 relating to the March 2005
settlement of a lawsuit and the payment of certain related legal fees, as
described below. The year-over-year increase would have been greater except for
a $5,000,000 expense incurred in 2003 for the restricted stock granted to the
Leenhoutses as part of their retirement as Co-CEO's. After taking into account
the settlement expense and the restricted stock grant, all other items of G&A
increased $2,571,000 year over year. Of this net variance, $1,591,000 is
directly attributed to increased external costs incurred specifically to comply
with Section 404 of Sarbanes-Oxley. Including all other accounting, auditing and
tax compliance cost increases explains an additional $368,000 of the variance
increase. All other items of G&A accounted for the $612,000 balance of the
increase. The total direct external costs incurred during 2004 for Section 404
compliance totaled approximately $1,800,000.
The $3,800,000 accrued for settlement costs ($3,500,000) and the legal fees
($300,000) relates to a legal action, commenced in 2000, against the Company,
the Operating Partnership and Home Leasing Corporation. Home Leasing is owned by
Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board of
Directors and Senior Advisors to the Company. The Company was originally formed
to expand and continue Home Leasing's business. The essence of the complaint was
that the entity in which the plaintiffs were investors was wrongfully excluded
from the Company's initial public offering. In their original complaint,
plaintiffs sought damages in the amount of $3,000,000. In the subsequent
discovery process, plaintiffs increased damages sought to $10,000,000. Payment
in settlement and of legal fees was made on behalf of Home Leasing as well as
the Company and the Operating Partnership in recognition of the fact that the
matters alleged in the action against Home Leasing related directly and solely
to the promotion and creation of the Company.
Interest expense increased in 2004 by $7,152,000 as a result of the increased
borrowings in connection with acquisition of the 2004 Acquisition Communities,
and a full year of interest expense for the 2003 Acquisition Communities. In
addition, amortization from deferred charges relating to the financing of
properties totaled $1,766,000 and $1,483,000, and was included in interest
expense for 2004 and 2003, respectively.
Included in interest expense are prepayment penalties which decreased in 2004 by
$1,305,000 as compared to 2003. During 2004, the Company incurred a total of
$305,000 in prepayment penalties in connection with the refinancing of certain
mortgages and the sale of one of the 2004 disposed properties. In 2003,
$1,610,000 was recorded in loss from early extinguishment of debt in connection
with the sale of two of the 2003 Disposed Communities.
Depreciation and amortization expense increased $13,497,000 due to the
additional depreciation expense on the 2004 Acquisition Communities and a full
year of depreciation expense for the 2003 Acquisition Communities, as well the
incremental depreciation on the capital expenditures for additions and
improvements to the Core Properties in 2004 and 2003 of $91,151,000 and
$101,398,000, respectively, net of the Disposition Communities.
In the fourth quarter of 2002, the Company announced its intention to sell
virtually all of the assets associated with its general partner interests in the
affordable properties in order to focus solely on the direct ownership and
management of market rate apartment communities. The assets included principally
loans, advances and management contracts. During 2004, the Company recorded
impairment charges of $1,116,000 (all in the first quarter). Of this total,
$171,000 represents advances made during the first quarter of 2004 to certain of
the affordable property limited partnerships which the Company believes will not
be repaid upon the sale of the loans. The remaining $945,000 pertains to an
additional net impairment charge taken on the 38 properties included in the
Company's planned disposition of its affordable portfolio to reduce the
investment in the partnership based upon the revisions to the sale contract in
the first quarter. In connection with FIN 46R, the Company was required to
consolidate the majority of the affordable limited partnerships results of
operations beginning April 1, 2004.
The equity in earnings (losses) of unconsolidated affiliates of ($538,000) is
primarily the result of the general partner recording a greater share of the
underlying investment's losses due to the loans and advances to certain of the
affordable property limited partnerships where the limited partner has no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses." In connection
with FIN 46R, the Company was required to consolidate the majority of the
affordable limited partnerships results of operations beginning April 1, 2004.
Minority interest decreased $165,000 as a direct result of the decrease in
income from operations over the prior year.
Included in discontinued operations for the year-ended December 31, 2004, are
the Disposition Communities, Held for Sale Communities and the results of
operations of the sold affordable limited partnerships that in connection with
FIN 46R were required to be consolidated beginning April 1, 2004. As all
significant contingencies surrounding the sale of the affordable properties had
been resolved, the Company had considered these assets held for sale and
reported them in discontinued operations. (See further detail supplied under
"Variable Interest Entities" section below).
Included in the $11,417,000 net gain on disposition of property reported for the
year 2004 is the sale of five apartment communities where the Company has
recorded a combined gain on sale, net of minority interest, of approximately
$18,082,000. In addition, the Company recorded a $6,665,000 loss, net of
minority interest of $3,103,000, during the year related to the disposal of the
affordable partnerships. Included in the gross $9,800,000 loss reported is a
$5,000,000 loss from a property being disposed through a default with the
lender. In December, 2004, the Company recorded an obligation to repurchase the
limited partner's interests in two VIEs in satisfaction of any tax credit
guarantees or other obligations to that partner for $5.7 million, resulting in a
loss of $5.0 million included in "gain on disposition of property" as part of
"Discontinued operations." The transfer of the partnership interests was
effective in January, 2005. An additional impairment in the Company's investment
of $4,000,000 was recorded relating to the closing of 26 affordable properties
and the eight properties under contract for sale with the same buyer. Finally, a
reduction of $800,000 to fair market value of the Company's investment has been
recorded for the property the Company will continue to hold for sale.
In connection with the adoption of FIN 46R, the Company recorded a $321,000
cumulative effect charge, net of minority interest, of a change in accounting
principle in the first quarter of 2004. This charge was the result of negative
capital accounts of minority interest partners that were absorbed by the
Company.
Net income increased $5,224,000 primarily due to the increase in discontinued
operations of $6,489,000 in 2004 compared to 2003.
Liquidity and Capital Resources
-------------------------------
The Company's principal liquidity demands are expected to be distributions to
the preferred and common stockholders and Operating Partnership Unitholders,
capital improvements and repairs and maintenance for the properties, acquisition
of additional properties, stock repurchases and debt repayments. The Company may
also acquire equity ownership in other public or private companies that own and
manage portfolios of apartment communities. Management anticipates the
acquisition of properties of approximately $150 million in 2006, although there
can be no assurance that such acquisitions will actually occur.
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 and make distributions to its
stockholders in accordance with the provisions of the Internal Revenue Code, as
amended, applicable to REITs.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and the
line of credit, it intends to satisfy such requirements through property debt
financing, proceeds from the sale of properties, the issuance of UPREIT Units,
proceeds from sales of its common stock through the Dividend Reinvestment Plan,
or issuing additional common shares, shares of the Company's preferred stock, or
other securities. As of December 31, 2005, the Company owned 25 properties, with
5,271 apartment units, which were unencumbered by debt.
A source of liquidity in 2006 is expected to be from the sale of properties.
During 2005, the Company sold four communities for a total sales price of $142.6
million. The Company sold five communities during 2004 for a total sales price
of $92.5 million. The Company was able to sell these properties at an average
capitalization rate of 5.7% and reinvest in the acquisition of properties with
more growth potential at an expected first year cap rate of 6.3%. Management has
included in its operating plan that the Company will strategically dispose of
assets totaling approximately $250 million in 2006, although there can be no
assurance that such dispositions will actually occur.
In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. As of December 31, 2005, the Company
continued to have available securities under the registration statement in the
aggregate amount of $144,392,000.
In May and June 2000, the Company completed the sale of $60 million of Series C
Preferred Stock in a private transaction with affiliates of Prudential Real
Estate Investors ("Prudential"), Teachers Insurance and Annuity Association of
America ("Teachers"), affiliates of AEW Capital Management and Pacific Life
Insurance Company. The Series C Preferred Stock carried an annual dividend rate
equal to the greater of 8.75% or the actual dividend paid on the Company's
common shares into which the preferred shares could be converted. The stock had
a conversion price of $30.25 per share and a five-year, non-call provision. As
part of the Series C Preferred Stock transaction, the Company also issued
240,000 warrants to purchase common shares at a price of $30.25 per share,
expiring in five years. On January 9, 2003, holders of 100,000 shares of Series
C Preferred Shares elected to convert those shares for 330,579 shares of common
stock. On May 8, 2003, 200,000 shares of Series C Preferred Shares were
converted into 661,157 shares of common stock. On August 26, 2003, 200,000
shares of Series C Preferred Shares were converted into 661,157 of common stock.
On November 5, 2003, holders of the remaining 100,000 shares of Series C
Preferred Shares elected to convert those shares for 330,579 shares of common
stock. On September 9, 2003, 17,780 warrants were exercised, resulting in the
issuance of 17,780 shares of common stock. During the fourth quarter of 2003,
the remaining 222,220 common stock warrants were exercised, resulting in the
issuance of 222,220 shares of common stock. Neither the conversions nor the
warrant exercise had an effect on the reported results of operations.
In June 2000, the Company completed the sale of $25 million of Series D
Preferred Stock in a private transaction with The Equitable Life Assurance
Society of the United States. The Series D Preferred Stock carries an annual
dividend rate equal to the greater of 8.775% or the actual dividend paid on the
Company's common shares into which the preferred shares can be converted. The
stock has a conversion price of $30 per share and a five-year, non-call
provision. On May 26, 2005, all 250,000 shares of the Series D Preferred Stock
were converted into 833,333 shares of common stock. The conversion of preferred
shares to common shares did not have an effect on the reported results of
operations.
In December 2000, the Company completed the sale of $30 million of Series E
Preferred Stock in a private transaction, again with affiliates of Prudential
and Teachers. The Series E Preferred Stock carried an annual dividend rate equal
to the greater of 8.55% or the actual dividend paid on the Company's common
shares into which the preferred shares could be converted. The stock had a
conversion price of $31.60 per share and a five-year, non-call provision. In
addition, as part of the Series E Preferred Stock transaction, the Company
issued warrants to purchase 285,000 common shares at a price of $31.60 per
share, expiring in five years. On August 20, 2002, 63,200 of the Series E
Convertible Preferred Shares were converted into 200,000 shares of common stock.
On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted into
116,456 shares of common stock. On August 26, 2003 the remaining 200,000 shares
of Series E Preferred Shares were converted into 632,911 of common stock. On
September 9, 2003, 17,100 warrants were exercised, resulting in the issuance of
17,100 shares of common stock. During the fourth quarter of 2003, the remaining
267,900 common stock warrants were exercised, resulting in the issuance of
267,900 shares of common stock. Neither the conversions nor the warrant exercise
had an effect on the reported results of operations.
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million. The net proceeds were used to fund the repurchase of
the Company's Series B Preferred Stock, property acquisitions, and property
upgrades. The Series F Preferred Shares are redeemable by the Company at anytime
on or after March 25, 2007 at a redemption price of $25.00 per share, plus any
accumulated, accrued and unpaid dividends. Each Series F Preferred share will
receive an annual dividend equal to 9.00% of the liquidation preference per
share (equivalent to a fixed annual amount of $2.25 per share).
In 2000, the Company obtained an investment grade rating from Fitch, Inc. The
Company was assigned an initial corporate credit rating of "BBB" (Triple-B),
with a rating of "BBB-" (Triple-B Minus) for Series C through E Convertible
Preferred Stock and Series F Preferred Stock. This rating remains in effect as
of December 31, 2005.
The issuance of UPREIT Units for property acquisitions continues to be a minor
source of capital for the Company. During 2005, the Company issued $55,600,000
of UPREIT Units as consideration for three acquired properties. During 2004, the
Company issued $12,100,000 worth of UPREIT Units as consideration for two of the
four properties acquired in the New Jersey region. No units were issued in
connection with the two acquisitions during 2003.
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action did not establish a target price or a specific timetable for
repurchase. At December 31, 2003, there was approval remaining to purchase
3,135,800 shares. During 2004, the Company repurchased 1,135,800 shares at a
cost of $47,426,000. During 2005, the Company repurchased 2,779,805 shares at a
cost of $111,738,000. In addition, in January, 2006, the Company repurchased
107,800 shares at a cost of $4,468,000. On each of February 16, 2005 and
November 4, 2005, the Board of Directors approved a 2,000,000 share increase in
the stock repurchase program, resulting in a remaining authorization level of
approximately 3,112,000 shares at February 21, 2006. During 2006, the Company
will monitor stock prices, the published net asset value, and acquisition
alternatives to determine the current best use of capital between the two major
uses of capital - stock buyback and acquisitions.
The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the
stockholders of the Company an opportunity to automatically invest their cash
dividends in common stock. In addition, eligible participants may make monthly
payments or other voluntary cash investments in shares of common stock. The
maximum monthly investment without prior Company approval is currently $1,000.
In the fourth quarter of 2004, the Company began meeting share demand in the
program through share repurchase by the transfer agent in the open market on the
Company's behalf instead of new share issuance. This removes essentially 100% of
the dilution caused by issuing new shares at a price less than the net asset
value in an economic and efficient manner. During 2004, $17,560,000 (net of
$5,978,000 share repurchase) of common stock was issued under this plan, with no
additional issuance (net of share repurchases) of common stock in 2005.
Management monitors the relationship between the Company's stock price and its
estimated net asset value. During times when the difference between these two
values is small, resulting in little "dilution" of net asset value by common
stock issuances, the Company has the flexibility to satisfy the demand for DRIP
shares with stock repurchased in the open market or to issue waivers to DRIP
participants to provide for investments in excess of the $1,000 maximum monthly
investment. No such waivers were granted during 2004 or 2005.
During 2005, the Company extended its revolving line of credit with M&T Bank for
a period of three years, increasing the line from $115,000,000 to $140,000,000.
As of December 31, 2005, the Company had $82,000,000 outstanding on the line of
credit. Borrowings under the line of credit bear interest at .75% over the
one-month LIBOR rate. Accordingly, increases in interest rates will increase the
Company's interest expense and as a result will affect the Company's results of
operations and financial condition. The one-month Libor was 4.38% at December
31, 2005. The Company renegotiated certain terms of the line of credit
effective, including a forty basis point drop in the interest rate and easing of
certain covenant restrictions. The line of credit expires on September 1, 2008.
The Credit Agreement relating to this line of credit provides for the Company to
maintain certain financial ratios and measurements. One of these covenants was
that the Company may not pay any distribution if a distribution, when added to
other distributions paid during the three immediately preceding fiscal quarters,
exceeds the greater of: (i) 90% of funds from operations and 110% of cash
available for distribution; and (ii) the amount required to maintain the
Company's status as a REIT. Historically, there were certain quarters where the
Company did not meet this specific covenant and appropriate waivers were granted
by the participating banks. The new credit agreement, effective September 1,
2005, has removed this covenant completely. The line of credit has not been used
for long-term financing but adds a certain amount of flexibility, especially in
meeting the Company's acquisition goals. Many times it is easier to temporarily
finance an acquisition in a short-term nature through the line of credit, with
long term secured financing or other sources of capital replenishing the line of
credit availability.
On November 23, 2004, the Company signed a supplemental demand note with M&T
Bank. The note had a maximum principal amount of $42 million. Borrowings on the
note bear interest at 1.25% over the one-month LIBOR rate. The demand note was
entered into to fund the Company's stock repurchase program. The Company had no
outstanding balance on the note as of December 31, 2004. In connection with the
increased borrowing capacity of the line of credit as described above, this
supplemental note was terminated during the third quarter of 2005.
On November 23, 2005, the Company executed a Standard Libor Grid Note with M&T
Bank. The note has a maximum principal amount of $40 million with an interest
rate at .95% over the one-month LIBOR. Proceeds from this demand note were
utilized to fund the Company's stock repurchase program. The Company had no
outstanding balance on the note as of December 31, 2005.
As of December 31, 2005, the weighted average rate of interest on the Company's
mortgage debt was 5.9% and the weighted average maturity of such indebtedness
was approximately seven years. Mortgage debt of $1.8 billion was outstanding
with 91% at fixed rates of interest with staggered maturities. 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.
The Company's net cash provided by operating activities decreased from
$161,691,000 for the year ended December 31, 2004, to $132,947,000 for the year
ended December 31, 2005. The decrease was principally due to changes in accounts
payable and accrued liabilities. The decrease in liabilities over the prior year
were primarily related to paying $5,700,000 to repurchase limited partner
interests, $3,800,000 for a legal settlement, bonus accrual of $1,500,000 and
increased insurance reserves of $2,000,000 over the prior year. The remainder of
the difference is attributable to an increase in trade payables offset by a
decrease in other assets.
Net cash used in investing activities increased from $165,466,000 in 2004 to
$179,696,000 in 2005. The increase was principally due to the higher level of
properties purchased in 2005, which increased to $283,363,000 in 2005 from
$247,500,000 in 2004. Other changes included an increase of $50,045,000 in
proceeds from sale of property, offset by a decrease in property additions of
$3,783,000.
The Company's net cash provided by financing activities increased from
$5,747,000 in 2004 to $44,215,000 in 2005. Debt proceeds, used to fund property
acquisitions and additions, increased from $94,038,000 in 2004 to $250,813,000
in 2005. Net borrowings on the Company's line of credit decreased from a net
borrowing of $58,000,000 in 2004 to a net borrowing of $24,000,000 in 2005.
On February 7, 2006, the Board of Directors approved a dividend on the Company's
common shares of $.64 per share for the period from October 1, 2005 to December
31, 2005. This is the equivalent of an annual distribution of $2.56 per share.
In addition, the Company declared a dividend of $0.5625 per share on its Series
F Cumulative Redeemable Preferred Stock for the quarter ended February 28, 2006.
The dividends were paid on February 28, 2006 to shareholders of record on
February 17, 2006.
Critical Accounting Policies
----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related notes. In
preparing these financial statements, management has utilized information
available including industry practice and its own past history in forming its
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements may not materialize. However, application of the
accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates which may impact comparability of the Company's results of operations
to those of companies in similar businesses.
Revenue Recognition
The Operating Partnership leases its residential properties under leases with
terms generally one year or less. Rental income is recognized on a straight-line
basis over the related lease term. As a result, deferred rents receivable are
created when rental income is recognized during the concession period of certain
negotiated leases and amortized over the remaining term of the lease. In
accordance with SFAS 141, the Company recognizes rental revenue of acquired
in-place "above and below" market leases at their fair value over the weighted
average remaining lease term. Property other income, which consists primarily of
income from operation of laundry facilities, utility recovery, administrative
fees, garage and carport rentals and miscellaneous charges to residents, is
recognized when earned (when the services are provided, or when the resident
incurs the charge).
Property management fees are recognized when earned based on a contractual
percentage of net monthly cash collected on rental income.
Real Estate
Real estate is recorded at cost. Costs related to the acquisition, development,
construction and improvement of properties are capitalized. Recurring capital
replacements typically include carpeting and tile, appliances, HVAC equipment,
new roofs, site improvements and various exterior building improvements.
Non-recurring upgrades include, among other items, community centers, new
appliances, new windows, kitchens and bathrooms. Interest costs are capitalized
until construction is substantially complete. There was $1,096,000, $763,000,
and $920,000 of interest capitalized in 2005, 2004 and 2003, respectively.
Salaries and related costs capitalized for the years ended December 31, 2005,
2004 and 2003 were $2,135,000, $3,391,000 and $6,008,000, respectively. When
retired or otherwise disposed of, the related asset cost and accumulated
depreciation are cleared from the respective accounts and the net difference,
less any amount realized from disposition, is reflected in income. Ordinary
repairs and maintenance that do not extend the life of the asset are expensed as
incurred.
Management reviews its long-lived assets used in operations for impairment when
there is an event or change in circumstances that indicates an impairment in
value. An asset is considered impaired when the undiscounted future cash flows
are not sufficient to recover the asset's carrying value. If such impairment is
present, an impairment loss is recognized based on the excess of the carrying
amount of the asset over its fair value. The Company records impairment losses
and reduces the carrying amounts of assets held for sale when the carrying
amounts exceed the estimated selling proceeds less the costs to sell.
The Company accounts for its acquisitions of investments in real estate in
accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires
the fair value of the real estate acquired to be allocated to the acquired
tangible assets, consisting of land, building, and personal property and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, value of in-place leases and value of
resident relationships, based in each case on their fair values. The Company
considers acquisitions of operating real estate assets to be businesses as that
term is contemplated in Emerging Issues Task Force Issue No. 98-3, Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business.
The Company allocates purchase price to the fair value of the tangible assets of
an acquired property (which includes the land, building, and personal property)
determined by valuing the property as if it were vacant. The as-if-vacant value
is allocated to land, buildings, and personal property based on management's
determination of the relative fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are
recorded based on the present value (using an interest rate which reflects the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in place leases and (ii)
management's estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. The capitalized above-market lease values are amortized as a reduction of
rental income over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values are amortized as an increase to rental
income over the initial term and any fixed-rate renewal periods in the
respective leases.
Other intangible assets acquired include amounts for in-place lease values that
are based upon the Company's evaluation of the specific characteristics of the
leases. Factors considered in these analyses include an estimate of carrying
costs during hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. The Company also considers
information obtained about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. In estimating carrying costs,
management also includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the expected
lease-up periods depending on the property acquired.
The total amount of other intangible assets acquired is further allocated to
in-place leases, which includes other resident relationship intangible values
based on management's evaluation of the specific characteristics of the
residential leases and the Company's resident retention history.
The value of in-place leases and resident relationships are amortized as a
leasing cost expense over the initial term of the respective leases and any
expected renewal period.
The acquisitions of minority interests for shares of the Company's Common Stock
are recorded under the purchase method with assets acquired reflected at the
fair market value of the Company's Common Stock on the date of acquisition. The
acquisition amounts are allocated to the underlying assets based on their
estimated fair values.
Discontinued Operations
In the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets ("SFAS 144"), the standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It also retains
the basic provisions for presenting discontinued operations in the income
statement but broadened the scope to include a component of an entity rather
than a segment of a business. Pursuant to the definition of a component of an
entity in SFAS 144, assuming no significant continuing involvement by the former
owner after the sale, the sale of an apartment community is now considered a
discontinued operation. In addition, apartment communities classified as held
for sale are also considered a discontinued operation. The Company generally
considers assets to be held for sale when all significant contingencies
surrounding the closing have been resolved, which often corresponds with the
actual closing date.
Included in discontinued operations for the three years ended December 31, 2005
are the operating results, net of minority interest, of sixteen apartment
community dispositions (four sold in 2005, five sold in 2004 and seven sold in
2003). In addition, discontinued operations for all periods presented includes
the operating results, net of minority interest of twenty two VIEs sold during
2004 and four VIEs sold during 2005 and nineteen apartment communities held for
sale as of December 31, 2005. For purposes of the discontinued operations
presentation, the Company only includes interest expense associated with
specific mortgage indebtedness of the properties that are considered
discontinued operations. Subsequent to the classification of assets held for
sale, no further depreciation expense is recorded. The depreciation suspended
for the nineteen apartment communities held for sale amounted to $1,457,000.
Capital Improvements
The Company has a policy to capitalize costs related to the acquisition,
development, rehabilitation, construction, and improvement of properties.
Capital improvements are costs that increase the value and extend the useful
life of an asset. Ordinary repair and maintenance costs that do not extend the
useful life of the asset are expensed as incurred. Costs incurred on a lease
turnover due to normal wear and tear by the resident are expensed on the turn.
Recurring capital improvements typically include: appliances, carpeting and
flooring, HVAC equipment, kitchen/ bath cabinets, new roofs, site improvements
and various exterior building improvements. Non- recurring upgrades include,
among other items: community centers, new windows, and kitchen/ bath apartment
upgrades. The Company capitalizes interest and certain internal personnel costs
related to the communities under rehabilitation and construction.
The Company is required to make subjective assessments as to the useful lives of
its properties and improvements for purposes of determining the amount of
depreciation to reflect on an annual basis. These assessments have a direct
impact on the Company's net income.
Estimate of Fair Value of Assets Associated with General Partnership Interests
The Company uses the sale contract to determine the fair market value of assets
associated with its general partner investment, including notes, advances,
management contracts and the equity investment in the limited partnership. The
fair value used could vary from the actual sales price of the assets which could
result in further charges or gains recognized upon disposition. See Note 3 to
the Notes to Consolidated Financial Statements for further discussion.
Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31, 1994. As a result, the Company generally is not subject
to Federal or State income taxation at the corporate level to the extent it
distributes annually at least 90% of its REIT taxable income to its shareholders
and satisfies certain other requirements. For the years ended December 31, 2005,
2004 and 2003, the Company distributed in excess of 100% of its taxable income;
accordingly, no provision has been made for federal income taxes in the
accompanying consolidated financial statements. Stockholders of the Company are
taxed on dividends and must report distributions from the Company as either
ordinary income, capital gains, or as return of capital.
Included in total assets on the Consolidated Balance Sheets are deferred tax
assets of $8,496,000 and $8,737,000 as of December 31, 2005 and 2004,
respectively. The deferred tax assets were a result of the net losses associated
with the affordable property portfolio sales during 2004 and 2003. Management
does not believe it is more likely than not that these deferred assets will be
used, and accordingly has recorded a reserve against the deferred tax assets of
$8,421,000 and $8,680,000 for the years ended December 31, 2005 and 2004,
respectively. The deferred tax assets are associated with the Management
Companies who perform certain of the residential and development activities of
the Company. The Management Companies historically provided commercial
management services and provided loan advances to affordable housing entities
owned through general partnership interests. As these activities are no longer
provided, Management does not currently believe there is a source for future
material taxable earnings for the Management Companies that would give rise to
value for the deferred tax assets.
Variable Interest Entities
--------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities, "VIE"). The
Company had made the determination that all 41 of the remaining limited
partnerships at the time were Variable Interest Entities.
The Company determined that it was not the primary beneficiary in seven
partnerships syndicated under U.S. Department of Housing and Urban Development
subsidy programs, all of which have been sold as of December 31, 2005.
The Company had further determined that it was the primary beneficiary in 34 of
the VIEs and, therefore, consolidated these entities effective March 31, 2004.
Beginning with the second quarter of 2004, the Company consolidated the results
of operations of the VIEs. Effective December 31, 2005, the Company has closed
on the sale on all but one of the VIEs. The one remaining VIE is not considered
held for sale and is included in the Consolidated statement of operations for
the years ended December 31, 2005 and 2004.
The Company is currently the general partner in this one VIE with a total of 868
units syndicated using low income housing tax credits under Section 42 of the
Internal Revenue Code. As general partner, the Company manages the day-to-day
operations of this partnership for a management fee. In addition, the Company
has certain operating deficit and tax credit guarantees to its limited partner.
The Company is responsible to fund operating deficits to the extent there are
any and can receive operating incentive awards when cash flow reaches certain
levels. The effect on the consolidated balance sheets of including these VIEs as
of December 31, 2005 and 2004 includes Total assets of $21.3 and $87.8 million,
Total liabilities of $17.9 and $80.6 million, and Minority interest of $3.4 and
$7.5 million, respectively.
The Company believes the properties' operations conform to the applicable
requirements as set forth above.
Acquisitions and Dispositions
-----------------------------
In 2005, the Company acquired a total of seven communities with a total of 2,430
units for total consideration of approximately $283,400,000, or an average of
approximately $116,900 per unit. For the same time period, the Company sold four
properties with a total of 816 units for total consideration of $142,600,000, or
an average of $174,700 per unit. The weighted average expected first year cap
rate of the 2005 Acquisition Communities was 6.0% and of the 2005 Disposed
Communities was 4.0%. The weighted average unleveraged internal rate of return
(IRR) during the Company's ownership for the properties sold was 20.0%.
In 2004, the Company acquired a total of ten communities with a total of 2,486
units for total consideration of approximately $247,500,000, or an average of
approximately $99,600 per unit. For the same time period, the Company sold five
properties with a total of 1,646 units for total consideration of $92,500,000,
or an average of $56,200 per unit. The weighted average expected first year cap
rate of the 2004 Acquisition Communities was 6.7% and of the 2004 Disposed
Communities was 8.2%. The weighted average unleveraged IRR during the Company's
ownership for the properties sold was 13.1%.
Contractual Obligations and other Commitments
---------------------------------------------
The primary obligations of the Company relate to its borrowings under the line
of credit and mortgage notes payable. The Company's line of credit matures in
September 2008, and has $82,000,000 outstanding at December 31, 2005. The $1.8
billion in mortgage notes payable have varying maturities ranging from one to 37
years. The principal payments on the mortgage notes payable for the years
subsequent to December 31, 2005, are set forth in the table below as "long-term
debt."
The Company has a non-cancelable operating ground lease for one of its
properties. The lease expires May 1, 2020, with options to extend the term of
the lease for two successive terms of twenty-five years each. The lease provides
for contingent rental payments based on certain variable factors. At
December 31, 2005, future minimum rental payments required under the lease are
$70,000 per year until the lease expires.
The Company leases its corporate office space from an affiliate and the office
space for its regional offices from third parties. The corporate office space
requires an annual base rent plus a pro-rata portion of property improvements,
real estate taxes, and common area maintenance. The regional office leases
require an annual base rent plus a pro-rata portion of real estate taxes. These
leases are set forth in the table below as "Operating lease."
On December 1, 2004 the Company entered into a lease agreement with a third
party owner to manage the operations of one of their communities. The lease has
a term of five years, but after two years, (from the 24th month to the 36th
month) the owner may require the Company to buy the property. From the 36th
month to the end of the lease term, we have the right to require the owner to
sell the property to the Company. It is the Company's expectation that closing
on the acquisition of the property will occur no later than 36 months after the
commencement of the lease. The estimated future acquisition cost of $141 million
is included in the total purchase obligations amount for the year 2007 in the
table below.
Purchase obligations represent those costs that the Company is contractually
obligated to in the future. The significant components of this caption are costs
for capital improvements at the Company's properties, as well as costs for
normal operating and maintenance expenses at the site level that are tied to
contracts such as utilities, landscaping and grounds maintenance and
advertising. The purchase obligations include amounts tied to contracts, some of
which expire in 2006. It is the Company's intention to renew these normal
operating contracts; however, there has been no attempt to estimate the length
or future costs of these contracts.
Tabular Disclosure of Contractual Obligations:
Payments Due by Period (in thousands)
-------------------------------------
Contractual Obligations Total 2006 2007 2008 2009 2010 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt (1) $1,842,086 $60,848 $184,684 $205,630 $66,249 $289,161 $1,035,514
Ground lease 1,050 70 70 70 70 70 700
Operating lease 7,883 2,020 1,951 1,921 1,861 130 -
Purchase obligations 159,493 15,800 142,783 653 164 93 -
---------- ------- -------- -------- ------- -------- ----------
Total (2) $2,010,512 $78,738 $329,488 $208,274 $68,344 $289,454 $1,036,214
========== ======= ======== ======== ======= ======== ==========
(1) Amounts include principal payments only. The Company will pay interest on
outstanding indebtedness based on the rates and terms summarized in note 4
to the consolidated financial statements.
(2) The contractual obligations and other commitments in the table are set
forth as required by Item 303(a)(5) of Regulation S-K promulgated by the
SEC in January of 2003 and are not prepared in accordance with
generally-accepted accounting principles.
As discussed in the section entitled "Variable Interest Entities," the Company,
through its general partnership interest in an affordable property limited
partnership, has guaranteed the Low Income Housing Tax Credits to limited
partners in this partnership totaling approximately $3 million. With respect to
the guarantee of the low income housing tax credits, the Company believes the
property's operations conform to the applicable requirements and does not
anticipate any payment on the guarantee. In addition, the Company, acting as
general partner in this partnership, is obligated to advance funds to meet
partnership operating deficits.
In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Article
Supplementary, of 1.75 to 1.0.
The fixed charge coverage ratio and the components thereof do not represent a
measure of cash generated from operating activities in accordance with generally
accepted accounting principles and are not necessarily indicative of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's performance
or of cash flow as a measure of liquidity.
The calculation of the fixed charge coverage ratio for the four most recent
quarters since the issuance of the Series F Preferred Stock are presented below
(in thousands). EBITDA is defined in the Series F Cumulative Redeemable
Preferred Stock Article Supplementary as consolidated income before gain (loss)
on disposition of property and business, minority interest and extraordinary
items, before giving effect to expenses for interest, taxes, depreciation and
amortization. Net operating income from discontinued operations in the
calculation below is defined as total revenues from discontinued operations less
operating and maintenance expenses.
Calculation Presented for Series F Covenants
Three-months ended
Dec. 31 Sept. 30 June 30 Mar. 31
2005 2005 2005 2005
---- ---- ---- ----
EBITDA
Total revenues $114,835 $125,775 $121,636 $118,787
Net operating income from discontinued operations 5,677 1,045 (343) 142
Operating and maintenance (51,801) (54,161) (53,623) (57,511)
General and administrative (5,209) (4,894) (4,144) (5,405)
-------- -------- -------- --------
$ 63,502 $ 67,765 $ 63,526 $ 56,013
Fixed Charges
Interest expense $ 25,793 $ 27,059 $ 25,173 $ 24,943
Interest expense on discontinued operations 1,578 382 279 21
Preferred dividends 1,350 1,350 1,681 1,898
Capitalized interest 312 254 339 191
-------- -------- -------- --------
$ 29,033 $ 29,045 $ 27,472 $ 27,053
Times Coverage ratio: 2.19 2.33 2.31 2.07
Capital Improvements
The Company has a policy to capitalize costs related to the acquisition,
development, rehabilitation, construction, and improvement of properties.
Capital improvements are costs that increase the value and extend the useful
life of an asset. Ordinary repair and maintenance costs that do not extend the
useful life of the asset are expensed as incurred. Costs incurred on a lease
turnover due to normal wear and tear by the resident are expensed on the turn.
Recurring capital improvements typically include: appliances, carpeting and
flooring, HVAC equipment, kitchen/ bath cabinets, new roofs, site improvements
and various exterior building improvements. Non- recurring upgrades include,
among other items: community centers, new windows, and kitchen/ bath apartment
upgrades. The Company capitalizes interest and certain internal personnel costs
related to the communities under rehabilitation and construction.
The following table is a list of the items that management considers recurring,
non-revenue enhancing capital and maintenance expenditures for a standard garden
style apartment. Included are the per unit replacement cost and the useful life
that management estimates the Company incurs on an annual basis.
Maintenance
Capitalized Expense Total
Capitalized Expenditure Cost per Cost per
Cost per Useful Per Unit Unit Unit
Category Unit Life(1) Per Year(2) Per Year(3) Per Year
----------------------------------------------------------------------------------------------------------------------
Appliances $1,000 18 $ 56 $ 5 $ 61
Blinds/Shades 130 6 22 6 28
Carpets/cleaning 840 5 140 97 237
Computers, equipment, misc.(4) 120 5 24 29 53
Contract repairs - - - 102 102
Exterior painting (5) 84 5 17 1 18
Flooring 250 8 31 - 31
Furnace/Air (HVAC) 765 24 32 43 75
Hot water heater 130 7 19 - 19
Interior painting - - - 138 138
Kitchen/bath cabinets 1,100 25 44 - 44
Landscaping - - - 106 106
New roof 800 24 33 - 33
Parking lot 400 15 27 - 27
Pool/ Exercise facility 100 16 6 23 29
Windows 980 36 27 - 27
Miscellaneous (6) 705 15 47 40 87
----------------------------------------------------------------------------------------------------------------------
Total $7,404 $525 $590 $1,115
----------------------------------------------------------------------------------------------------------------------
(1) Estimated weighted average actual physical useful life of the expenditure
capitalized.
(2) This amount is not necessarily incurred each and every year. Some years,
per unit expenditures in any category will be higher, or lower depending on
the timing of certain longer lived capital or maintenance items.
(3) These expenses are included in the Operating and maintenance line item of
the Consolidated Statement of Operations. Maintenance labor costs are not
included in the $590 per unit maintenance estimate. All personnel costs for
site supervision, leasing agents, and maintenance staff are combined and
disclosed in the Company's same- store expense detail schedule. The annual
per unit cost of maintenance staff would add another $570 to maintenance
expenses and total cost figures provided.
(4) Includes computers, office equipment/ furniture, and maintenance vehicles.
(5) The level of exterior painting may be lower than other similar titled
presentations by other apartment companies as the Company's portfolio has a
significant amount of brick exteriors. In addition, other exposed exterior
surfaces are most often covered with aluminum or vinyl.
(6) Includes items such as; balconies, siding, and concrete/sidewalks.
The Company's strategy in operating apartments is to improve every property
every year regardless of age. Another part of its strategy is to purchase older
properties and rehab and reposition them to enhance internal rates of return.
This strategy results in higher costs of capital expenditures and maintenance
costs than may be reported by other apartment companies, but the Company's
experience is that the strategy results in higher revenue growth, higher net
operating income growth and a higher rate of property appreciation.
The Company estimates that during 2005, approximately $525 per unit was spent on
recurring capital expenditures. The table below summarizes the breakdown of
capital improvements by major categories between recurring and non-recurring,
revenue generating capital improvements as follows:
For the year- ended December 31,
(in thousands, except per unit data)
2005 2004
-------------------------------------------------------------------- --------------------------
Recurring Non-recurring Total Capital Total Capital
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
-------------------------------------------------------------------- --------------------------
New Buildings $ - $ - $4,647 $ 111 $ 4,647 $ 111 $ 3,718 $ 93
Major building
improvements 3,794 91 18,523 444 22,317 535 18,992 474
Roof replacements 1,376 33 3,731 89 5,107 122 3,866 97
Site improvements 1,376 33 7,464 179 8,840 212 9,283 232
Apartment upgrades 2,751 66 17,421 418 20,172 484 25,391 634
Appliances 2,335 56 1,933 46 4,268 102 4,155 104
Carpeting/Flooring 7,129 171 3,679 88 10,808 259 10,464 261
HVAC/Mechanicals 2,126 51 8,880 213 11,006 264 11,883 297
Miscellaneous 1,001 24 2,569 62 3,570 86 3,382 84
------- ---- ------- ------ ------- ------ ------- ------
Totals $21,888 $525 $68,847 $1,650 $90,735 $2,175 $91,134 $2,276
======= ==== ======= ====== ======= ====== ======= ======
(a) Calculated using the weighted average number of apartment units owned,
including 33,422 core units, 5,046 held for sale units, 2004 acquisition
units of 2,486 and 2005 acquisition units of 734 for the year-ended
December 31, 2005 and 33,422 core units, 5,046 held for sale units and 2004
acquisition units of 1,593 for the year-ended December 31, 2004.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the year- ended December 31,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------ -----------------------
Recurring Non-recurring Total Capital Total Capital
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
------ -------- ------ -------- ------------ -------- ---------------------
Core Communities $17,549 $525 $53,932 $1,614 $71,481 $2,139 $81,379 $2,435
Held For Sale/Detroit
Communities 2,649 525 2,494 494 5,143 1,019 6,341 1,257
------- ---- ------- ------ ------- ------ -------- ------
Total Same Store 20,198 525 56,426 1,467 76,624 1,992 87,720 2,280
2005 Acquisition Communities 385 525 6,371 8,680 6,756 9,205 - -
2004 Acquisition Communities 1,305 525 6,050 2,434 7,355 2,959 3,414 2,143
------- ---- ------- ------ ------- ------ -------- ------
Sub-total 21,888 525 68,847 1,650 90,735 2,175 91,134 2,276
2005 Disposed Communities 371 525 2,942 4,168 3,313 4,693 5,128 6,284
2004 Disposed Communities - - - - - - 2,543 4,455
Construction In Progress - - 4,089 - 4,089 - 1,515 -
Corporate office expenditures(1) - - - - 780 - 2,380 -
------- ---- ------- ------ ------- ------ -------- ------
$22,259 $525 $75,878 $1,790 $98,917 $2,315 $102,700 $2,420
======= ==== ======= ====== ======= ====== ======== ======
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office.
Environmental Issues
--------------------
Phase I environmental site assessments have been completed on substantially all
of the Owned Properties. There are no recorded amounts resulting from
environmental liabilities as there are no known contingencies with respect
thereto. Furthermore, no condition is known to exist that would give rise to a
material liability for site restoration or other costs that may be incurred with
respect to the sale or disposal of a property.
During the past few years, there has been media attention given to the subject
of mold in residential communities. The Company has responded to this attention
by providing to its community management the Company's "Operation and
Maintenance Plan for the Control of Moisture". The Plan, designed to analyze and
manage all exposures to mold, has been implemented at all of the Company's
communities. There have been only limited cases of mold identified to management
due to the application and practice of the Plan. No condition is known to exist
that would give rise to a material liability for site restoration or other costs
that may be incurred with respect to mold.
Recent Accounting Pronouncements
--------------------------------
In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company adopted this pronouncement for the year ended December 31,
2004, and it did not have a material impact on the Company's results of
operations, financial position or liquidity.
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"). This interpretation addresses
consolidation by business enterprises of variable interest entities in which the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties
or in which the equity investors do not have the characteristics of a
controlling financial interest. This interpretation requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
interpretation also requires disclosures about variable interest entities that
the company is not required to consolidate but in which it has a significant
variable interest. Effective March 31, 2004, the Company adopted FIN 46R. See
the Basis of Presentation disclosure in Note 1 to the Company's consolidated
financial statements and the Company's disclosure on its Investments in and
Advances to Affiliates in Note 3 for a discussion of the impact on the Company
from the adoption of FIN 46R.
In March 2004, the FASB issued EITF 03-6, Participating Securities and the
Two-Class Method under FASB Statement 128, Earnings per Share ("EITF 03-6").
EITF 03-6 addresses a number of questions regarding the computation of earnings
per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the
company when, and if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of calculating EPS.
It clarifies what constitutes a participating security and how to apply the
two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The EITF was effective for the fiscal periods beginning after March
31, 2004. The Company adopted the provisions of this EITF effective April 1,
2004, and had no impact on the Company's results of operations, financial
position or liquidity.
In November 2004, the FASB issued EITF Issue 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share. ("EITF 04-8"). EITF 04-8
addresses a number of issues relating to issued securities with embedded market
price contingent conversion features, which includes contingently convertible
preferred stock, and the impact on the calculation of earnings per share on a
quarterly basis. The EITF is effective for periods ending after December 15,
2004. The Company adopted the provisions of this EITF for the year ended
December 31, 2004, and it and had no impact on the Company's results on
operations, financial position or liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment ("SFAS 123(R)"). The statement is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123(R) requires that entities recognize the cost
of employee services received in exchange for awards of equity instruments (i.e.
stock options) based on the grant-date fair value of those awards. The Statement
is effective for the first fiscal year beginning after June 15, 2005. On January
1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS No.
123 ("SFAS 148"). Effective on that date, the Company began recognizing
compensation cost related to stock option grants. Based upon the Company's
adoption of SFAS 148, the Company expects to adopt the provisions of SFAS No.
123(R) beginning January 1, 2006 using a modified prospective application. The
Company does not expect the adoption to have a material impact on the Company's
results of operations, financial position or liquidity.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- An amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 eliminates the
exception from fair value measurement for non-monetary exchanges of similar
productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with a general exception for
exchanges that lack commercial substance. SFAS 153 specifies that a non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 was
effective for the Company's interim periods beginning July 1, 2005. The adoption
of SFAS 153 did not have a material effect on our financial position or results
of operations.
In March 2005, the FASB issued Interpretation No. 47 Accounting for Conditional
Asset Retirement Obligations ("FIN 47"). FIN 47 requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN 47 clarifies that the term
"conditional asset retirement obligation" as used in the FASB refers to a legal
obligation to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the entity. This legal obligation is absolute, despite the
uncertainty regarding the timing and/or method of settlement. In addition, the
fair value of a liability for the conditional asset retirement obligation should
be recognized when incurred: generally upon acquisition, construction or
development and/or through normal operation of the asset. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 was effective no later than
fiscal years ending after December 15, 2005. The Company adopted FIN 47 as
required effective December 31, 2005. The initial application of FIN 47 did not
have a material effect on our financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and
establishes retrospective application as the required method for reporting a
change in accounting principle. SFAS 154 provides guidance for determining
whether a retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not believe that the adoption of SFAS 154 will have a material effect on our
financial position and results of operations.
In October 2005, the FASB issued Staff Position No. 13-1 Accounting for Rental
Costs Incurred during a Construction Period ("FSP FAS 13-1"). FSP FAS 13-1
addresses the accounting for rental costs associated with operating leases that
are incurred during the construction period. FSP FAS 13-1 makes no distinction
between the right to use a leased asset during the construction period and the
right to use that asset after the construction period. Therefore, rental costs
associated with ground or building operating leases that are incurred during a
construction period are to be recognized as rental expense, allocated over the
lease term in accordance with SFAS No. 13 and Technical Bulletin 85-3. FSP FAS
13-1 is effective for the first reporting period beginning after December 15,
2005. Retrospective application in accordance with SFAS 154 is permitted but not
required. The Company does not believe that the application of FSP FAS 13-1 will
have a material impact on our financial position or results of operations.
Economic Conditions
-------------------
Substantially all of the leases at the communities are for a term of one year or
less, which enables the Company to seek increased rents upon renewal of existing
leases or commencement of new leases. These short-term leases minimize the
potential adverse effect of inflation on rental income, although residents may
leave without penalty at the end of their lease terms and may do so if rents are
increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing intensities and at different times. Starting in 2001 and continuing
into 2004 many regions of the United States had experienced varying degrees of
economic recession and certain recessionary trends, such as a temporary
reduction in occupancy and reduced pricing power limiting the ability to
aggressively raise rents. Starting in the second half on 2004 and continuing
into 2005, we have seen a reversal of these recessionary trends. In light of
this, we will continue to review our business strategy; however, we believe that
given our property type and the geographic regions in which we are located, we
do not anticipate any changes in our strategy or material effects on financial
performance.
Contingencies
-------------
The Company is not a party to any legal proceedings which are expected to have a
material adverse effect on the Company's liquidity, financial position or
results of operations. The Company is subject to a variety of legal actions for
personal injury or property damage arising in the ordinary course of its
business, most of which are covered by liability insurance. Various claims of
employment and resident discrimination are also periodically brought. While the
resolution of these matters cannot be predicted with certainty, management
believes that the final outcome of such legal proceedings and claims will not
have a material adverse effect on the Company's liquidity, financial position or
results of operations.
In 2001, the Company underwent a state tax audit. The state had assessed taxes
of $469,000 for the 1998 and 1999 tax years under audit. If the state's position
was applied to all tax years through December 31, 2001, the assessment would be
$1.3 million. At the time, the Company believed the assessment and the state's
underlying position were not supportable by the law nor consistent with
previously provided interpretative guidance from the office of the State
Secretary of Revenue. After two subsequent enactments by the state legislation
during 2002 affecting the pertinent tax statute, the Company has been advised by
outside tax counsel that its filing position for 1998-2001 should prevail.
During December 2003, the state's governor signed legislation which included the
REIT tax provisions. Based upon this, Company's tax counsel expected that the
outstanding litigation should now be able to be resolved. Effective January 1,
2003, the Company reorganized the ownership of Home Properties Trust, which
should subject the Company to a much lower level of tax going forward. In
September 2004, the Company settled the 1998 year under audit for a total of
$39,000, including interest. During 2005, the Company filed a protest with the
Pennsylvania State Commonwealth Court concerning the 1999 tax year. The Company
has had settlement discussions for the years 1999-2001 with the State and, based
on these discussions, believes that the likelihood of settling all three years
is imminent. The Company has accrued $160,000 as of December 31, 2005.
During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861,000. This was included in the first quarter 2004 results and allocated
$448,000 to expense and $413,000 capitalized to real estate assets for
improvements.
As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance and
recorded at June 30, 2004 a liability of $1,712,000. This was included in the
second quarter results and allocated $761,000 to expense and $951,000
capitalized to real estate assets for improvements. The liability recorded
relates to the period beginning on the later of: (i) the date the Company first
purchased property in the applicable state; or (ii) January 1, 1997 and ending
on June 30, 2004. In addition, the Company increased the liability for sales tax
exposure by $68,000 for the six-month period ended December 31, 2004. The
Company filed Voluntary Disclosure Agreements ("VDAs") with the four states
where it had significant financial exposure. During the first six months of
2005, the Company signed VDAs with these states limiting the VDA filing period
back to January 1, 2001, and the Company had satisfied all financial obligations
under the VDAs. For the three- and six-month periods ended June 30, 2005, the
Company had recorded adjustments to the liability for both the effects of
signing the VDAs as well as for the results of the Company's additional testing
for the first six months. The net impact of these adjustments resulted in a
decrease in real estate assets of $175,000, interest expense of $115,000 and
operating expenses of $108,000 for a net decrease to the accrued liability of
$398,000. During the third quarter of 2005, the Company finalized negotiations
with New York State settling a sales tax audit covering the period June 1, 2002
through November 30, 2004. The settlement was not materially different from what
had been accrued. The result of the payments on the VDAs and this New York State
audit is that the sales tax accrual which had been $1,712,000 (as referenced
above) has been reduced to $0 at December 31, 2005.
In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Articles
Supplementary to the Company's Articles of Incorporation, of 1.75 to 1.0. The
fixed charge coverage ratio and the components thereof do not represent a
measure of cash generated from operating activities in accordance with generally
accepted accounting principles and are not necessarily indicative of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's performance
or of cash flow as a measure of liquidity. The Company has been in compliance
with the covenant since the Series F Preferred Stock was issued. If the Company
fails to be in compliance with this covenant for six or more consecutive fiscal
quarters, the holders of the Series F Preferred Stock would be entitled to elect
two directors to the board of directors of the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
The Company's primary market risk exposure is interest rate risk. At December
31, 2005 and December 31, 2004, approximately 91% and 89%, respectively, of the
Company's debt bore interest at fixed rates with a weighted average maturity of
approximately 7 and 8 years and a weighted average interest rate of
approximately 5.95% and 6.23%, respectively, including the $29 million and $34
million of debt, respectively which has been swapped to a fixed rate. The
remainder of the Company's debt bears interest at variable rates with a weighted
average maturity of approximately 12 and 8 years, respectively, and a weighted
average interest rate of 4.54% and 2.98%, respectively, at December 31, 2005 and
December 31, 2004. The Company does not intend to utilize a significant amount
of permanent variable rate debt to acquire properties in the future. On
occasion, the Company may use its line of credit in connection with a property
acquisition with the intention to refinance at a later date. The Company
believes, however, that in no event would increases in interest expense as a
result of inflation significantly impact the Company's distributable cash flow.
At December 31, 2005 and December 31, 2004, the interest rate risk on $29
million and $34 million, respectively of such variable rate debt has been
mitigated through the use of interest rate swap agreements (the "Swaps") with
major financial institutions. The Company is exposed to credit risk in the event
of non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.
At December 31, 2005 and December 31, 2004, the fair value of the Company's
fixed rate debt, including the $29 million at December 31, 2005 and $34 million
at December 31, 2004 which was swapped to a fixed rate, amounted to a liability
of $1.9 billion and $1.7 billion, respectively, compared to its carrying amount
of $1.84 billion and $1.64 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at December 31, 2005 would
have changed the fair value of the Company's fixed rate debt to a liability of
$1.81 billion.
The Company intends to continuously monitor and actively manage interest costs
on its variable rate debt portfolio and may enter into swap positions based upon
market fluctuations. In addition, the Company believes that it has the ability
to obtain funds through additional equity offerings or the issuance of UPREIT
Units. Accordingly, the cost of obtaining such interest rate protection
agreements in relation to the Company's access to capital markets will continue
to be evaluated. The Company has not, and does not plan to, enter into any
derivative financial instruments for trading or speculative purposes. As of
December 31, 2005, the Company had no other material exposure to market risk.
Additional disclosure about market risk is incorporated herein by reference to
the discussion under the heading "Results of Operations" in Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements and supplementary data are listed under Item 15(a) and
filed as part of this report on the pages indicated.
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
--------------------------------
Evaluation of Disclosure Controls and Procedures.
-------------------------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted by the Company under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the officers who certify the Company's
financial reports and to the other members of senior management and the Board of
Directors.
The principal executive officer and principal financial officer evaluated, as of
December 31, 2005, the effectiveness of the disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15-d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and have determined that such
disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
----------------------------------------------------------------
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. The Company's internal control over financial reporting is a
process designed under the supervision of the Company's principal executive
officer and principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with the United States of America generally accepted accounting principles.
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company conducted an evaluation of the effectiveness of its internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on its evaluation under that framework, management concluded
that the Company's internal control over financial reporting was effective as of
December 31, 2005. In addition, management has not identified any material
weaknesses in the Company's internal controls.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report appearing herein, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005.
Changes in Internal Controls Over Financial Reporting
-----------------------------------------------------
There were no changes in the internal controls over financial reporting that
occurred during the fourth quarter of the year ended December 31, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
--------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------
Directors
The Board of Directors (the "Board") currently consists of twelve members. The
terms for all of the directors of Home Properties expire at the 2006
Shareholders' Meeting.
The information sets forth, as of February 21, 2006, for each director of the
Company such director's name, experience during the last five years, other
directorships held, age and the year such director was first elected as director
of the Company.
Year First
Name of Director Age Elected Director
---------------- --- ----------------
William Balderston, III 78 1994
Josh E. Fidler 50 2004
Alan L. Gosule 65 1996
Leonard F. Helbig, III 60 1994
Roger W. Kober 72 1994
Nelson B. Leenhouts 70 1993
Norman Leenhouts 70 1993
Edward J. Pettinella 54 2001
Clifford W. Smith, Jr. 59 1994
Paul L. Smith 70 1994
Thomas S. Summer 52 2004
Amy L. Tait 47 1993
William Balderston, III has been a director of the Company since 1994. From 1991
to the end of 1992, he was an Executive Vice President of The Chase Manhattan
Bank, N.A. From 1986 to 1991, he was President and Chief Executive Officer of
Chase Lincoln First Bank, N.A., which was merged into The Chase Manhattan Bank,
N.A. He is a Senior Trustee of the University of Rochester and a member of the
Board of Governors of the University of Rochester Medical Center. Mr. Balderston
is a graduate of Dartmouth College.
Josh E. Fidler has been a director of the Company since August, 2004. Mr. Fidler
is a Founding Partner of Boulder Ventures, Ltd., a manager of venture capital
funds, which has been in operation since 1995. Since 1985, he has also been a
principal in a diversified real estate development business known as The Macks
Group. In 1999, the Company acquired 3,297 apartment units from affiliates of
The Macks Group. Mr. Fidler was also a principal of the entity which owned a
240-unit apartment community which the Company purchased in 2004. He is a
graduate of Brown University and received a law degree from New York University.
Mr. Fidler is a member of the Maryland Region Advisory Board of SunTrust Bank
and the Board of Trustees of The Park School.
Alan L. Gosule, has been a director of the Company since 1996. Mr. Gosule has
been a partner in the New York Office of the law firm of Clifford Chance US LLP
since August 1991 and prior to that time was a partner in the law firm of Gaston
& Snow. Mr. Gosule is a graduate of Boston University and its Law School and
received an LLM in Taxation from Georgetown University. Mr. Gosule also serves
on the Board of Directors of MFA Mortgage Investments, Inc. He is a member of
the Board of Advisors of Paloma, LLC, which is the general partner of Simpson
Housing Limited Partnership, and is a voting trustee of F.L. Putnam Investment
Management Company.
Leonard F. Helbig, III has been a director of the Company since 1994. Since
September 2002 he has served as a Director of Integra Realty Advisors in
Philadelphia. Between 1980 and 2002 he was employed with Cushman & Wakefield,
Inc. From 1990 until 2002, Mr. Helbig served as President, Financial Services
for Cushman & Wakefield, Inc.. Prior to that and since 1984, Mr. Helbig was the
Executive Managing Director of the Asset Services and Financial Services Groups.
He was a member of that firm's Board of Directors and Executive Committee. Mr.
Helbig is a member of the Urban Land Institute, the Pension Real Estate
Association and the International Council of Shopping Centers. Mr. Helbig is a
graduate of LaSalle University and holds the MAI designation of the American
Institute of Real Estate Appraisers.
Roger W. Kober has been a director of the Company since 1994. He was employed by
Rochester Gas and Electric Corporation from 1965 until his retirement on January
1, 1998. From March 1996 until January 1, 1998, Mr. Kober served as Chairman and
Chief Executive Officer of Rochester Gas and Electric Corporation. He is a
Trustee Emeritas of Rochester Institute of Technology. Mr. Kober is a graduate
of Clarkson College and holds a Masters Degree in Engineering from Rochester
Institute of Technology.
Nelson B. Leenhouts has served as Board Co-Chair since his retirement as
Co-Chief Executive Officer effective January 1, 2004. He had served as Co-Chief
Executive Officer, President and a director of the Company since its inception
in 1993. Since their formation, he has also served as a director of HP
Management and HPRS, for which he had also served in various officer capacities
prior to his retirement. Mr. Leenhouts also currently serves as a Senior Advisor
to the Company pursuant to an Employment Agreement with a term that expires on
December 31, 2006. Nelson Leenhouts was the founder, and a co-owner, together
with Norman Leenhouts, of Home Leasing, and has served as President of Home
Leasing since 1967. He is a member of the Board of Directors of the Genesee
Valley Trust Company. Nelson Leenhouts is a graduate of the University of
Rochester. He is the twin brother of Norman Leenhouts.
Norman P. Leenhouts has served as Board Co-Chair since his retirement as
Co-Chief Executive Officer effective January 1, 2004. He had served as Board
Chair, Co-Chief Executive Officer and a director of the Company since its
inception in 1993. Since their formation, he has also served as a director of HP
Management and HPRS. Mr. Leenhouts also currently serves as a Senior Advisor to
the Company pursuant to an Employment Agreement with a term that expires on
December 31, 2006. Prior to January 1, 2006, Norman Leenhouts was a co-owner,
together with Nelson Leenhouts, of Home Leasing, where he had served as Board
Chair since 1971. He is currently the Chairman of Broadstone Ventures, LLC and
Broadstone Real Estate, LLC, formed to contain the property management business
of Home Leasing. He is a member of the Board of Trustees of the University of
Rochester, Roberts Wesleyan College, The Charles E. Finney School and the Free
Methodist Foundation, where he also serves as Board Chair. He is a graduate of
the University of Rochester and is a certified public accountant. He is the twin
brother of Nelson Leenhouts.
Edward J. Pettinella has served as President and Chief Executive Officer of the
Company since January 1, 2004. He is also a director. He joined the Company in
2001 as an Executive Vice President and director. He is also the President and
Chief Executive Officer of HP Management and HPRS. From 1997 until February
2001, Mr. Pettinella served as President, Charter One Bank (NY Division) and
Executive Vice President of Charter One Financial, Inc. From 1980 through 1997,
Mr. Pettinella served in several managerial capacities for Rochester Community
Savings Bank, Rochester, NY, including the positions of Chief Operating Officer
and Chief Financial Officer. Mr. Pettinella serves on the Board of Directors of
United Way of Greater Rochester, Rochester Business Alliance, The Lifetime
Healthcare Companies, National Multi Housing Counsel, Syracuse University School
of Business and YMCA of Greater Rochester. He is also on the Board of Governors
of National Association of Real Estate Investment Trusts and is a member of
Urban Land Institute. Mr. Pettinella is a graduate of the State University at
Geneseo and holds an MBA Degree in finance from Syracuse University.
Clifford W. Smith, Jr. has been a director of the Company since 1994. Mr. Smith
is the Epstein Professor of Finance of the William E. Simon Graduate School of
Business Administration of the University of Rochester, where he has been on the
faculty since 1974. He has written numerous books and articles on a variety of
financial, capital markets and risk management topics and has held editorial
positions for a variety of journals. Mr. Smith is a graduate of Emory University
and has a PhD from the University of North Carolina at Chapel Hill.
Paul L. Smith has been a director of the Company since 1994. Mr. Smith was a
director, Senior Vice President and the Chief Financial Officer of the Eastman
Kodak Company from 1983 until he retired in 1993. He was a member of the
Financial Accounting Standards Advisory Council. He is currently a director of
Constellation Brands, Inc. He is also a member of the Board of Trustees of the
George Eastman House and Ohio Wesleyan University. Mr. Smith is a graduate of
Ohio Wesleyan University and holds an MBA Degree in finance from
Northwestern University.
Thomas S. Summer has been a director of the Company since August, 2004. Mr.
Summer has been the Executive Vice President and Chief Financial Officer of
Constellation Brands, Inc. since 1997. Prior to that, he held various positions
in financial management with Cardinal Health, Inc., PepsiCo, Inc., and Inland
Steel Industries. He is also a member of the Boards of Greatbatch, Inc. and AIDS
Rochester, Inc. Prior to January, 2006, Mr. Summer was a member of the Board of
the Rochester Philharmonic Orchestra. Mr. Summer is a graduate of Harvard
University and holds an MBA degree in finance and accounting from the University
of Chicago.
Amy L. Tait has served as a director of the Company since its inception in 1993.
Effective February 15, 2001, Mrs. Tait resigned her full-time position as
Executive Vice President of the Company and as a director of HP Management. She
continued as a consultant to the Company pursuant to a consulting agreement that
terminated on February 15, 2002. She is currently the Chief Executive Officer
and a director of Broadstone Ventures, LLC and Broadstone Real Estate, LLC,
where she also serves as Secretary. Mrs. Tait joined Home Leasing in 1983 and
held several positions with the Company, including Senior and Executive Vice
President and Chief Operating Officer. She currently serves on the M & T Bank
Regional Advisory Board and the boards of the United Way of Rochester, Princeton
Club of Rochester, Al Sigl Center, Center for Governmental Research, Allendale
Columbia School, and Monroe County Center for Entrepreneurship. Mrs. Tait is a
graduate of Princeton University and holds an MBA from the William E. Simon
Graduate School of Business Administration of the University of Rochester. She
is the daughter of Norman Leenhouts.
See Item 4A in Part I hereof for information regarding executive officers of the
Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
---------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the New York Stock Exchange. Officers, directors and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the fiscal year ended December 31, 2005, all Section 16(a)
filing requirements applicable to its executive officers, directors and greater
than 10% beneficial owners were satisfied.
Audit Committee, Audit Committee Independence and Financial Expert
------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 4, 2006 under "Audit Committee."
The proxy statement will be filed within 120 days after the end of the Company's
fiscal year.
Stockholder Nominations to Board
--------------------------------
The information required by this item is incorporated herein by reference to the
Company's Proxy Statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 4, 2006 under "Board of
Directors." The proxy statement will be filed within 120 days after the end of
the Company's fiscal year.
Code of Ethics
--------------
The Company has adopted a Code of Business Conduct and Ethics and a Code of
Ethics for Senior Financial Officers, both which apply to the Company's Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer
and Controller. Both codes are available on the Company's website at
www.homeproperties.com under the heading "Investors/Corporate
Governance/Highlights." In addition, the Company will provide a copy of the
codes to anyone without charge, upon request addressed to the Corporate
Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York
14604.
The Company intends to disclose any amendment to its Code of Business Conduct
and Ethics and its Code of Ethics for Senior Financial Officers on its Web site.
In addition, in the event that the Company waives compliance by any of its
directors and executive officers with the Code of Business Conduct and Ethics or
compliance by any of the individuals subject to the Code of Ethics for Senior
Financial Officers with that Code of Ethics, the Company will post on its Web
site within four business days the nature of the waiver in satisfaction of its
disclosure requirement under Item 5.05 of Form 8-K.
Corporate Guidelines and Committee Charters
-------------------------------------------
The Board of Directors has adopted corporate Governance Guidelines and revised
charters in compliance with applicable law and NYSE listing standards for the
Company's Audit, Compensation, Corporate Governance/Nominating and Real Estate
Investment Committees. The Guidelines and charters are available on the
Company's Web site, www.homeproperties.com, and by request addressed to the
Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New
York 14604.
Item 11. Executive Compensation
-------------------------------
The information required by this Item is incorporated herein by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
the Stockholders of the Company to be held on May 4, 2006 under "Executive
Compensation." The proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
Item 12. Securities Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required by this Item, including Equity Compensation Plan
Information, is incorporated herein by reference to the Company's proxy
statement to be issued in connection with the Annual Meeting of Stockholders of
the Company to be held on May 4, 2006 under "Security Ownership of Certain
Beneficial Owners and Management" and under "Equity Compensation Plan
Information." The proxy statement will be filed within 120 days after the end of
the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
The information required by this Item is incorporated herein by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 4, 2006 under "Certain
Relationships and Transactions." The proxy statement will be filed within 120
days after the end of the Company's fiscal year.
Item 14. Principal Accountant Fees and Services
-----------------------------------------------
The information required by this Item is incorporated herein by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 4, 2006 under "Report of the Audit
Committee" and "Principal Accounting Fees and Services." The proxy statement
will be filed within 120 days after the end of the Company's fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules
------------------------------------------------
(a) 1 and 2. Financial Statements and Schedule
The financial statements and schedule listed below are filed as part of this
annual report on the pages indicated.
HOME PROPERTIES, INC.
Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets
as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
Schedule II:
Valuation and Qualifying Accounts F-41
Schedule III:
Real Estate and Accumulated Depreciation F-42
3. Exhibits
Exhibit
Number Exhibit
2.1 Agreement among Home Properties of New York, Inc. and Philip J. Solondz,
Daniel Solondz and Julia Weinstein Relating to Royal Gardens I, together
with Amendment No. 1
2.2 Agreement among Home Properties of New York, Inc and Philip Solondz and
Daniel Solondz relating to Royal Gardens II, together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Home Properties of
New York between Home Properties of New York, L.P. and Berger/Lewiston
Associates Limited Partnership; Stephenson-Madison Heights Company Limited
Partnership; Kingsley- Moravian Company Limited Partnership; Woodland
Garden Apartments Limited Partnership; B&L Realty Investments Limited
Partnership; Southpointe Square Apartments Limited Partnership; Greentrees
Apartments Limited Partnership; Big Beaver-Rochester Properties Limited
Partnership; Century Realty Investment Company Limited Partnership
2.24 Contribution Agreement dated March 2, 1998 among Home Properties of New
York, L.P., Braddock Lee Limited Partnership and Tower Construction Group,
LLC
2.25 Contribution Agreement dated March 2, 1998 among Home Properties of New
York, L.P., Park Shirlington Limited Partnership and Tower Construction
Group, LLC
2.27 Form of Contribution Agreement among Home Properties of New York, L.P. and
Strawberry Hill Apartment Company LLLP, Country Village Limited
Partnership, Morningside Six, LLLP, Morningside North Limited Partnership
and Morningside Heights Apartment Company Limited Partnership with schedule
setting forth material details in which documents differ from form
2.29 Form of Contribution Agreement dated June 7, 1999, relating to the CRC
Portfolio with schedule setting forth material details in which documents
differ from form
2.30 Form of Contribution Agreement relating to the Mid-Atlantic Portfolio with
schedule setting forth material details in which documents differ from form
2.31 Contribution Agreement among Home Properties of New York, L.P., Leonard
Klorfine, Ridley Brook Associates and the Greenacres Associates
2.33 Contribution Agreement among Home Properties of New York, L.P.,
Gateside-Bryn Mawr Company, L.P., Willgold Company, Gateside-Trexler
Company, Gateside-Five Points Company, Stafford Arms, Gateside-Queensgate
Company, Gateside Malvern Company, King Road Associates and Cottonwood
Associates
2.34 Contribution Agreement between Old Friends Limited Partnership and Home
Properties of New York, L.P. and Home Properties of New York, Inc., along
with Amendments Number 1 and 2 thereto
2.35 Contribution Agreement between Deerfield Woods Venture Limited Partnership
and Home Properties of New York, L.P.
2.36 Contribution Agreement between Macomb Apartments Limited Partnership and
Home Properties of New York, L.P.
2.37 Contribution Agreement between Home Properties of New York, L.P. and
Elmwood Venture Limited Partnership
2.38 Sale Purchase and Escrow Agreement between Bank of America as Trustee and
Home Properties of New York, L.P.
2.39 Contribution Agreement between Home Properties of New York, L.P., Home
Properties of New York, Inc. and S&S Realty, a New York General Partnership
(South Bay)
2.40 Contribution Agreement between Hampton Glen Apartments Limited Partnership
and Home Properties of New York, L.P.
2.41 Contribution Agreement between Home Properties of New York, L.P. and Axtell
Road Limited Partnership
2.42 Contribution Agreement between Elk Grove Terrace II and III, L.P., Elk
Grove Terrace, L.P. and Home Properties of New York, L.P.
3.1 Articles of Amendment and Restatement of Articles of Incorporation of Home
Properties of New York, Inc.
3.2 Articles of Amendment of the Articles of Incorporation of Home Properties
of New York, Inc.
3.3 Articles of Amendment of the Articles of Incorporation of Home Properties
of New York, Inc.
3.4 Amended and Restated Articles Supplementary of Series A Senior Convertible
Preferred Stock of Home Properties of New York, Inc.
3.5 Series B Convertible Cumulative Preferred Stock Articles Supplementary to
the Amended and Restated Articles of Incorporation of Home Properties of
New York, Inc.
3.6 Series C Convertible Cumulative Preferred Stock Articles Supplementary to
the Amended and Restated Articles of Incorporation of Home Properties of
New York, Inc.
3.7 Series D Convertible Cumulative Preferred Stock Articles Supplementary to
the Amended and Restated Articles of Incorporation of Home Properties of
New York, Inc.
3.8 Series E Convertible Cumulative Preferred Stock Articles Supplementary to
the Amended and Restated Articles of Incorporation of Home Properties of
New York, Inc.
3.9 Amended and Restated By-Laws of Home Properties of New York, Inc. (Revised
12/30/96)
3.10 Series F Cumulative Redeemable Preferred Stock Articles Supplementary to
the Amended and Restated Articles of Incorporation of Home Properties of
New York, Inc.
3.11 Articles of Amendment to the Articles of Incorporation of Home Properties
of New York, Inc.
3.12 Amendment Number One to Home Properties of New York, Inc. Amended and
Restated Bylaws
4.1 Form of certificate representing Shares of Common Stock
4.2 Agreement of Home Properties of New York, Inc. to file instruments defining
the rights of holders of long-term debt of it or its subsidiaries with the
Commission upon request
4.7 Spreader, Consolidation, Modification and Extension Agreement between Home
Properties of New York, L.P. and John Hancock Mutual Life Insurance
Company, dated as of October 26, 1995, relating to indebtedness in the
principal amount of $20,500,000
4.8 Amended and Restated Stock Benefit Plan of Home Properties of New York,
Inc.
4.9 Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock
Purchase and Employee Stock Purchase Plan
4.10 Amendment No. One to Amended and Restated Dividend Reinvestment, Stock
Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.11 Amendment No. Two to Amended and Restated Dividend Reinvestment, Stock
Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.12 Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock
Purchase and Employee Stock Purchase Plan
4.13 Amendment No. Three to Amended and Restated Dividend Reinvestment, Stock
Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.14 Directors' Stock Grant Plan
4.16 Home Properties of New York, Inc., Home Properties of New York, L.P.
Executive Retention Plan
4.17 Home Properties of New York, Inc. Deferred Bonus Plan
4.18 Fourth Amended and Restated Dividend Reinvestment, Stock Purchase, Resident
Stock Purchase and Employee Stock Purchase Plan
4.19 Directors Deferred Compensation Plan
4.23 Home Properties of New York, Inc. Amendment Number One to the Amended and
Restated Stock Benefit Plan
4.24 Fifth Amendment to Amended and Restated Dividend Reinvestment, Stock
Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.25 Sixth Amendment to Amended and Restated Dividend Reinvestment and Direct
Stock Purchase Plan
4.26 Home Properties of New York, Inc. Amendment Number Two to the Amended and
Restated Stock Benefit Plan
4.27 Amendment No. One to Home Properties of New York, Inc. Deferred Bonus Plan
4.28 Amended and Restated Director Deferred Compensation Plan
4.29 Amendment No. Two to Deferred Bonus Plan
4.30 Amendment Number One to Sixth Amended and Restated Dividend Reinvestment
and Direct Stock Purchase Plan
4.31 Amended and Restated 2003 Stock Benefit Plan
4.32 Second Amended and Restated Director Deferral Compensation Plan
10.1 Second Amended and Restated Agreement Limited Partnership of Home
Properties of New York, L.P.
10.2 Amendments No. One through Eight to the Second Amended and Restated
Agreement of Limited Partnership of Home Properties of New York, L.P.
10.3 Articles of Incorporation of Home Properties Management, Inc.
10.4 By-Laws of Home Properties Management, Inc.
10.5 Articles of Incorporation of Conifer Realty Corporation
10.6 Articles of Amendment to the Articles of Incorporation of Conifer Realty
Corporation Changing the name to Home Properties Resident Services, Inc.
10.7 By-Laws of Conifer Realty Corporation (now, Home Properties Resident
Services, Inc.)
10.8 Home Properties Trust Declaration of Trust, dated September 19, 1997
10.13 Indemnification Agreement between Home Properties of New York, Inc. and
certain officers and directors
10.15 Indemnification Agreement between Home Properties of New York, Inc. and
Alan L. Gosule
10.17 Agreement of Operating Sublease, dated October 1, 1986, among KAM, Inc.,
Morris Massry and Raintree Island Associates, as amended by Letter
Agreement Supplementing Operating Sublease dated October 1, 1986
10.26 Amendment No. Nine to the Second Amended and Restated Agreement of Limited
Partnership of the Operating Partnership
10.27 Master Credit Facility Agreement by and among Home Properties of New York,
Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home
Properties of New York, L.P. and P-K Partnership doing business as Patricia
Court and Karen Court and WMF Washington Mortgage Corp., dated as of August
28, 1998
10.28 First Amendment to Master Credit Facility Agreement, dated as of December
11, 1998 among Home Properties of New York, Inc., Home Properties of New
York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P.
and P-K Partnership doing business as Patricia Court and Karen Court and
WMF Washington Mortgage Corp. and Fannie Mae
10.29 Second Amendment to Master Credit Facility Agreement, dated as of August
30, 1999 among Home Properties of New York, Inc., Home Properties of New
York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P.
and P-K Partnership doing business as Patricia Court and Karen Court and
WMF Washington Mortgage Corp. and Fannie Mae
10.30 Amendments Nos. Ten through Seventeen to the Second Amended and Restated
Limited Partnership Agreement
10.31 Amendments Nos. Eighteen through Twenty- Five to the Second Amended and
Restated Limited Partnership Agreement
10.32 Credit Agreement, dated 8/23/99 between Home Properties of New York, L.P.,
certain lenders, and Manufacturers and Traders Trust Company as
Administrative Agent
10.33 Amendment No. Twenty-Seven to the Second Amended and Restated Limited
Partnership Agreement
10.34 Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to the Second
Amended and Restated Limited Partnership Agreement
10.37 2000 Stock Benefit Plan
10.39 Purchase Agreement between Home Properties of New York, Inc. and The
Equitable Life Assurance Society of the United States
10.41 Home Properties of New York, L.P. Amendment Number One to Executive
Retention Plan
10.42 Amendments No. Thirty-One and Thirty-Two to the Second Amended and
Restated Limited Partnership Agreement
10.49 Amendment No. Thirty Three to the Second Amended and Restated Limited
Partnership Agreement
10.50 Amendment No. Thirty Five to the Second Amended and Restated Limited
Partnership Agreement
10.51 Amendment No. Forty Two to the Second Amended and Restated Limited
Partnership Agreement
10.52 Amendments Nos. Thirty Four, Thirty Six through Forty One, Forty Three and
Forty Four to the Second Amended and Restated Limited Partnership Agreement
10.57 Amendment Nos. Forty-Five through Fifty-One to the Second Amendment and
Restated Limited Partnership Agreement
10.58 Home Properties of New York, Inc. Amendment No. One to 2000 Stock Benefit
Plan
10.59 Home Properties of New York, Inc. Amendment No. Two to 2000 Stock Benefit
Plan
10.60 Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended and Restated
Limited Partnership Agreement
10.61 Amendment Nos. Fifty-Six to Fifty-Eight to the Second Amended and Restated
Limited Partnership Agreement
10.62 Amendment No. Two to Credit Agreement
10.63 Purchase and Sale Agreement, dated as of January 1, 2004 among Home
Properties of New York, L.P., Home Properties Management, Inc. and Home
Leasing, LLC, dated January 1, 2004
10.64 Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Amended and
Restated Limited Partnership Agreement
10.65 Home Properties of New York, Inc. Amendment No. Three to 2000 Stock
Benefit Plan
10.66 Employment Agreement, dated as of October 28, 2003 between Home
Properties, L.P., Home Properties, Inc., and Nelson B. Leenhouts
10.67 Employment Agreement, dated as of October 28, 2003 between Home
Properties, L.P., Home Properties, Inc. and Norman B. Leenhouts
10.68 Home Properties of New York, Inc. 2003 Stock Benefit Plan
10.69 Amendment Number Two to Home Properties of New York, Inc. and Home
Properties of New York, L.P. Executive Retention Plan
10.70 Employment Agreement, dated as of May 17, 2004, between Home Properties,
L.P., Home Properties, Inc. and Edward J. Pettinella
10.71 Amendment Nos. Sixty-Eight through Seventy-Three to the Second Amended and
Restated Limited Partnership Agreement
10.72 Summary of Non-Employee Director Compensation Effective January 1, 2006
10.73 Summary of Named Executive Compensation for 2006
10.74 Amendment No. Three to Credit Agreement, dated April 1, 2004 between Home
Properties, L.P., certain lenders, and Manufacturers and Traders Trust
Company as Administrative Agent
10.75 Amended and Restated Incentive Compensation Plan
10.76 Libor Grid Note, dated November 23, 2004 from Home Properties, L.P. to
Manufacturers and Traders Trust Company
10.77 Mutual Release, dated January 24, 2005, given by Home Properties, L.P. and
Home Properties, Inc. and Boston Capital Tax Credit Fund XIV, a Limited
Partnership, Boston Capital Tax Credit Fund XV, a Limited Partnership and
BCCC, Inc. relating to certain obligations pertaining to Green Meadows and
related Letter Agreement.
10.78 Amendment No. Four to Credit Agreement, dated September 8, 2005 between
Home Properties, L.P., certain Lenders, and Manufacturers and Traders Trust
Company, as Administrative Agent
10.79 Agreement, dated September 30, 2005, between General Electric Credit
Equities, Inc. and H.P. Knolls I Associates, L.P.
10.80 Agreement, dated September 30, 2005, between General Electric Credit
Equities, Inc. and H.P. Knolls II Associates, L.P.
10.81 Amendments Nos. Seventy-Four to through Seventy-Nine to the Second Amended
and Restated Limited Partnership
11 Computation of Per Share Earnings Schedule
14.1 Home Properties, Inc. Code of Ethics for Senior Finance Officers
14.2 Home Properties, Inc. Code of Business Conduct and Ethics
21 List of Subsidiaries of Home Properties, Inc.
23 Consent of PricewaterhouseCoopers LLP
31.1* Section 302 Certification of Chief Executive Officer (furnished)
31.2* Section 302 Certification of Chief Financial Officer(furnished)
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99 Additional Exhibits - Debt Summary Schedule
*These exhibits are not incorporated by reference in any registration statement
or report which incorporates this Annual Report on Form 10-K for the year ended
December 31, 2005.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOME PROPERTIES, INC.
/s/ Edward J. Pettinella
------------------------
Edward J. Pettinella
Director, President and Chief Executive Officer
Date: March 13, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, the report
has been signed by the following persons on behalf of Home Properties, Inc. and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Edward J. Pettinella Director, President and Chief Executive Officer March 13, 2006
--------------------
Edward J. Pettinella
/s/ David P. Gardner Executive Vice President, Chief Financial Officer March 13, 2006
-------------------- (Principal Financial Officer)
David P. Gardner
/s/ Robert J. Luken Senior Vice President, Chief Accounting Officer March 13, 2006
-------------------- and Treasurer (Principal Accounting Officer)
Robert J. Luken
/s/ Kenneth O. Hall Vice President and Controller March 13, 2006
--------------------
Kenneth O. Hall
/s/ Norman P. Leenhouts Director, Co-Chairman of the Board of Directors March 13, 2006
--------------------
Norman P. Leenhouts
/s/ Nelson B. Leenhouts Director, Co-Chairman of the Board of Directors March 13, 2006
--------------------
Nelson B. Leenhouts
/s/ William Balderston, III Director March 13, 2006
--------------------
William Balderston, III
/s/ Josh E. Fidler Director March 13, 2006
--------------------
Josh E. Fidler
/s/ Alan L. Gosule Director March 13, 2006
--------------------
Alan L. Gosule
/s/ Leonard F. Helbig, III Director March 13, 2006
--------------------
Leonard F. Helbig, III
/s/ Roger W. Kober Director March 13, 2006
--------------------
Roger W. Kober
/s/ Clifford W. Smith, Jr. Director March 13, 2006
--------------------
Clifford W. Smith, Jr.
/s/ Paul L. Smith Director March 13, 2006
--------------------
Paul L. Smith
/s/ Thomas S. Summer Director March 13, 2006
--------------------
Thomas S. Summer
/s/ Amy L. Tait Director March 13, 2006
--------------------
Amy L. Tait
HOME PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets
as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
Schedule II:
Valuation and Qualifying Accounts F-41
Schedule III:
Real Estate and Accumulated Depreciation F-42
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Home Properties, Inc.:
We have completed integrated audits of Home Properties, Inc.'s 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedules
-------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Home Properties, Inc. and its subsidiaries at December 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under Item 15(a)(2) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
-----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control over Financial Reporting appearing under Item 9(a), that the
Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2006
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 and 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2005 2004
---- ----
ASSETS
Real estate:
Land $ 402,299 $ 402,620
Construction in progress 4,471 1,627
Buildings, improvements and equipment 2,704,372 2,640,943
Real estate held for sale or disposal, net 219,776 78,711
--------- ---------
3,330,918 3,123,901
Less: accumulated depreciation (446,367) (405,919)
--------- ---------
Real estate, net 2,884,551 2,717,982
Cash and cash equivalents 5,391 7,925
Cash in escrows 36,760 39,528
Accounts receivable 7,386 6,198
Prepaid expenses 16,141 18,057
Deferred charges 11,156 9,918
Other assets 12,536 8,323
Other assets held for sale 3,949 8,865
--------- ---------
Total assets $2,977,870 $2,816,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,768,483 $1,567,085
Line of credit 82,000 58,000
Accounts payable 19,458 24,057
Accrued interest payable 8,274 7,539
Accrued expenses and other liabilities 22,565 26,194
Security deposits 21,742 22,118
Liabilities held for sale 75,267 80,606
--------- ---------
Total liabilities 1,997,789 1,785,599
--------- ---------
Commitments and contingencies
Minority interest 323,269 310,775
--------- ---------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares issued and
outstanding at December 31, 2005 and 2004, respectively 60,000 60,000
Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares authorized;
250,000 shares issued and outstanding at December 31, 2004 - 25,000
Common stock, $.01 par value; 80,000,000 shares authorized; 31,184,256 and 32,625,413
shares issued and outstanding at December 31, 2005 and 2004, respectively 312 326
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or
outstanding - -
Additional paid-in capital 773,396 807,212
Accumulated other comprehensive income (loss) 206 (362)
Distributions in excess of accumulated earnings (177,102) (171,754)
--------- ---------
Total stockholders' equity 656,812 720,422
--------- ---------
Total liabilities and stockholders' equity $2,977,870 $2,816,796
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2005 2004 2003
---- ---- ----
Revenues:
Rental income $417,607 $388,084 $348,895
Property other income 23,590 18,722 15,994
Interest income 581 481 516
Other income 2,023 2,782 4,426
------- ------- -------
Total Revenues 443,801 410,069 369,831
------- ------- -------
Expenses:
Operating and maintenance 198,974 181,206 158,740
General and administrative 19,652 23,978 22,607
Interest 97,898 83,078 75,926
Depreciation and amortization 90,232 79,683 66,186
Impairment of assets held as General Partner 400 1,116 2,518
------- ------- -------
Total Expenses 407,156 369,061 325,977
------- ------- -------
Income from operations 36,645 41,008 43,854
Equity in earnings (losses) of unconsolidated affiliates - (538) (1,892)
------- ------- -------
Income before minority interest, discontinued operations and extraordinary item 36,645 40,470 41,962
Minority interest in limited partnership - 441 -
Minority interest in operating partnerships (10,015) (10,702) (10,867)
------- ------- -------
Income from continuing operations 26,630 30,209 31,095
------- ------- -------
Discontinued operations
Income from operations, net of $442, $2,856 and $4,485, in 2005, 2004 and
2003 allocated to minority interest, respectively 907 5,784 8,113
Gain on disposition of property, net of $26,733, $5,382 and $1,359 in 2005,
2004 and 2003 allocated to minority interest, respectively 53,975 11,417 2,599
------- ------- -------
Discontinued operations 54,882 17,201 10,712
------- ------- -------
Income before loss on sale of property and business and cumulative effect of
change in accounting principle 81,512 47,410 41,807
Loss on sale of property and business, net of $33 and $4 in 2004 and 2003
allocated to minority interest, respectively - (67) (9)
------- ------- -------
Income before cumulative effect of change in accounting principle 81,512 47,343 41,798
Cumulative effect of change in accounting principle net of $159 in 2004
allocated to minority interest - (321) -
------- ------- -------
Net income 81,512 47,022 41,798
Preferred dividends (6,279) (7,593) (11,340)
------- ------- -------
Net income available to common shareholders $75,233 $39,429 $30,458
======= ======= =======
Basic earnings per share data:
Income from continuing operations $0.63 $0.69 $0.67
Discontinued operations 1.72 0.52 0.37
Cumulative effect of change in accounting principle - (0.01) -
------- ------- -------
Net income available to common shareholders $2.35 $1.20 $1.04
======= ======= =======
Diluted earnings per share data:
Income from continuing operations $0.63 $0.67 $0.67
Discontinued operations 1.70 0.52 0.36
Cumulative effect of change in accounting principle - (0.01) -
------- ------- -------
Net income available to common shareholders $2.33 $1.18 $1.03
======= ======= =======
Weighted average number of shares outstanding:
Basic 31,962,082 32,911,945 29,208,242
========== ========== ==========
Diluted 32,328,105 33,314,038 29,575,660
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Officer/
Preferred Distributions Accumulated Director
Stock at Additionalin Excess of Other Notes for
Liquidation Common Stock Paid-In Accumulated Comprehensive Stock
Preference Shares Amount Capital Earnings Income Purchase
---------- ------ ------ ------- -------- ------ --------
Balance, January 1, 2003 $167,680 27,027,003 $270 $649,489 $(89,452) $(972) $(773)
Issuance of common stock, net 1,330,733 14 44,608
Conversion of Series C preferred
stock for common stock (59,500) 1,983,470 20 59,480
Conversion of Series E preferred
stock for common stock (23,180) 749,367 7 23,173
Exercise of Series C Warrants 231,560 2 9,001
Exercise of Series E Warrants 285,000 3 6,927
Payments on notes for stock purchase 425
Interest receivable on notes for
stock purchase 33
Net income 41,798
Change in fair value of hedge
instruments, net of minority
interest 430
Conversion of UPREIT Units for stock 359,107 4 13,038
Adjustment of minority interest (20,006)
Preferred dividends (11,340)
Dividends paid ($2.45 per share) (69,916)
------ ---------- --- ------- -------- ---- ----
Balance, December 31, 2003 85,000 31,966,240 320 785,710 (128,910) (542) (315)
Issuance of common stock, net 1,251,949 12 43,086
Repurchase of common stock (1,280,196) (13) (53,783)
Payments on notes for stock purchase 307
Interest receivable on notes for
stock purchase 8
Net income 47,022
Change in fair value of hedge
instruments, net of minority
interest 180
Conversion of UPREIT Units for stock 687,420 7 26,569
Adjustment of minority interest 5,630
Preferred dividends (7,593)
Dividends paid ($2.49 per share) (82,273)
------ ---------- --- ------- -------- ---- ----
Balance, December 31, 2004 85,000 32,625,413 326 807,212 (171,754) (362) -
Issuance of common stock, net 358,737 4 12,845
Repurchase of common stock (2,850,882) (28)(114,737)
Conversion of Series D preferred
stock for common stock (25,000) 833,333 8 24,992
Net income 81,512
Change in fair value of hedge
instruments, net of minority
interest 568
Conversion of UPREIT Units for stock 217,655 2 9,228
Adjustment of minority interest 33,856
Preferred dividends (6,279)
Dividends paid ($2.53 per share) (80,581)
------ ---------- --- ------- -------- ---- ----
Balance, December 31, 2005 $60,000 31,184,256 $312 $773,396 $(177,102) $206 $ -
======= ========== ==== ======== ========= ==== =====
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)
2005 2004 2003
---- ---- ----
Net income $ 81,512 $ 47,022 $ 41,798
Other comprehensive income:
Change in fair value of hedged instruments
568 180 430
--------- --------- ---------
Net comprehensive income $ 82,080 $ 47,202 $ 42,228
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income $ 81,512 $ 47,022 $ 41,798
-------- -------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in (earnings) losses of unconsolidated affiliates - 538 1,892
Income allocated to minority interest 37,190 18,747 16,706
Depreciation and amortization 100,584 98,051 80,915
Impairment of assets held as General Partner 400 1,116 2,518
Impairment of real property 7,325 1,100 423
Gain on disposition of property and business (81,679) (26,424) (3,945)
Issuance of restricted stock, compensation cost of stock options
and deferred compensation 2,662 2,496 6,586
Changes in assets and liabilities:
Other assets (8,423) (1,431) 3,644
Accounts payable and accrued liabilities (6,624) 20,476 156
-------- -------- --------
Total adjustments 51,435 114,669 108,895
-------- -------- --------
Net cash provided by operating activities 132,947 161,691 150,693
-------- -------- --------
Cash flows from investing activities:
Purchase of properties and other assets, net of mortgage notes
assumed and UPREIT Units issued (219,852) (153,535) (66,760)
Additions to properties (98,917) (102,700) (106,346)
Advances to affiliates - (820) (3,410)
Payments on advances to affiliates - 149 6,990
Proceeds from sale of affordable properties, net - 2,412 3,835
Proceeds from sale of properties and business, net 139,073 89,028 53,666
-------- -------- --------
Net cash used in investing activities (179,696) (165,466) (112,025)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 10,185 40,599 53,202
Repurchase of common stock (114,765) (53,796) -
Proceeds from mortgage notes payable 370,752 191,772 130,259
Payments of mortgage notes payable (119,939) (97,734) (75,352)
Proceeds from line of credit 376,370 291,600 186,000
Payments on line of credit (352,370) (233,600) (221,000)
Payments of deferred loan costs (2,991) (2,672) (1,498)
Withdrawals from (additions to) cash escrows, net 3,112 (1,953) 6,075
Repayment of officer and director loans - 315 458
Dividends and distributions paid (126,139) (128,784) (120,491)
-------- -------- --------
Net cash provided by (used in) financing activities 44,215 5,747 (42,347)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,534) 1,972 (3,679)
Cash and cash equivalents
Beginning of year 7,925 5,103 8,782
Cash assumed in connection with FIN 46 consolidation - 850 -
-------- -------- --------
End of year $ 5,391 $ 7,925 $ 5,103
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION
Organization
Home Properties, Inc. (the "Company ") was formed in November 1993, as a
Maryland corporation and is engaged primarily in the ownership, management,
acquisition, and rehabilitation of residential apartment communities in the
Northeastern, Mid-Atlantic, Midwestern and Southeast Florida regions of the
United States. The Company conducts its business through Home Properties, L.P.
(the "Operating Partnership"), a New York limited partnership. As of December
31, 2005, the Company operated 158 apartment communities with 47,001 apartments.
Of this total, the Company owned 153 communities, consisting of 43,432
apartments, managed as general partner one partnership that owned 868
apartments, and fee managed four communities, consisting of 2,701 apartments for
third parties.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its 65.2% (67.7% at December 31, 2004) interest in the Operating
Partnership. Such interest has been calculated as the percentage of outstanding
common shares divided by the total outstanding common shares and Operating
Partnership Units ("UPREIT Units") outstanding. The remaining 34.8% (32.3% at
December 31, 2004) is reflected as Minority Interest in these consolidated
financial statements. The Company owns a 1.0% general partner interest in the
Operating Partnership and the remainder indirectly as a limited partner through
its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of the
limited partner, Home Properties Trust. Home Properties Trust was formed in
September 1997, as a Maryland real estate trust and as a qualified REIT
subsidiary ("QRS") and owns the Company's share of the limited partner interests
in the Operating Partnership. For financing purposes, the Company has formed a
limited liability company (the "LLC") and a partnership (the "Financing
Partnership"), which beneficially own certain apartment communities encumbered
by mortgage indebtedness. The LLC is wholly owned by the Operating Partnership.
The Financing Partnership is owned 99.9% by the Operating Partnership and 0.1%
by the QRS.
The accompanying consolidated financial statements include the accounts of Home
Properties Management, Inc. and Home Properties Resident Services, Inc. (the
"Management Companies"). The Management Companies are wholly owned subsidiaries
of the Company. All significant inter-company balances and transactions have
been eliminated in these consolidated financial statements.
Through March 30, 2004, the Company accounted for its investment as managing
general partner ("GP") in unconsolidated affordable housing limited partnerships
("LP") using the equity method of accounting. Effective March 31, 2004, the
Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"). This interpretation addresses consolidation by business
enterprises of variable interest entities in which the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or in which the
equity investors do not have the characteristics of a controlling financial
interest. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The interpretation also
requires disclosures about variable interest entities that the company is not
required to consolidate but in which it has a significant variable interest. As
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION (Continued)
of March 31, 2004, the Company was the general partner in 41 limited
partnerships in Upstate New York, Pennsylvania, Ohio and Maryland. The Company
had made a determination that all 41 limited partnerships were Variable Interest
Entities ("VIEs"). As of March 31, 2004, Home Properties determined that it was
not the primary beneficiary in seven partnerships syndicated under U.S.
Department of Housing and Urban Development subsidy programs none of which
remained as of December 31, 2005. These investments continued to be accounted
for under the equity method until their sale. For those investments, the Company
continued to record its allocable share of the respective partnership's income
or loss based on the terms of the agreement. To the extent it was determined
that the LPs could not absorb their share of the losses, if any, the GP recorded
the LPs share of such losses. The Company had further determined that it was the
primary beneficiary in 34 of the VIEs and, therefore, consolidated these
entities effective March 31, 2004. Beginning with the second quarter of 2004,
the Company consolidated the results of operations of the VIEs. During 2004 and
2005, the Company sold most of these consolidated VIEs with only one partnership
remaining as of December 31, 2005. The results of operations for the VIEs sold
during the years ended 2005 and 2004 are included in discontinued operations.
The one remaining property is classified as held and used as of December 31,
2005 and the results of operations are included in continuing operations.
Reclassifications
Certain reclassifications have been made to the 2004 and 2003 consolidated
financial statements to conform to the 2005 presentation.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate
Real estate is recorded at cost. Costs related to the acquisition, development,
construction and improvement of properties are capitalized. Recurring capital
replacements typically include carpeting and tile, appliances, HVAC equipment,
new roofs, site improvements and various exterior building improvements.
Non-recurring upgrades include, among other items, community centers, new
appliances, new windows, kitchens and bathrooms. Interest costs are capitalized
until construction is substantially complete. There was $1,096, $763, and $920
of interest capitalized in 2005, 2004 and 2003, respectively. Salaries and
related costs capitalized for the years ended December 31, 2005, 2004 and 2003
were $2,135, $3,391 and $6,008, respectively. When retired or otherwise disposed
of, the related asset cost and accumulated depreciation are cleared from the
respective accounts and the net difference, less any amount realized from
disposition, is reflected in income. Ordinary repairs and maintenance that do
not extend the life of the asset are expensed as incurred.
Management reviews its long-lived assets used in operations for impairment when
in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets ("SFAS 144") there is an event or change in circumstances that
indicates an impairment in value. An asset is considered impaired when the
undiscounted future cash flows are not sufficient to recover the asset's
carrying value. If such impairment is present, an impairment loss is recognized
based on the excess of the carrying amount of the asset over its fair value. The
Company records impairment losses and reduces the carrying amounts of assets
held for sale when the carrying amounts exceed the estimated selling proceeds
less the costs to sell.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate (Continued)
The Company accounts for its acquisitions of investments in real estate in
accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires
the fair value of the real estate acquired to be allocated to the acquired
tangible assets, consisting of land, building, and personal property and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, value of in-place leases and value of
resident relationships, based in each case on their fair values. The Company
considers acquisitions of operating real estate assets to be businesses as that
term is contemplated in Emerging Issues Task Force Issue No. 98-3, Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business.
The Company allocates purchase price to the fair value of the tangible assets of
an acquired property (which includes the land, building, and personal property)
determined by valuing the property as if it were vacant. The as-if-vacant value
is allocated to land, buildings, and personal property based on management's
determination of the relative fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are
recorded based on the present value (using an interest rate which reflects the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in place leases and (ii)
management's estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. The capitalized above-market lease values are included in other assets
and are amortized as a reduction of rental income over the remaining
non-cancelable terms of the respective leases. The capitalized below-market
lease values are included in accrual expenses and other liabilities and are
amortized as an increase to rental income over the initial term and any
fixed-rate renewal periods in the respective leases.
Other intangible assets acquired include amounts for in-place lease values that
are based upon the Company's evaluation of the specific characteristics of the
leases. Factors considered in these analyses include an estimate of carrying
costs during hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. The Company also considers
information obtained about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. In estimating carrying costs,
management also includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the expected
lease-up periods depending on the property acquired.
The total amount of other intangible assets acquired is further allocated to
in-place leases, which includes other resident relationship intangible values
based on management's evaluation of the specific characteristics of the
residential leases and the Company's resident retention history.
The value of in-place leases and resident relationships are amortized as a
leasing cost expense over the initial term of the respective leases and any
expected renewal period.
The acquisitions of minority interests for shares of the Company's Common Stock
are recorded under the purchase method with assets acquired reflected at the
fair market value of the Company's Common Stock on the date of acquisition. The
acquisition amounts are allocated to the underlying assets based on their
estimated fair values.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation
Properties are depreciated using a straight-line method over the estimated
useful lives of the assets as follows: buildings, improvements and equipment - 3
to 40 years. Depreciation expense charged to operations was $89,427, $78,563 and
$65,956 from continuing operations and $9,883, $15,546 and $13,230 from
discontinued operations for the years ended December 31, 2005, 2004 and 2003,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments
purchased with original maturities of three months or less. The Company
estimates that the fair value of cash equivalents approximates the carrying
value due to the relatively short maturity of these instruments.
Cash in Escrows
Cash in escrows consists of cash restricted under the terms of various loan
agreements to be used for the payment of property taxes and insurance as well as
required replacement reserves and resident security deposits for residential
properties.
Allowance for Doubtful Receivables
The allowance for doubtful receivables was $513, $567 and $241 as of December
31, 2005, 2004 and 2003, respectively.
Deferred Charges
Costs relating to the financing of properties are deferred and amortized over
the life of the related financing agreement. The straight-line method, which
approximates the effective interest method, is used to amortize all financing
costs; such amortization is reflected as interest expense in the consolidated
statement of operations. The range in the terms of the agreements are from 1-18
years. Accumulated amortization was $5,832, $5,640 and $3,212, as of December
31, 2005, 2004 and 2003, respectively.
Intangible Assets
Intangible assets of $5,080, $3,281 and $3,403 at December 31, 2005, 2004 and
2003, respectively, included in Other Assets, consist primarily of property
management contracts obtained through the acquisition of real estate management
businesses, and intangible assets recorded in connection with SFAS 141.
Intangible assets associated with SFAS 141 are amortized on the straight-line
basis over their estimated useful lives of 7 months to 3 years. Subsequent to
2002, the Company has not amortized intangibles on assets held for sale (see
Notes 3 and 4). Accumulated amortization of intangible assets was $2,797, $2,005
and $893 as of December 31, 2005, 2004 and 2003, respectively. Amortization
expense was $805, $1,120, and $230 for the years ended December 31, 2005, 2004
and 2003, respectively. The carrying value of intangible assets is periodically
reviewed by the Company and impairments are recognized when the expected future
operating cash flows derived from such intangible assets is less than their
carrying value. During 2004 and 2003, in connection with the sale of the assets
associated with the general partnership interests in certain affordable housing
limited partnerships, the Company disposed of $1,771 and $1,284 of intangible
assets, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Operating Partnership leases its residential properties under leases with
terms generally one year or less. Rental income is recognized on a straight-line
basis over the related lease term. As a result, deferred rents receivable are
created when rental income is recognized during the concession period of certain
negotiated leases and amortized over the remaining term of the lease. In
accordance with SFAS 141, the Company recognizes rental revenue of acquired
in-place "above and below" market leases at their fair value over the weighted
average remaining lease term. Property other income, which consists primarily of
income from operation of laundry facilities, utility recovery, administrative
fees, garage and carport rentals and miscellaneous charges to residents, is
recognized when earned (when the services are provided, or when the resident
incurs the charge).
Property management fees are recognized when earned based on a contractual
percentage of net monthly cash collected on rental income.
Other Income
Other income for the years ended December 31, 2005, 2004 and 2003 primarily
reflects management and other real estate service fees.
Gains on Real Estate Sales
Gains on disposition of properties are recognized using the full accrual method
in accordance with the provisions of SFAS No. 66, Accounting for Real Estate
Sales, provided that various criteria relating to the terms of sale and any
subsequent involvement by the Company with the properties sold are met.
Advertising
Advertising expenses are charged to operations during the year in which they
were incurred. Advertising expenses incurred and charged to operations were
approximately $5,603, $5,568, and $5,525 from continuing operations, and $1,005,
$1,263, and $1,703 from discontinued operations, for the years ended December
31, 2005, 2004 and 2003, respectively.
Legal Settlements
In March 2005, the Company settled a legal claim for a total cost of $3,800,
which was expensed in 2004. The legal claim was brought against the Company, the
Operating Partnership, and Home Leasing Corporation. Home Leasing is owned by
Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board of
Directors and Senior Advisors to the Company. The Company was originally formed
to expand and continue Home Leasing's business. The essence of the complaint is
that the entity in which plaintiffs were investors was wrongfully excluded from
the Company's initial organization as a real estate investment trust and the
investors, therefore, did not obtain the benefits from exchanging their equity
interests in that entity for equity in the Operating Partnership. In their
original complaint, plaintiffs sought damages in the amount of $3,000. In the
subsequent discovery process, plaintiffs increased the damages sought to
$10,000. Included in general and administrative expenses for the year ended
December 31, 2004 is the accrual for payment made during 2005 in settlement of
$3,500 and for legal fees of $300 made on behalf of Home Leasing Corporation, as
well as the Company and the Operating Partnership. Payment was made on behalf of
Home Leasing in recognition of the fact that the matters alleged in the action
against Home Leasing related directly and solely to the promotion and creation
of the Company.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Legal Settlements (continued)
In October 2001, the Company resolved a legal claim with an insurance provider
and received a total settlement of $4,900. This refund was allocated to
insurance expense in relation to the Company's estimate of loss spread over the
corresponding policy term between November 1, 2000 to October 31, 2002. An
additional $600 was received in December 2002 relating to the settlement for the
policy period January 1, 2003 through October 31, 2003. This settlement was
amortized to insurance expense on a straight-line basis over that period.
Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31, 1994. As a result, the Company generally is not subject
to Federal or State income taxation at the corporate level to the extent it
distributes annually at least 90% of its REIT taxable income to its shareholders
and satisfies certain other requirements. For the years ended December 31, 2005,
2004 and 2003, the Company distributed in excess of 100% of its taxable income;
accordingly, no provision has been made for federal income taxes in the
accompanying consolidated financial statements. Stockholders of the Company are
taxed on dividends and must report distributions from the Company as either
ordinary income, capital gains, or as return of capital. (See Note 7)
The tax basis of assets is less than the amounts reported in the accompanying
consolidated financial statements by approximately $619,000 and $476,000 at
December 31, 2005 and 2004, respectively.
The following table reconciles net income to taxable income for the years ended
December 31, 2005, 2004 and 2003:
2005 2004 2003
---- ---- ----
Net income $81,512 $47,022 $41,798
Add back: Net loss of taxable REIT Subsidiaries included in net income above 172 987 2,534
Deduct: Net income of taxable REIT subsidiaries included in net income above ( 27) - -
------- ------- -------
Net income from REIT operations 81,657 48,009 44,332
Add: Book depreciation and amortization 68,814 64,886 55,570
Less: Tax depreciation and amortization ( 68,426) ( 69,532) ( 63,110)
Book/tax difference on gains/losses from capital transactions ( 45,906) ( 8,128) 2,754
Other book/tax differences, net ( 6,450) ( 79) 4,895
------- ------- -------
Adjusted taxable income subject to 90% REIT dividend requirement $29,689 $35,156 $44,441
======= ======= =======
The Company made actual distributions in excess of 100% of taxable income before
capital gains. All adjustments to net income from REIT operations are net of
amounts attributable to minority interest and taxable REIT subsidiaries.
Included in total assets on the Consolidated Balance Sheets are deferred tax
assets of $8,496 and $8,737 as of December 31, 2005 and 2004, respectively.
Management does not believe it is more likely than not that these deferred
assets will be used, and accordingly has recorded a reserve against the deferred
tax asset of $8,421 and $8,680 as of December 31, 2005 and 2004, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic Earnings Per Share ("EPS") is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock-based compensation including stock
options (using the treasury stock method) and the conversion of any cumulative
convertible preferred stock. The exchange of an UPREIT Unit for common stock
will have no effect on diluted EPS as unitholders and stockholders effectively
share equally in the net income of the Operating Partnership.
Income from continuing operations is the same for both the basic and diluted EPS
calculation. The reconciliation of the basic and diluted earnings per share for
the years ended December 31, 2005, 2004, and 2003, is as follows:
2005 2004 2003
---- ---- ----
Income from continuing operations $ 26,630 $ 30,209 $ 31,095
Add: Gain (loss) on sale of business, net of minority interest - (67) (9)
Less: Preferred dividends (6,279) (7,593) (11,340)
---------- ---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders $ 20,351 $ 22,549 $19,746
========== ========== ==========
Basic weighted average number of shares outstanding 31,962,082 32,911,945 29,208,242
Effect of dilutive stock options 366,023 402,093 367,418
---------- ---------- ----------
Diluted weighted average number of shares outstanding 32,328,105 33,314,038 29,575,660
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $0.63 $0.69 $0.67
Discontinued operations 1.72 0.52 0.37
Cumulative effect of change in accounting principle - (0.01) -
---------- ---------- ----------
Net income available to common shareholders $2.35 $1.20 $1.04
========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $0.63 $0.67 $0.67
Discontinued operations 1.70 0.52 0.36
Cumulative effect of change in accounting principle - (0.01) -
---------- ---------- ----------
Net income available to common shareholders $2.33 $1.18 $1.03
========== ========== ==========
Unexercised stock options to purchase 539,500, zero and 641,550 shares of the
Company's common stock were not included in the computations of diluted EPS
because the options' exercise prices were greater than the average market price
of the Company's stock during the years ended December 31, 2005, 2004 and 2003,
respectively. For the years ended December 31, 2005 (until the date of the
conversion) and 2004, the 833,333 common stock equivalents on an as-converted
basis of the Series D Convertible Cumulative Preferred Stock have an
antidilutive effect and are not included in the computation of diluted EPS. For
the year ended December 31, 2003, there were 2,229,719 common stock equivalents
on an as-converted basis of certain convertible preferred stock that had an
antidilutive effect and were not included in the computation of diluted EPS. To
the extent the preferred stock was converted, the common shares would be
included in outstanding shares from the date of conversion.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock Based Employee Compensation
Effective January 1, 2003, the Company adopted the fair value based method of
accounting for stock options in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. The Company applied the modified-prospective approach
in adopting SFAS No. 123 in conformity with the transition provisions of SFAS
No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure,
an Amendment of SFAS No. 123. Under this approach, the Company recognizes
stock-based employee compensation cost from the beginning of the fiscal year in
which the recognition provisions are first applied as if the fair value based
accounting method in this Statement had been used to account for all employee
awards granted, modified, or settled in fiscal years beginning after December
15, 1994. For 2005, 2004 and 2003, total compensation costs recognized by the
Company on its stock options and restricted stock, (including in 2003 $5,000
recognized in connection with a 129,870 share restricted stock grant to the
Leenhoutses upon their retirement as Co-CEO's), amounted to $2,429, $2,119 and
$6,341, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2005, 2004, and 2003:
Assumption 2005 2004 2003
---------- ---- ---- ----
Dividend yields 6.55% 6.74% 8.07%
Expected volatility 18.76% 19.79% 19.00%
Expected lives of the options with a lifetime of ten years 7.5 Years 7.5 Years 7.5 Years
Expected lives of the options with a lifetime of five years 5.0 Years N/A N/A
Risk free interest rate 4.10% 4.04% 3.22%
Recent Accounting Pronouncements
In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company adopted this pronouncement for the year ended December 31,
2004, and it did not have an impact on the Company's results of operations,
financial position or liquidity.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"). This interpretation addresses
consolidation by business enterprises of variable interest entities in which the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties
or in which the equity investors do not have the characteristics of a
controlling financial interest. This interpretation requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
interpretation also requires disclosures about variable interest entities that
the company is not required to consolidate but in which it has a significant
variable interest. Effective March 31, 2004, the Company adopted FIN 46R. See
the Basis of Presentation disclosure in Note 1 and the Company's disclosure on
its Variable Interest Entities (Investments in and Advances to Affiliates) in
Note 3 for a discussion of the impact on the Company from the adoption of FIN
46R.
In March 2004, the FASB issued EITF 03-6, Participating Securities and the
Two-Class Method under FASB Statement 128, Earnings per Share ("EITF 03-6").
EITF 03-6 addresses a number of questions regarding the computation of earnings
per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the
company when, and if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of calculating EPS.
It clarifies what constitutes a participating security and how to apply the
two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The EITF was effective for the fiscal periods beginning after March
31, 2004. The Company adopted the provisions of this EITF effective April 1,
2004, and had no impact on the Company's results of operations, financial
position or liquidity.
In November 2004, the FASB issued EITF Issue 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share. ("EITF 04-8"). EITF 04-8
addresses a number of issues relating to issued securities with embedded market
price contingent conversion features, which includes contingently convertible
preferred stock, and the impact on the calculation of earnings per share on a
quarterly basis. The EITF is effective for periods ending after December 15,
2004. The Company adopted the provisions of this EITF for the year ended
December 31, 2004 and it had no impact on the Company's results of operations,
financial position or liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment ("SFAS 123(R)"). The statement is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123(R), requires that entities recognize the cost
of employee services received in exchange for awards of equity instruments (i.e.
stock options) based on the grant-date fair value of those awards. The Statement
is effective for the first fiscal year beginning after June 15, 2005. On January
1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS No.
123 ("SFAS 148"). Effective on that date, the Company began recognizing
compensation cost related to stock option grants. Based upon the Company's
adoption of SFAS 148, the Company does not expect the application of SFAS No.
123(R) beginning January 1, 2006 to have a material impact on the Company's
results of operations, financial position or liquidity.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (continued)
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- An amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 eliminates the
exception from fair value measurement for non-monetary exchanges of similar
productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with a general exception for
exchanges that lack commercial substance. SFAS 153 specifies that a non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 was
effective for our interim periods beginning July 1, 2005. The adoption of SFAS
153 did not have an effect on our financial position or results of operations.
In March 2005, the FASB issued Interpretation No. 47 Accounting for Conditional
Asset Retirement Obligations ("FIN 47"). FIN 47 requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN 47 clarifies that the term
"conditional asset retirement obligation" refers to a legal obligation (pursuant
to existing laws or by contract) to perform an asset retirement activity in
which the timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the entity. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 was effective no later than
fiscal years ending after December 15, 2005. The Company adopted FIN 47 as
required effective December 31, 2005 and the initial application of FIN 47 did
not have a material effect on our financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and
establishes retrospective application as the required method for reporting a
change in accounting principle. SFAS 154 provides guidance for determining
whether a retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not believe that the adoption of SFAS 154 will have a material effect on our
financial position and results of operations.
In October 2005, the FASB issued Staff Position No. 13-1 Accounting for Rental
Costs Incurred during a Construction Period ("FSP FAS 13-1"). FSP FAS 13-1
addresses the accounting for rental costs associated with operating leases that
are incurred during the construction period. FSP FAS 13-1 makes no distinction
between the right to use a leased asset during the construction period and the
right to use that asset after the construction period. Therefore, rental costs
associated with ground or building operating leases that are incurred during a
construction period shall be recognized as rental expense, allocated over the
lease term in accordance with SFAS No. 13 and Technical Bulletin 85-3. FSP FAS
13-1 is effective for the first reporting period beginning after December 15,
2005. Retrospective application in accordance with SFAS 154 is permitted but not
required. The Company does not believe that the application of FSP FAS 13-1 will
have a material impact on our financial position or results of operations.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities, "VIE"). The
Company had made the determination that all 41 of the remaining limited
partnerships at the time were Variable Interest Entities.
The Company determined that it was not the primary beneficiary in seven
partnerships syndicated under U.S. Department of Housing and Urban Development
subsidy programs, all of which have been sold as of December 31, 2005. These
investments were accounted for under the equity method through their sale. The
Company recorded its allocable share of the respective partnership's income or
loss based on the terms of the agreements. To the extent it was determined that
the LPs could not absorb their share of the losses, if any, the GP recorded the
LPs share of such losses. The Company absorbed such losses to the extent the
Company had outstanding loans or advances and the limited partner had no
remaining capital account.
The Company had further determined that it was the primary beneficiary in 34 of
the VIEs and, therefore, consolidated these entities effective March 31, 2004.
In connection with the adoption of FIN 46R, the Company recorded a $321 charge
of a cumulative effect, net of minority interest, of a change in accounting
principle during the first quarter of 2004. This charge was a result of the
negative capital accounts of minority interest partners that were absorbed by
the Company. During the first quarter of 2004, prior to the adoption of FIN 46R,
the Company recorded an impairment charge of $1,654 to reduce the value of the
Company's investment associated with the VIEs to management's estimate of fair
market value. The impairment charge is classified in the financial statements as
"Impairment of assets held as general partner" of $1,116 and "Equity in earnings
(losses) of unconsolidated affiliates" of ($538). During 2003, the Company
recorded total impairment charges of $4,410 to reduce the value of the Company's
investment associated with the VIEs to management's estimate of fair market
value. The impairment charge is classified in the financial statements as
"Impairment of assets held as general partner" of $2,518 and "Equity in earnings
(losses) of unconsolidated affiliates" of ($1,892). Beginning with the second
quarter of 2004, the Company consolidated the results of operations of the VIEs.
The results of operations of 33 of the VIEs are included in discontinued
operations as of December 31, 2004, as all of the VIEs were considered held for
sale. During 2005, the Company closed on the sale of all but one VIE. The one
remaining VIE is not considered held for sale and is included in the
Consolidated statement of operations for the years ended December 31, 2005 and
2004. The effect on the consolidated balance sheets of including these VIEs as
of December 31, 2005 and 2004 includes Total assets of $21,300 and $87,800,
Total liabilities of $17,900 and $80,600, and Minority interest of $3,400 and
$7,500, respectively.
The Company is currently the general partner in the one remaining VIE syndicated
using low income housing tax credits under Section 42 of the Internal Revenue
Code. As general partner, the Company manages the day-to-day operations of this
partnership for a management fee. In addition, the Company has certain operating
deficit and tax credit guarantees to its limited partner. The Company is
responsible to fund operating deficits to the extent there are any and can
receive operating incentive awards when cash flow reaches certain levels.
Based upon the final contract price established during final negotiations with
the buyers for 38 of these partnerships, an additional $4,000 loss was recorded
during 2004, included in "gain on disposition of property" as part of
"Discontinued operations."
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (Continued)
In December, 2004, the Company recorded an obligation to repurchase the limited
partner's interests in two VIEs in satisfaction of any tax credit guarantees or
other obligations to that partner for $5,700, resulting in a loss of $5,000
included in "gain on disposition of property" as part of "Discontinued
operations." The transfer of the partnership interests was effective in January,
2005. In connection with the Company's decision to dispose of the property
through a transfer of deed in lieu of foreclosure, the Company performed a
valuation analysis on the underlying real estate, and as a result, recorded a
$7,300 impairment of real estate during the first quarter of 2005 to adjust the
net book value of the property to the Company's estimated fair market value.
This impairment is included as part of "Discontinued operations" in "Income from
operations." Finally, on September 30, 2005, the deed was transferred to the new
mortgage holder in lieu of foreclosure resulting in a gain on sale of real
estate of $7,700, included in "gain on disposition of property" as part of
"Discontinued operations."
Additionally, the Company is no longer marketing for sale the one remaining VIE.
Based upon the Company's estimate of fair market value, an $800 and $400
investment impairment charge was recorded in the periods ended December 31, 2004
and 2005, respectively, for this one remaining VIE, included as part of
"Discontinued operations" in "gain on disposition of property."
4 MORTGAGE NOTES PAYABLE
The Company's mortgage notes payable are summarized as follows:
2005 2004
---- ----
Fixed rate mortgage notes payable $1,749,127 $1,516,926
Variable rate mortgage notes payable 92,959 127,796
---------- ----------
Total mortgage notes payable 1,842,086 1,644,722
Less: Mortgage notes payable classified as held for sale 73,603 77,637
---------- ----------
Mortgage notes payable - net $1,768,483 $1,567,085
========== ==========
Mortgage notes payable (including mortgage notes classified as held for sale)
are collateralized by certain apartment communities and mature at various dates
from 2006 through 2042. The weighted average interest rate of the Company's
fixed rate notes was 5.95% and 6.23% at December 31, 2005 and 2004,
respectively. The weighted average interest rate of the Company's variable rate
notes and credit facility (Note 6) was 4.82% and 2.98% at December 31, 2005 and
2004, respectively.
Principal payments on the mortgage notes payable for years subsequent to
December 31, 2005 are as follows:
2006 $ 60,848
2007 184,684
2008 205,630
2009 66,249
2010 289,161
Thereafter 1,035,514
---------
$1,842,086
==========
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4 MORTGAGE NOTES PAYABLE (Continued)
The Company determines the fair value of the mortgage notes payable based on the
discounted future cash flows at a discount rate that approximates the Company's
current effective borrowing rate for comparable loans. Based on this analysis,
the Company has determined that the fair value of the mortgage notes payable
approximates $1,890,232 and $1,704,410, at December 31, 2005 and 2004,
respectively.
At December 31, 2005 and 2004, the consolidated mortgage balance (including
mortgage notes payable classified as held for sale) of $1,842,086 and
$1,644,722, respectively, included mortgage notes payable related to the
Company's affordable limited partnerships, consolidated in connection with the
Company's adoption of FIN 46R, in the amount of $16,989 and $77,637,
respectively.
Prepayment penalties of approximately $147, $305 and $1,610 were incurred for
the years ended December 31, 2005, 2004 and 2003, respectively. For 2005, a
prepayment penalty was incurred in connection with the repayment of a mortgage.
For 2004 the prepayment penalties were incurred in connection with both debt
restructurings and the sale of property, whereas in 2003 the prepayment
penalties were incurred strictly in connection with the sale of property.
During 2005, repayments on five debt instruments totaled $29,113 and were
refinanced by six new borrowings of $69,197. In addition, the Company added
additional financing on seven properties totaling $116,537 and repaid debt on
four mortgages in the amount of $26,429. In connection with the acquisition of
seven apartment communities, the Company entered into or assumed new debt in the
amount of $190,460. During 2004, repayments on three debt instruments totaling
$14,338 were refinanced by three new borrowings of $52,957 and the Company added
additional financing on six properties totaling $76,853. Debt totaling $9,561
was repaid. Debt in the amount of $146,566 was entered into or assumed in
connection with the acquisition of ten apartment communities.
5 LINE OF CREDIT
As of December 31, 2005, the Company had an unsecured line of credit of
$140,000. The Company's outstanding balance as of December 31, 2005 was $82,000.
Provided that no event of default under this agreement has occurred, the Company
may request on or before September 1, 2007 that the lenders increase the line of
credit to an amount not to exceed $190,000. The Company has had no occurrences
of default as of December 31, 2005. The line of credit is led by Manufacturers
and Traders Trust Company ("M&T Bank"), as Administrative Agent, with three
other participants: Citizens Bank of Rhode Island, Chevy Chase Bank, F.S.B., and
Comerica Bank. Borrowings under the line of credit bear interest at .75% over
the one-month LIBOR. The one-month LIBOR was 4.38% at December 31, 2005. The
LIBOR interest rate plus .75% was 5.13% at December 31, 2005.
Increases in interest rates will raise the Company's interest expense on any
outstanding balances and as a result would affect the Company's results of
operations and financial condition. The line of credit expires on September 1,
2008 and can be extended one year upon satisfaction of certain conditions. The
Credit Agreement relating to this line of credit requires the Company to
maintain certain financial ratios and measurements. The Company was in
compliance with these financial covenants for the quarterly period ended
December 31, 2005.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5 LINE OF CREDIT (Continued)
As of December 31, 2004 the Company had an unsecured line of credit of $115,000.
The outstanding balance as of December 31, 2004 was $58,000. The Credit
Agreement relating to this line of credit required the Company to maintain
certain financial ratios and measurements. One of these covenants restricted the
Company from making any distribution to its shareholders and holders of its
Operating Partnership units if a distribution, that when added to other
distributions paid during the three immediately preceding fiscal quarters,
exceeded the greater of: (i) 90% of funds from operations and 110% of cash
available for distribution; and (ii) the amount required to maintain the
Company's status as a REIT. Due to the granting of restricted stock to the
retiring Co-CEO's in the fourth quarter of 2003, the Company did not meet the
required ratio. The funds from operations payout ratio was 91%, when measured
for the calendar years. Waivers were granted by the participating banks for the
excess payout incurred in 2003, as indicated above. The new credit agreement
effective September 1, 2005 has removed this covenant completely. The line of
credit has not been used for long-term financing but adds a certain amount of
flexibility, especially in meeting the Company's acquisition goals. Many times,
it is easier to temporarily finance an acquisition or stock repurchase in a
short-term nature through the line of credit, with long-term secured financing
or other sources of capital replenishing the line of credit availability.
On November 23, 2005, the Company executed a Standard Libor Grid Note with M&T
Bank. The note has a maximum principal amount of $40,000 with an interest rate
at .95% over the one-month LIBOR. Proceeds from this demand note were utilized
to fund the Company's stock repurchase program. The Company had no outstanding
balance on the note as of December 31, 2005.
6 MINORITY INTEREST
Minority interest in the Company relates to the interest in the Operating
Partnership and affordable limited partnerships not owned by Home Properties,
Inc. Holders of UPREIT Units may redeem a 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.
For 2005 and 2004, the effect of consolidating the affordable limited
partnership in connection with FIN 46R has been reflected in the change in
minority interest for the year. The changes in minority interest for the years
ended December 31, 2005 and 2004 are as follows:
2005 2004
---- ----
Balance, beginning of year $310,775 $330,544
Issuance of UPREIT Units associated with property acquisitions 55,598 12,104
Adjustment between minority interest and stockholders' equity (33,856) ( 5,630)
Exchange of UPREIT Units for Common Shares (4,010) ( 14,106)
Net income 37,190 18,987
Accumulated other comprehensive loss 278 117
Distributions (39,279) ( 38,918)
Effect of consolidating affordable limited partnerships under FIN 46R (3,427) 7,677
-------- --------
Balance, end of year $323,269 $310,775
======== ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7 PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock
In May and June of 2000, the Company privately placed 600,000 of its 8.75%
Series C convertible cumulative preferred stock ("Series C Preferred Shares"),
$100 liquidation preference per share. This offering generated net proceeds of
approximately $60,000. The net proceeds were used to fund acquisitions and
property upgrades. The Series C Preferred shares were convertible at any time by
the holder into Common Shares at a conversion price of $30.25 per Common Share,
equivalent to a conversion ratio of 3.3058 Common Shares for each Series C
Preferred share (equivalent to 1,983,471 Common shares assuming 100% converted).
The Series C Preferred shares were non-callable for five years. Each Series C
Preferred share received the greater of a quarterly distribution of $2.1875 per
share or the dividend paid on a share of common stock on an as-converted basis.
The Company also issued 240,000 additional warrants to purchase common shares at
a price of $30.25 per share, expiring in 2005. In January 2003, holders of
100,000 shares of Series C Preferred Shares elected to convert those shares for
330,579 shares of common stock. On May 8, 2003, 200,000 shares of Series C
Preferred Shares were converted into 661,157 shares of common stock. On August
26, 2003, 200,000 shares of Series C Preferred Shares were converted into
661,157 of common stock. On November 5, 2003, the remaining 100,000 shares of
Series C Preferred Shares elected to convert those shares for 330,579 shares of
common stock. On September 9, 2003, 17,780 warrants were exercised, resulting in
the issuance of 17,780 shares of common stock. During the fourth quarter of
2003, the remaining 222,220 common stock warrants were exercised, resulting in
the issuance of 222,220 shares of common stock. Neither the conversions nor the
warrant exercise had an effect on the reported results of operations. As of
December 31, 2003, there were no Series C Preferred Shares outstanding.
In June 2000, the Company privately placed 250,000 of its 8.78% Series D
convertible cumulative preferred stock ("Series D Preferred Shares"), $100
liquidation preference per share. This offering generated net proceeds of
approximately $25,000. The net proceeds were used to fund Company acquisitions
and property upgrades. The Series D Preferred Shares were convertible at any
time by the holder into Common Shares at a conversion price of $30.00 per Common
Share, equivalent to a conversion ratio of 3.333 Common Shares for each Series D
Preferred share (equivalent to 833,333 Common Shares assuming 100% converted)
and were non-callable for five years. Each Series D Preferred share received the
greater of a quarterly distribution of $2.195 per share or the dividend paid on
a share of common stock on an as-converted basis. On May 26, 2005, all 250,000
shares of the Series D Preferred Shares were converted into 833,333 shares of
Common stock. The conversion of the Series D Preferred Shares to Common Shares
did not have an effect on the reported results of operations. As of December 31,
2005, there were no Series D Preferred Shares outstanding.
In December 2000, the Company privately placed 300,000 of its 8.55% Series E
convertible cumulative preferred stock ("Series E Preferred Shares"), $100
liquidation preference per share. This offering generated net proceeds of
approximately $30,000. The net proceeds were used to pay down Company
borrowings. The Series E Preferred Shares were convertible at any time by the
holder into Common Shares at a conversion price of $31.60 per Common Share,
equivalent to a conversion ratio of 3.1646 Common Shares for each Series E
Preferred Share (equivalent to 949,367 Common Shares assuming 100% converted).
The Series E Preferred Shares were non-callable for five years. Each Series E
Preferred Share received the greater of a quarterly distribution of $2.1375 per
share or the dividend paid on a share of common stock on an as-converted basis.
In addition, the Company issued warrants to purchase 285,000 common shares at a
price of $31.60 per share, expiring in 2005. On August 20, 2002, 63,200 of the
Series E Convertible Preferred Shares were converted into 200,000 shares of
common stock. On May 6, 2003, 36,800 shares of Series E Preferred Shares were
converted into 116,456 shares of common stock. On August 26, 2003 the remaining
200,000 shares of Series E Preferred Shares were converted into 632,911 of
common stock. On September 9, 2003, 17,100 warrants were exercised, resulting in
the issuance of 17,100 shares of common stock. During the fourth quarter of
2003, the remaining 267,900 common stock warrants were exercised, resulting in
the issuance of 267,900 shares of common stock. Neither the conversions nor the
warrant exercise had an effect on the reported results of operations. As of
December 31, 2003, there were no Series E Preferred Shares outstanding.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58,000. The net proceeds were used to fund the repurchase of the
Company's Series B preferred stock, property acquisitions, and property
upgrades. The Series F Preferred Shares are redeemable by the Company at anytime
on or after March 25, 2007 at a redemption price of $25.00 per share, plus any
accumulated, accrued and unpaid dividends. Each Series F Preferred share will
receive an annual dividend equal to 9.00% of the liquidation preference per
share (equivalent to a fixed annual amount of $2.25 per share).
Common Stock
In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action did not establish a target price or a specific timetable for
repurchase. At December 31, 2003, there was approval remaining to purchase
3,135,800 shares. During 2004, the Company repurchased 1,135,800 shares at a
total cost of $47,400. At December 31, 2004 the Company had authorization to
repurchase 2,000,000 shares of common stock and UPREIT Units under the stock
repurchase program. On each of February 16, and November 4, 2005, the Board of
Directors approved 2,000,000-share increases in the stock repurchase program.
During 2005, the Company repurchased 2,779,805 additional shares at a cost of
$111,700, leaving a remaining share authorization level of 3,220,195 shares as
of December 31, 2005.
In January 2006, the Company repurchased 107,800 additional shares at a cost of
$4,500, leaving a remaining share authorization level of 3,112,395 shares as of
February 21, 2006.
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the
stockholders of the Company an opportunity to automatically invest their cash
dividends in common stock. In addition, eligible participants may make monthly
payments or other voluntary cash investments in shares of common stock. The
maximum monthly investment without prior Company approval is currently $1.
Effective December 10, 2004, the discount was reduced from 2% to 0%. In
addition, in the fourth quarter of 2004 and year ended 2005, the Company has met
share demand in the program through share repurchase by the transfer agent in
the open market on the Company's behalf instead of new share issuance. This
removes essentially 100% of the dilution caused by issuing new shares at a price
less than the net asset value in an economic and efficient manner. A total of
$18,000 was raised through this program during 2004.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Dividends
Stockholders are taxed on dividends and must report such dividends as either
ordinary income, capital gains, or as return of capital. The Company has
declared a $2.53 distribution per common share (CUSIP 437306103) and a $2.25
distribution per Series F preferred share (CUSIP 437306509) during its most
recent fiscal year. Pursuant to Internal Revenue Code Section 857 (b) (3) (C),
for the years ended December 31, 2005, 2004 and 2003, the Company designates the
taxable composition of the following cash distributions to holders of common and
preferred shares in the amounts set forth in the tables below :
Common
Distribution Type
---------------------------------------------------------
------------- ------------- ------------- ---------------
Ordinary Long-Term Unrecaptured
Declaration Record Payable Distributions Taxable Return of Sec. 1250
Dates Dates Dates Per Share Dividend Capital Capital Gain Gain
---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2/7/2005 2/17/2005 2/28/2005 $0.63 42.95% 55.34% 0.00% 1.71%
5/6/2005 5/17/2005 5/27/2005 $0.63 42.95% 55.34% 0.00% 1.71%
8/3/2005 8/15/2005 8/26/2005 $0.63 42.95% 55.34% 0.00% 1.71%
11/4/2005 11/15/2005 11/25/2005 $0.64 42.95% 55.34% 0.00% 1.71%
----- ----- ----- ---- ----
TOTALS $2.53 42.95% 55.34% 0.00% 1.71%
===== ===== ===== ==== ====
The taxable composition of cash distributions for each common share for 2004 and 2003 is as follows:
Distribution Type
---------------------------------------------------------
------------- ------------- ------------- ---------------
Ordinary Long-Term Unrecaptured
Distributions Taxable Return of Sec. 1250
Year Per Share Dividend Capital Capital Gain Gain
---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2004 $2.49 41.83% 55.24% 0.00% 2.93%
2003 $2.45 55.67% 38.12% 0.00% 6.21%
Series F Preferred
Distribution Type
---------------------------------------------------------
------------- ------------- ------------- ---------------
Ordinary Long-Term Unrecaptured
Declaration Record Payable Distributions Taxable Return of Sec. 1250
Dates Dates Dates Per Share Dividend Capital Capital Gain Gain
---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2/7/2005 2/17/2005 2/28/2005 $0.5625 96.16% 0% 0% 3.84%
5/6/2005 5/17/2005 5/31/2005 $0.5625 96.16% 0% 0% 3.84%
8/3/2005 8/15/2005 8/31/2005 $0.5625 96.16% 0% 0% 3.84%
11/4/2005 11/15/2005 11/30/2005 $0.5625 96.16% 0% 0% 3.84%
----- ----- ----- ---- ----
TOTALS $2.2500 96.16% 0% 0% 3.84%
===== ===== ===== ==== ====
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
The taxable composition of cash distributions for each preferred share for 2004
and 2003 is as follows:
Distribution Type
---------------------------------------------------------
------------- ------------- ------------- ---------------
Ordinary Long-Term Unrecaptured
Distributions Taxable Return of Sec. 1250
Year Per Share Dividend Capital Capital Gain Gain
---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2004 $2.25 93.44% 0.00% 0.00% 6.56%
2003 $2.25 89.96% 0.00% 0.00% 10.04%
Total Shares/Units Outstanding
At December 31, 2005, 31,184,256 common shares, and 16,716,724 UPREIT Units were
outstanding for a total of 47,900,980 common share equivalents.
In addition, 2,400,000 shares of Series F Cumulative Redeemable Preferred shares
were outstanding as of December 31, 2005.
8 STOCK BENEFIT PLAN
The Company has adopted the 1994 Stock Benefit Plan, as amended (the "Plan").
Plan participants include officers, non-employee directors, and key employees of
the Company. The Plan provided for the issuance of up to 1,596,000 shares to
officers and employees and 154,000 shares for issuance to non-employee
directors. Options granted to officers and employees of the Company vest 20% for
each year of service until 100% vested on the fifth anniversary. Certain
officers' options (264,000) and directors' options (149,100) vest immediately
upon grant. The exercise price per share for stock options may not be less than
100% of the fair market value of a share of common stock on the date the stock
option is granted (110% of the fair market value in the case of incentive stock
options granted to employees who hold more than 10% of the voting power of the
Company's common stock). Options granted to directors and employees who hold
more than 10% of the voting power of the Company expire after five years from
the date of grant.
All other options expire after ten years from the date of grant. The Plan also
allowed for the grant of stock appreciation rights and restricted stock awards.
No additional options will be granted under this Plan.
On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan (the "2000
Plan"). The 2000 Plan participants include directors, officers, regional
managers and on-site property managers. The 2000 Plan limits the number of
shares issuable under the plan to 2,755,000, of which 205,000 were to be
available for issuance to the non-employee directors. No additional options will
be granted under the 2000 Plan.
On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan (the "2003
Plan"). Plan participants include directors, officers, regional managers and
on-site property managers. The 2003 Plan limits the number of shares issuable
under the plan to 2,859,475, of which 249,475 are to be available for issuance
to the non-employee directors. At December 31, 2005, 1,121,250 and 90,000 common
shares were available for future grant of options or awards under the 2003 plan
for officers and employees and non-employee directors, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 STOCK BENEFIT PLAN (Continued)
Details of stock option activity during 2005, 2004, and 2003 are as follows:
Weighted Average
Number Exercise Price
of Options Per Option
---------- ----------
Options outstanding at December 31, 2002 2,427,353 $30.66
(921,781 shares exercisable at a weighted average price of
$28.75 per share)
Granted, 2003 678,370 $36.80
Exercised, 2003 ( 255,502) $28.31
Cancelled, 2003 ( 221,088) $32.50
--------- ------
Options outstanding at December 31, 2003 2,629,133 $32.32
(1,070,995 shares exercisable at a weighted average price of
$29.74 per share)
Granted, 2004 607,160 $38.75
Exercised, 2004 ( 605,053) $29.47
Cancelled, 2004 ( 177,524) $34.63
--------- ------
Options outstanding at December 31, 2004 2,453,716 $34.41
(959,292 shares exercisable at a weighted average price of
$31.55 per share)
Granted, 2005 556,600 $41.93
Exercised ( 225,605) $31.16
Cancelled ( 122,130) $36.09
--------- ------
Options outstanding at December 31,2005 2,662,581 $36.18
========= ======
(1,173,605 shares exercisable at a weighted average price of
$33.02 per share)
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 STOCK BENEFIT PLAN (Continued)
The following table summarizes information about options outstanding at December 31, 2005:
Weighted Weighted
Average Average
Remaining Fair Value Weighted Average Exercise
Year Number Contractual of Options on Exercise Price Number Price Range
Granted Outstanding Life Grant Date Outstanding Exercisable Exercisable Per Option
------- ----------- ---- ---------- ----------- ----------- ----------- ----------
1996 2,501 0.32 $1.15 $19.600 $19.600 2,501 $19.00-$20.50
1997 3,500 1.83 $1.55 26.500 26.500 3,500 $26.50
1998 8,280 2.67 $1.32 25.125 25.125 8,280 $25.125
1999 52,872 3.67 $1.57 27.125 27.125 52,872 $27.125
2000 168,574 4.67 $1.88 31.375 31.375 168,814 $31.375
2001 401,835 5.45 $1.63 29.286 29.092 329,203 $27.01-$31.60
2002 430,884 6.55 $1.96 34.796 34.877 284,668 $32.20-$36.03
2003 509,515 7.55 $1.79 36.780 36.779 202,975 $36.28-$36.85
2004 538,120 8.56 $3.33 38.743 38.748 114,792 $37.91-$38.83
2005 546,500 9.33 $3.52 41.931 $41.950 6,000 $40.45-$41.95
--------- ---- ----- ------- ------- --------- ------ ------
Totals 2,662,581 7.35 $2.46 $36.182 $33.019 1,173,605 $19.00-$41.95
========= ==== ===== ======= ======= ========= ====== ======
In 2005, 2004 and 2003, the Company granted a total of 57,375, 65,932 and
198,420 shares of restricted stock to both employees and directors,
respectively. The director grants included above for 2005, 2004 and 2003 were
7,875, 3,600 and 2,700 shares, respectively. All the director shares vest 100%
on the fifth anniversary of the date of grant. All of the 49,500 and 62,332
shares of restricted stock granted to key employees during 2005 and 2004 vest
25% on each anniversary of the date of grant for a period of four years. For
65,850 of the shares of restricted stock granted to key employees during 2003,
the shares vest 100% on the fifth anniversary of the date of grant. In addition,
in the fourth quarter of 2003, $5,000 of restricted stock was granted to the
Leenhoutses (129,870 shares at $37.75 per share). The total amount of the grant
was expensed in the fourth quarter of 2003 as it was part of their retirement
award and was fully earned at that date. The restrictions on this restricted
stock granted to the Leenhoutses vests 20% on each anniversary of the grant
date. The restricted shares were granted during 2005, 2004 and 2003 at a
weighted average price of $41.47, $40.10 and $35.64 per share, respectively.
Total compensation cost recorded for the years ended December 31, 2005, 2004 and
2003 for the restricted share grants was $1,557, $1,171, and $5,537,
respectively. The restricted stock outstanding at December 31, 2005 and 2004 was
277,822 and 267,928 shares, respectively.
In January 2003, the Company adopted the fair value method of recording stock
compensation awards in accordance with SFAS 148 Accounting for Stock Based
Compensation - An Amendment of SFAS 123 ("SFAS 148") using the Modified
Prospective approach of adoption as outlined in the pronouncement. In 2005, 2004
and 2003, the Company recognized $872, $948 and $804 in stock compensation costs
related to its outstanding stock options.
9 SEGMENT REPORTING
The Company is engaged in the ownership and management of market rate apartment
communities. Each apartment community is considered a separate operating
segment. Each segment on a stand alone basis is less than 10% of the revenues,
profit or loss, and assets of the combined reported operating segments and meets
all of the aggregation criteria under SFAS No. 131. The operating segments
are aggregated as Core and Non-core properties.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 SEGMENT REPORTING (Continued)
Non-segment revenue to reconcile total revenue consists of interest and dividend
income and other income. Non-segment assets to reconcile to total assets include
cash and cash equivalents, cash in escrows, accounts receivable, prepaid
expenses, deferred charges, other assets and other assets held for sale.
Core properties consist of all apartment communities owned throughout 2004 and
2005 where comparable operating results are available. Therefore, the Core
Properties represent communities owned as of January 1, 2004. Non-core
properties consist of apartment communities acquired during 2004 and 2005, such
that full year comparable operating results are not available. In addition, core
properties does not include assets held for sale as of December 31, 2005, 2004
and 2003.
The Company assesses and measures segment operating results based on a
performance measure referred to as net operating income. Net operating income is
defined as total revenues less operating and maintenance expenses.
The accounting policies of the segments are the same as those described in Notes
1 and 2.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 SEGMENT REPORTING (Continued)
The revenues, net operating income, and assets for each of the reportable
segments are summarized as follows for the years ended December 31, 2005, 2004,
and 2003.
2005 2004 2003
---- ---- ----
Revenues
Apartments owned
Core properties $396,722 $384,098 $364,889
Non-core properties 44,475 22,708 -
Reconciling items 2,604 3,263 4,942
-------- -------- --------
Total Revenue $443,801 $410,069 $369,831
======== ======== ========
Net operating income
Apartments owned
Core properties $220,383 $214,144 $206,149
Non-core properties 21,840 11,456 -
Reconciling items 2,604 3,263 4,942
-------- -------- --------
Combined segment net operating income 244,827 228,863 211,091
General & administrative expenses (19,652) (23,978) (22,607)
Interest expense (97,898) (83,078) (75,926)
Depreciation and amortization (90,232) (79,683) (66,186)
Impairment of assets held as General Partner (400) (1,116) (2,518)
Equity in earnings (losses) of unconsolidated affiliates - (538) (1,892)
Minority interest in limited partnership - 441 -
Minority interest in operating partnership (10,015) (10,702) (10,867)
-------- -------- --------
Income from continuing
operations $ 26,630 $ 30,209 $ 31,095
======== ======== ========
Assets
Apartments owned
Core properties $2,082,413 $2,082,312
Held for sale properties 219,776 78,711
Non-core properties 582,362 556,959
Reconciling items 93,319 98,814
---------- ----------
Total Assets $2,977,870 $2,816,796
========== ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate swaps to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
The Company does not utilize these arrangements for trading or speculative
purposes. The principal risk to the Company through its interest rate hedging
strategy is the potential inability of the financial institutions from which the
interest rate protection was purchased to cover all of their obligations. To
mitigate this exposure, the Company purchases its interest rate swaps from
either the institution that holds the debt or from institutions with a minimum
A- credit rating.
All derivatives, which have historically been limited to interest rates swaps
designated as cash flow hedges, are recognized on the balance sheet at their
fair value. On the date that the Company enters into an interest rate swap, it
designates the derivative as a hedge of the variability of cash flows that are
to be received or paid in connection with a recognized liability. To the extent
effective, subsequent changes in the fair value of a derivative designated as a
cash flow hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows of the hedged transaction. Any hedge
ineffectiveness will be reported in interest expense in the consolidated
statement of operations.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. The Company formally assesses (both at
the hedge's inception and on an ongoing basis) whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes in
the cash flows of the hedged items and whether those derivatives may be expected
to remain highly effective in future periods. Should it be determined that a
derivative is not (or has ceased to be) highly effective as a hedge, the Company
will discontinue hedge accounting prospectively.
The Company has four interest rate swaps that effectively convert variable rate
debt to fixed rate debt. The notional amount amortizes in conjunction with the
principal payments of the hedged items. The terms as follows:
Original
Notional Amount Fixed Interest Rate Variable Interest Rate Maturity Date
--------------- ------------------- ---------------------- -------------
$16,384,396 5.35% LIBOR + 1.50% June 25, 2007
$10,000,000 5.39% LIBOR + 1.50% June 25, 2007
$3,000,000 8.22% LIBOR + 1.40% June 25, 2007
$4,625,000 8.40% LIBOR + 1.40% June 25, 2007
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 131"). At that time, the Company
designated all of its interest rate swaps as cash flow hedges in accordance with
the requirements of SFAS 133. The aggregate fair value of the derivatives on
January 1, 2001 was $583, prior to the allocation of minority interest, and was
recorded as a liability on the consolidated balance sheet with an offset to
other comprehensive income representing the cumulative effect of the transition
adjustment pursuant to the provisions of Accounting Principles Board Opinion No.
20, Accounting Changes.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
As of December 31, 2005, the aggregate fair value of the Company's interest rate
swaps was $186 prior to the allocation of minority interest, and is included in
accrued expenses and other liabilities in the consolidated balance sheets. For
the twelve months ending December 31, 2005, as the critical terms of the
interest rate swaps and the hedged items are the same, no ineffectiveness was
recorded in the consolidated statements of operations. All components of the
interest rate swaps were included in the assessment of hedge effectiveness. The
Company expects that within the next twelve months it will reclassify as a
charge to earnings $123, prior to the allocation of minority interest, of the
amount recorded in accumulated other comprehensive income. The fair value of the
interest rate swaps is based upon the estimate of amounts the Company would
receive or pay to terminate the contract at the reporting date and is estimated
using interest rate market pricing models.
11 TRANSACTIONS WITH AFFILIATES
The Company and the Management Companies recognized management and development
fee revenue, interest income and other miscellaneous income from affiliated
entities of $190, $696, and $3,679 for the years ended December 31, 2005, 2004,
and 2003, respectively. The Company had accounts receivable outstanding due from
affiliated entities of $157, $12 and $162 at December 31, 2005, 2004 and 2003,
respectively.
On January 1, 2004, the Company sold certain assets of its commercial property
management division to Home Leasing, LLC, which is owned by Nelson and Norman
Leenhouts. This division managed approximately 2.2 million square feet of gross
leasable area, as well as certain planned communities. The initial amount paid
was $82. In addition, the Company is entitled to receive a percentage of the
management fee received by Home Leasing in connection with the management of one
of the commercial properties for a period not to exceed 36 months. The expected
monthly fee as outlined in the contract is approximately $3.4, or $40 per year.
If Home Leasing continues to manage the property for three years, the Company is
expected to receive total additional deferred purchase price of $135, of which
$40 has been received for the year ended December 31, 2005. The cumulative gain
recognized on the sale of these assets through December 31, 2005 amounts to $64.
If the management of this property is retained for the entire three years, the
Company expects to receive an additional $40 for the period January 1, 2006
through January 1, 2007. The gain on sale would then be approximately $104.
On March 2, 2004, the Company acquired Wellington Trace Apartments for $27,100
from an entity owned in part by an individual who subsequently became one of the
Company's directors.
The Company leases its corporate office space from an affiliate. The lease
requires an annual base rent of $895 for the years ended 2006 through 2009. The
lease also requires the Company to pay a pro rata portion of property
improvements, real estate taxes and common area maintenance. Rental expense was
$1,693, $1,694, and $1,609 for the years ended December 31, 2005, 2004, and
2003, respectively.
During 2004, the loan balances aggregating $315, outstanding as of December 31,
2003, under the officer and director share purchase program were repaid in full.
On August 5, 2002, the Board of Directors of the Company prohibited any further
loans to officers and directors in accordance with the Sarbanes-Oxley Act of
2002.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12 COMMITMENTS AND CONTINGENCIES
Property Lease
On December 1, 2004 the Company entered in to a lease agreement with a third
party owner to manage the operations of one of their communities with 1,387
apartment units. The lease has a term of five years, but after two years (from
the 24th month to the 36th month), the owner may require the Company to buy the
property. From the 36th month to the end of the lease term, the Company has the
right to require the owner to sell the property to the Company. It is the
Company's expectation that closing on the acquisition of the property will occur
no later than 36 months after the commencement of the lease. The estimated
future acquisition price of the property is $141,000. The agreement required an
initial deposit of $5,000, a deposit in 2005 of $1,230, with an additional
$1,000 estimated deposit requirement during 2006, representing capital
improvements paid by the owner. The net operating income of the property (as
defined in the lease agreement) is remitted back to the owner as rent on a
monthly basis. In exchange for services, the Company is entitled to receive
monthly; a management fee equal to 5% of Collected Income, as defined in the
lease, an incentive fee of $25, and interest payments equal to 3% annual
interest on the outstanding deposit. Including interest, the total income
recognized by the Company amounted to $1,278 and $98, for the years ended
December 31, 2005 and 2004, respectively.
Ground Lease
The Company has a non-cancelable operating ground lease for one of its
properties. The lease expires May 1, 2020, with options to extend the term of
the lease for two successive terms of twenty-five years each. The lease provides
for contingent rental payments based on certain variable factors. The lease also
requires the Company to pay real estate taxes, insurance and certain other
operating expenses applicable to the leased property. Ground lease expense was
$210, $226, and $219, including contingent rents of $140, $156, and $149, for
the years ended December 31, 2005, 2004 and 2003, respectively. At December 31,
2005, future minimum rental payments required under the lease are $70 per year
until the lease expires.
401(k) Savings Plan
The Company sponsors a contributory savings plan. Under the plan, the Company
will match 75% of the first 4% of participant contributions. The matching
expense under this plan was $802, $690, and $1,010 for the years ended December
31, 2005, 2004 and 2003, respectively.
Incentive Compensation Plan
In 2005, the Incentive Compensation Plan provided that eligible officers and key
employees may earn a cash bonus based upon two performance measures: the
percentage of growth in the Company's funds from operations ("FFO") on a per
share/unit diluted basis from the previous year and the percentage of growth in
same store net operating income from the previous year as compared to industry
peers. In 2004 and 2003, the performance measure was based on the percentage
growth in the Company's FFO per share/unit on the diluted basis as compared
against the industry average growth. The bonus expense charged to operations was
$2,582, $3,414, and $1,729 for the years ended December 31, 2005, 2004 and 2003,
respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12 COMMITMENTS AND CONTINGENCIES (Continued)
Contingencies
In 2001, the Company underwent a state capital stock tax audit. The state had
assessed taxes of $469 for the 1998 and 1999 tax years under audit. If the
state's position was applied to all tax years through December 31, 2001, the
assessment would be $1,300. At the time, the Company believed the assessment and
the state's underlying position were neither supportable by the law nor
consistent with previously provided interpretative guidance from the office of
the State Secretary of Revenue. After two subsequent enactments by the state
legislation during 2002 affecting the pertinent tax statute, the Company was
advised by outside tax counsel that its filing position for 1998-2001 should
prevail. During December 2003, the state's governor signed legislation which
included the REIT tax provisions. Based upon this, Company's tax counsel expects
that the outstanding litigation should now be able to be resolved. Effective
January 1, 2003, the Company reorganized the ownership of Home Properties Trust,
which should subject the Company to a much lower level of tax going forward. In
September 2004, the Company settled the 1998 year under audit for a total of
$39, including interest. During the first quarter of 2005, the Company filed a
protest with the State Commonwealth Court concerning the 1999 tax year.
Settlement discussions have occurred during the third and fourth quarters of
2005 for the open years 1999-2001. The Company has made a settlement offer for
the 1999, 2000 and 2001 tax years which, if accepted, would result in a payment
of $160. The Company believes, and has been advised by counsel, that this
settlement should be acceptable to the Department of Revenue and is awaiting
final approval of the offer. The Company has accrued $160 at December 31, 2005.
During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861. This was included in the first quarter 2004 results and allocated $448 to
expense and $413 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance of
$1,712. This was included in the second quarter of 2004 results and allocated
$761 to expense and $951 capitalized to real estate assets for improvements. The
liability recorded relates to the period beginning on the later of: (i) the date
the Company first purchased property in the applicable state; or (ii) January 1,
1997 and ending on June 30, 2004. In addition, the Company increased the
liability for sales tax exposure by $68 for the six-month period ended
December 31, 2004. The Company had filed Voluntary Disclosure Agreements
("VDAs") with the four states where it had significant financial exposure.
During the first six months of 2005, the Company signed VDAs with these states
limiting the VDA filing period back to January 1, 2001, and the Company has
satisfied all financial obligations under the VDAs. For the three- and six-month
periods ended June 30, 2005, the Company has recorded adjustments to the
liability for both the effects of signing the VDAs as well as for the results of
the Company's additional testing for the first six months. The net impact of
these adjustments resulted in a decrease in real estate assets of $175, interest
expense of $115 and operating expenses of $108 for a net decrease to the accrued
liability of $398. During the third quarter of 2005, the Company finalized
negotiations with New York State settling a sales tax audit covering the period
June 1, 2002 through November 30, 2004. The settlement was not materially
different from what had been accrued. The result of the recent payments on the
VDAs and this New York State audit is that the sales tax accrual which had been
over $1,712 (as referenced above) has been fully paid as of December 31, 2005.
In connection with various UPREIT transactions, the Company has agreed to
maintain certain levels of nonrecourse debt for a period of 5 to 10 years
associated with the contributed properties acquired. In addition, the Company is
restricted in its ability to sell certain contributed properties (47% of the
owned portfolio) for a period of 5 to 15 years except through a tax deferred
Internal Revenue Code Section 1031 like-kind exchange.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12 COMMITMENTS AND CONTINGENCIES (Continued)
Debt Covenants
The line of credit loan agreement contains restrictions which, among other
things, require maintenance of certain financial ratios (See Note 5).
In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Article
Supplementary, of 1.75 to 1.0. For the fiscal quarterly periods ended December
31, 2005, the Company maintained the required fixed charge coverage ratio.
Guarantees
As of December 31, 2005, the Company, through its general partnership interest
in an affordable property limited partnership, has guaranteed the Low Income
Housing Tax Credits to limited partners totaling approximately $3,000. As of
December 31, 2005, there were no known conditions that would make such payments
necessary relating to these guarantees. In addition, the Company, acting as
general partner in this partnership, is obligated to advance funds to meet
partnership operating deficits.
Executive Retention Plan
Effective February 2, 1999, the Executive Retention Plan provides for severance
benefits and other compensation to be received by certain employees in the event
of a change in control of the Company and a subsequent termination of their
employment without cause or voluntarily with good cause.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 PROPERTY ACQUISITIONS
For the years ended December 31, 2005, 2004, and 2003, the Company has acquired
the communities listed below (see Note15):
Cost of
Market Date Year Number Cost of Acquisition
Apartment Community Area Acquired Constructed of Units Acquisition Per Unit
------------------- ---- -------- ----------- -------- ----------- --------
Stone Ends Boston 2/12/03 1972 280 $ 34,028 $121
Falkland Chase Northern VA 9/10/03 1937 450 $ 58,942 $131
Chatham Hill New Jersey 1/30/04 1967 308 $ 48,215 $157
Northwood New Jersey 1/30/04 1965 134 $ 15,186 $113
Fairmount New Jersey 1/30/04 1943 54 $ 2,256 $ 42
Kensington New Jersey 1/30/04 1943 38 $ 1,843 $ 49
Wellington Trace Northern VA 3/2/04 2002 240 $ 27,134 $113
Village at Marshfield Boston 3/17/04 1972 276 $ 31,695 $115
Woodleaf Northern VA 3/19/04 1985 228 $ 20,672 $ 91
The Hamptons Southeast Florida 7/7/04 1986-1987 668 $ 56,395 $ 84
Vinings Southeast Florida 7/7/04 1989 168 $ 13,986 $ 83
Regency Club New Jersey 9/24/04 1974 372 $ 37,610 $ 101
Ridgeview at Wakefield Valley Baltimore 1/13/05 1988 204 $ 19,407 $ 96
Hackensack Gardens New Jersey 3/1/05 1948 198 $ 13,292 $ 65
Barrington Gardens New Jersey 3/1/05 1973 148 $ 7,444 $ 50
Sayville Commons Long Island 7/15/05 2001-2003 342 $ 63,384 $186
The Brooke at Peachtree Philadelphia 8/15/05 1986-1989 146 $ 16,137 $110
Peppertree Farm Northern VA 12/28/05 1972-1978 881 $ 96,322 $110
Cinnamon Run Northern VA 12/28/05 1979-1982 511 $ 67,377 $133
14 DISCONTINUED OPERATIONS
The Company adopted the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), effective January 1,
2002. This standard addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. It also retains the basic
provisions for presenting discontinued operations in the income statement but
broadened the scope to include a component of an entity rather than a segment of
a business. Pursuant to the definition of a component of an entity in SFAS 144,
assuming no significant continuing involvement by the former owner after the
sale, the sale of an apartment community is now considered a discontinued
operation. In addition, apartment communities classified as held for sale are
also considered a discontinued operation. The Company generally considers assets
to be held for sale when all significant contingencies surrounding the closing
have been resolved, which often corresponds with the actual closing date.
However, the Company has classified as held for sale an entire region portfolio
(Detroit) of 19 apartment communities containing 5,046 apartment units. The
Company has announced its intention to sell the portfolio and has met all of the
requirements under SFAS 144. Properties classified in this manner through
December 31, 2005, as discussed below, were reclassified as such in the
accompanying Consolidated Statements of Operations for each of the three years
ended December 31, 2005.
Included in discontinued operations for the three years ended December 31, 2005
are the operating results, net of minority interest, of sixteen apartment
community dispositions (four sold in 2005, five sold in 2004 and seven sold in
2003). In addition, discontinued operations for the year ended December 31, 2005
includes the operating results of four VIEs sold during 2005 and nineteen
apartment communities held for sale as of December 31, 2005. For purposes of the
discontinued operations presentation, the Company only includes interest expense
associated with specific mortgage indebtedness of the properties that are
considered discontinued operations.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14 DISCONTINUED OPERATIONS (Continued)
The operating results of discontinued operations are summarized as follows for
the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003
---- ---- ----
Revenues:
Rental Income $52,799 $75,500 $71,160
Property other income 3,363 3,640 3,313
------ ------ ------
Total Revenues 56,162 79,140 74,473
------ ------ ------
Operating and Maintenance 30,087 41,169 36,252
Interest expense 7,495 13,518 11,970
Depreciation and amortization 9,883 15,546 13,230
Impairment of real property 7,325 1,100 423
------ ------ ------
Total Expenses 54,790 71,333 61,875
------ ------ ------
Income from discontinued operations before minority interest and gain
on disposition of property 1,372 7,807 12,598
Minority interest in limited partnerships (23) 833 -
Minority interest in operating partnerships (442) (2,856) (4,485)
------ ------ ------
Income from discontinued operations $ 907 $ 5,784 $ 8,113
======== ======== ========
The table below provides a more detailed presentation of the components of
discontinued operations for year-ended December 31, 2005.
Owned
Communities VIEs Total
----------- ---- -----
Revenues:
Rental Income $49,585 $3,214 $52,799
Property other income 3,222 141 3,363
------ ------ ------
Total Revenues 52,807 3,355 56,162
------ ------ ------
Expenses:
Operating and Maintenance 27,466 2,621 30,087
Interest expense 7,484 11 7,495
Depreciation and amortization 9,883 - 9,883
Impairment of real property - 7,325 7,325
Total Expenses 44,833 9,957 54,790
------ ------ ------
Income (loss) from discontinued operations before minority interest and
gain on disposition of property 7,974 (6,602) 1,372
Minority interest in limited partnerships - (23) (23)
Minority interest in operating partnerships
(2,635) 2,193 (442)
------ ------ ------
Income (loss) from discontinued operations $ 5,339 $(4,432) $ 907
======== ======= ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14 DISCONTINUED OPERATIONS (Continued)
The table below provides a more detailed presentation of the components of
discontinued operations for year-ended December 31, 2004.
Owned
Communities VIEs Total
----------- ---- -----
Revenues:
Rental Income $63,107 $12,393 $75,500
Property other income 3,358 282 3,640
------ ------ ------
Total Revenues 66,465 12,675 79,140
------ ------ ------
Expenses:
Operating and Maintenance 31,884 9,285 41,169
Interest expense 10,437 3,081 13,518
Depreciation and amortization 12,993 2,553 15,546
Impairment of real property 1,100 - 1,100
------ ------ ------
Total Expenses 56,414 14,919 71,333
------ ------ ------
Income (loss) from discontinued operations before minority interest and
gain on disposition of property 10,051 (2,244) 7,807
Minority interest in limited partnerships - 833 833
Minority interest in operating partnerships (3,253) 397 (2,856)
------ ------ ------
Income (loss) from discontinued operations $ 6,798 $ (1,014) $ 5,784
======== ========= ========
The results of discontinued operations in the table above have been presented
for the years ended December 31, 2005 and 2004 only, as the discontinued
operations for 2003 solely represents the results from owned communities.
The major classes of assets and liabilities held for sale as of December 31,
2005 and 2004 were as follows:
2005 2004
---- ----
Real estate:
Land $ 27,820 $ 6,776
Buildings, improvements and equipment 246,181 107,530
-------- --------
274,001 114,306
Less: accumulated depreciation (54,225) (35,595)
-------- --------
Real estate held for sale or disposal, net 219,776 78,711
-------- --------
Other assets:
Cash in escrows 348 4,355
Accounts receivable 650 466
Prepaid expenses and other assets 2,951 184
Deferred charges - 3,860
-------- --------
Other assets held for sale 3,949 8,865
-------- --------
Liabilities:
Mortgage notes payable 73,603 77,637
Accounts payable - 543
Accrued expenses and other liabilities 431 1,893
Security deposits 1,233 533
-------- --------
Liabilities held for sale 75,267 80,606
-------- --------
Net assets held for sale $148,458 $ 6,970
======== ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 PROFORMA CONDENSED FINANCIAL INFORMATION
The Company acquired seven apartment communities ("2005 Acquired Communities")
with a combined 2,430 units in six unrelated transactions during the
twelve-month period ended December 31, 2005. The total combined purchase price
(including closing costs) of $283,400 equates to approximately $117 per unit.
Consideration for the communities was funded through the assumption or placement
of new debt of $184,300 of debt, $43,500 from the Company's line of credit and
$55,600 of UPREIT Units.
The following unaudited proforma information was prepared as if: (i) the 2005
transactions related to the acquisition of the "2005 Acquired Communities"
occurred as of the beginning of each period, and (ii) the 2004 transactions
related to the acquisition of ten apartment communities in six separate
transactions had occurred as of the beginning of each period. The proforma
financial information is based upon the historical consolidated financial
statements and is not necessarily indicative of the consolidated results which
actually would have occurred if the transactions had been consummated at January
1, 2003 or 2004, nor does it purport to represent the results of operations for
future periods. Adjustments to the proforma condensed combined statement of
operations for the twelve months ended December 31, 2005, 2004, and 2003 consist
principally of providing net operating activity and recording interest,
depreciation and amortization from January 1, 2003 or 2004 to the acquisition
date as appropriate.
Proforma (i)
For the years ended
December 31, (unaudited)
------------------------
2005 2004
---- ----
Total revenues $465,145 $448,519
Net income available to common shareholders before cumulative effect of change in
accounting principle 20,152 23,044
Net income available to common shareholders 20,152 22,723
Per common share data:
Net income available to common shareholders before cumulative effect of change in
accounting principle
Basic $0.63 $0.70
Diluted $0.62 $0.69
Net income available to common shareholders:
Basic $0.63 $0.69
Diluted $0.62 $0.68
Weighted average numbers of shares outstanding:
Basic 31,962.082 32,911.945
========== ==========
Diluted 32,328.105 33,314.038
========== ==========
Proforma (ii)
For the years ended
December 31, (unaudited)
------------------------
2004 2003
---- ----
Total revenues $419,477 $395,353
Net income available to common shareholders 22,762 22,016
Per common share data:
Net income available to common shareholders:
Basic $0.69 $0.75
Diluted $0.68 $0.74
Weighted average numbers of shares outstanding:
Basic 32,911.945 29,208.242
========== ==========
Diluted 33,314.038 29,575.660
========== ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16 SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information including non cash financing and investing
activities for the years ended December 31, 2005, 2004, and 2003 are as follows:
2005 2004 2003
---- ---- ----
Cash paid for interest $104,674 $ 92,150 $ 85,895
Mortgage loans assumed associated with property acquisitions 7,916 90,568 25,239
Issuance of UPREIT Units associated with property and other acquisitions 55,598 12,105 4,806
Increase in real estate associated with the purchase of UPREIT Units 5,220 12,470 5,600
Exchange of UPREIT Units for common shares 4,010 14,106 7,442
Fair value of hedge instruments 845 659 956
Net real estate assumed in connection with FIN 46R consolidation - 152,319 -
Other assets assumed in connection with FIN 46R consolidation - 11,916 -
Mortgage debt assumed in connection with FIN 46R consolidation - 129,149 -
Other liabilities assumed in connection with FIN 46R consolidation - 5,363 -
Net real estate disposed in connection with FIN 46R consolidation (50,467) (69,743) -
Other assets disposed in connection with FIN 46R consolidation (6,940) (3,054) -
Mortgage debt disposed in connection with FIN 46R consolidation (59,339) (48,611) -
Other liabilities disposed in connection with FIN 46R consolidation (1,187) (2,759) -
17 GAIN (LOSS) ON DISPOSITION OF PROPERTY AND BUSINESS
During 2005, the Company disposed of four apartment communities with 816 units
in three unrelated transactions. The total sales price of $142,600 equates to
$175 per unit. The total gain on sale of these transactions amounted to
approximately $73,200.
During 2004, the Company disposed of five apartment communities with 1,646 units
in four unrelated transactions. The total sales price of $92,500 equates to $56
per unit. The total gain on sale of these transactions amounted to approximately
$26,600.
During 2003, the Company disposed of seven apartment communities with 1,568
units in seven unrelated transactions. The total sales price of $59,000 equates
to $38 per unit. The total gain on sale of these transactions amounted to
approximately $4,000.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18 QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2005 and 2004 are as follows:
2005
----
First Second Third Fourth
----- ------ ----- ------
Total revenue $ 106,287 $ 109,167 $ 113,512 $ 114,835
Net income available to common shareholders 28 9,719 16,703 55,062
Per share data:
Basic earnings per share data:
Net income (loss) available to common shareholders $ (0.06) $ 0.25 $ 0.47 $ 1.70
Diluted earnings per share data:
Net income (loss) available to common shareholders $ (0.06) $ 0.25 $ 0.47 $ 1.68
2004
----
First Second Third Fourth
----- ------ ----- ------
Total revenue $ 96,643 $ 102,004 $ 104,926 $ 106,496
Net income before cumulative effect of change in accounting
principle 6,799 10,641 4,925 24,978 -
Net income available to common shareholders 6,478 10,641 4,925 24,978
Per share data:
Basic earnings per share data:
Net income available to common shareholders $ 0.14 $ 0.27 $ 0.09 $ 0.70
Diluted earnings per share data:
Net income available to common shareholders $ 0.14 $ 0.26 $ 0.09 $ 0.69
Full year per share data does not equal the sum of the quarterly data due
to the impact of the convertible securities on the quarterly results and not the
year to date amounts. The quarterly reports for the years ended December 31,
2005 and 2004 have been reclassified to reflect discontinued operations in
accordance with SFAS 144.
19 SUBSEQUENT EVENTS
On February 7, 2006, the Board of Directors approved a dividend of $.64 per
share for the quarter ended December 31, 2005. This is the equivalent of an
annual distribution of $2.56 per share. The dividend is payable February 28,
2006 to shareholders of record on February 17, 2006.
On February 7, 2006, the Company also declared a regular dividend of $.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending February 28, 2006. The dividend on the preferred shares is payable on
February 28, 2006 to shareholders of record on February 17, 2006. This dividend
is equivalent to an annualized rate of $2.25 per share.
SCHEDULE II
HOME PROPERTIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31:
(IN THOUSANDS)
Balance at Charged to
Beginning Costs and Amounts Balance at
of year Expenses Written Off end of year
------- -------- ----------- -----------
Allowance for Doubtful Receivables
December 31, 2005: $ 567 $3,472 ($3,526) $ 513
------- ------ ------- -------
December 31, 2004: 241 3,527 (3,201) 567
------- ------ ------- -------
December 31, 2003: 125 2,954 (2,838) 241
------- ------ ------- -------
Deferred Tax Asset Valuation Allowance
December 31, 2005: 8,680 - (259) 8,421
------- ------ ------- -------
December 31, 2004: 8,185 495 - 8,680
------- ------ ------- -------
December 31, 2003: 559 7,626 - 8,185
------- ------ ------- -------
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2005
(IN THOUSANDS)
Initial Costs Total Total
Cost Capital- Cost Cost
Buildings, ized Buildings, Net of
Improve- Subse- Improve- Accumu- Accumu-
ments & quent to ments & lated lated Year of
Encum- Equip- Adjust- Acqui- Equip- Depre- Depre- Acqui-
Community brances Land ment ments(a) sition Land ment Total(b) ciation ciation sition
--------- ------- ---- ---- -------- ------ ---- ---- -------- ------- ------- ------
1600 East Avenue $ 1,000 $ 8,527 $ 5,226 $ 1,000 $ 13,753 $ 14,753 $ 3,709 $11,044 1997
1600 Elmwood $ 10,870 299 5,698 $3,339 4,739 299 13,776 14,075 7,723 6,352 1983
Barrington Gardens 4,350 888 6,556 1,029 888 7,585 8,473 166 8,307 2005
Bayview & Colonial 11,669 1,600 8,471 4,046 1,600 12,517 14,117 1,921 12,196 2000
Beechwood Gardens 560 3,442 2,568 560 6,010 6,570 1,402 5,168 1998
Blackhawk Apts 13,507 2,968 14,568 5,166 2,968 19,734 22,702 3,162 19,540 2000
Bonnie Ridge Apts 35,065 4,830 42,769 22,992 4,830 65,761 70,591 12,593 57,998 1999
Braddock Lee Aps 21,596 3,810 8,842 5,245 3,810 14,087 17,897 3,757 14,140 1998
Brittany Place 18,207 4,728 39,608 9,830 4,728 49,438 54,166 4,680 49,486 2002
Brook Hill
Village Apts 8,404 330 7,920 4,995 330 12,915 13,245 4,427 8,818 1994
Cambridge
Village Assoc 3,148 2,460 3,188 1,816 2,460 5,004 7,464 548 6,916 2002
Canterbury Apts 29,582 4,944 21,384 6,709 4,944 28,093 33,037 4,717 28,320 1999
Canterbury Square(e) 5,788 2,352 10,791 5,200 2,352 15,991 18,343 4,100 14,243 1997
Carriage Hill-MI(e) 7,073 840 5,974 2,081 840 8,055 8,895 1,862 7,033 1998
Carriage Hill Apt 5,767 570 3,827 3,306 570 7,133 7,703 2,156 5,547 1996
Carriage Park(e) 9,304 1,280 8,184 3,442 1,280 11,626 12,906 2,853 10,053 1998
Castle Club Apts 6,720 948 8,909 2,768 948 11,677 12,625 1,858 10,767 2000
Charter Square(e) 9,777 3,952 18,247 8,819 3,952 27,066 31,018 6,446 24,572 1997
Chatham Hill Apts 26,065 1,848 46,150 3,566 1,848 49,716 51,564 2,487 49,077 2004
Cherry Hill
Club Apartments(e) 492 4,096 3,296 492 7,392 7,884 1,856 6,028 1998
Cherry Hill Village(e) 5,123 1,120 6,835 2,731 1,120 9,566 10,686 2,134 8,552 1998
Chesterfield Apts 8,137 1,482 8,206 4,738 1,482 12,944 14,426 3,281 11,145 1997
Cider Mill 62,933 15,552 65,938 5,847 15,552 71,785 87,337 6,402 80,935 2002
Cinnamon Run Apts 52,300 7,731 59,646 1 7,731 59,647 67,378 127 67,251 2005
Cornwall Park 5,574 439 2,947 4,348 439 7,295 7,734 2,094 5,640 1996
Country Village Apts 6,087 2,236 11,149 7,610 2,236 18,759 20,995 4,141 16,854 1998
Courtyards Village 4,851 3,360 9,824 2,518 3,360 12,342 15,702 1,611 14,091 2001
Coventry Village Apts 784 2,328 2,773 784 5,101 5,885 1,217 4,668 1998
Curren Terrace 14,774 1,908 10,957 6,221 1,908 17,178 19,086 4,401 14,685 1997
Cypress Place 6,109 2,304 7,861 3,342 2,304 11,203 13,507 1,792 11,715 2000
Deerfield Woods Apts(e) 3,068 864 4,877 2,115 864 6,992 7,856 1,083 6,773 2000
Devonshire Hills 23,009 14,850 32,934 4,632 14,850 37,566 52,416 4,594 47,822 2001
East Hill Gardens 231 1,560 1,069 231 2,629 2,860 610 2,250 1998
East Meadow Apts 7,140 2,250 10,803 1,010 2,250 11,813 14,063 1,693 12,370 2000
East Winds Apts 6,626 960 5,079 2,556 960 7,635 8,595 1,193 7,402 2000
Elmwood Terrace 21,415 6,048 14,680 4,959 6,048 19,639 25,687 3,135 22,552 2000
Emerson Square 2,201 384 2,019 1,163 384 3,182 3,566 990 2,576 1997
Executive House Apts 3,313 600 3,420 2,667 600 6,087 6,687 1,605 5,082 1997
Fairmount Apts 324 1,914 159 324 2,073 2,397 115 2,282 2004
Fairview Apts 7,406 580 5,305 2,828 4,267 580 12,400 12,980 6,423 6,557 1985
Falcon Crest Townhomes 16,030 2,772 11,116 6,876 2,772 17,992 20,764 3,408 17,356 1999
Falkland Chase Apts 39,499 9,000 49,705 2,537 9,000 52,242 61,242 3,130 58,112 2003
Fenland Field 12,090 3,510 11,050 3,505 3,510 14,555 18,065 1,816 16,249 2001
Fordham Green (e) 2,679 802 5,280 2,951 802 8,231 9,033 1,966 7,067 1997
Gardencrest Apts 24,360 61,525 13,648 24,360 75,173 99,533 7,386 92,147 2002
Gateway Village Apts 6,976 1,320 6,621 1,521 1,320 8,142 9,462 1,431 8,031 1999
Glen Brook Apts 1,414 4,816 2,401 1,414 7,217 8,631 1,320 7,311 1999
Glen Manor Apts 5,900 1,044 4,564 2,161 1,044 6,725 7,769 1,548 6,221 1997
Golf Club Apts 15,664 3,990 21,236 10,768 3,990 32,004 35,994 5,668 30,326 2000
Greentrees(e) 4,298 1,152 8,608 3,676 1,152 12,284 13,436 2,977 10,459 1997
Hackensack Gardens 9,426 2,376 10,916 811 2,376 11,727 14,103 259 13,844 2005
Hampton Court Apt(e) 3,208 1,252 4,615 3,625 1,252 8,240 9,492 1,287 8,205 2000
Harborside Manor 8,445 250 6,113 4,885 250 10,998 11,248 4,036 7,212 1995
Hawthorne Court 37,781 8,940 23,447 13,731 8,940 37,178 46,118 4,070 42,048 2002
Heritage Square 6,386 2,000 4,805 1,778 2,000 6,583 8,583 659 7,924 2002
Hill Brook
Place Apts 11,381 2,192 9,118 4,242 2,192 13,360 15,552 2,328 13,224 1999
Holiday Square 3,488 3,575 6,109 1,101 3,575 7,210 10,785 697 10,088 2002
Home Properties
of Bryn Mawr 14,747 3,160 17,907 9,180 3,160 27,087 30,247 4,691 25,556 2000
Home Properties
of Devon 28,892 6,280 35,545 19,688 6,280 55,233 61,513 9,171 52,342 2000
Home Properties
of Newark 16,567 2,592 12,713 11,753 2,592 24,466 27,058 4,862 22,196 1999
Idylwood Resort Apts 700 16,927 10,599 700 27,526 28,226 9,288 18,938 1995
Kensington Apts 228 1,593 152 228 1,745 1,973 93 1,880 2004
Kingsley (e) 5,859 1,640 11,671 4,602 1,640 16,273 17,913 3,912 14,001 1997
Lake Grove Apts 37,610 7,360 11,952 12,269 7,360 24,221 31,581 6,697 24,884 1997
Lakeshore
Villa Apts 4,983 573 3,849 4,269 573 8,118 8,691 2,214 6,477 1996
Lakeview Apts 8,787 636 4,552 2,656 636 7,208 7,844 1,722 6,122 1998
Liberty Commons(f) 506 5,272 506 5,272 5,778 88 5,690 2005
Macomb Manor Apts(e) 3,575 1,296 7,357 1,750 1,296 9,107 10,403 1,446 8,957 2000
Maple Tree 840 4,445 2,033 840 6,478 7,318 977 6,341 2000
Mid-Island Apts 6,675 4,160 6,567 4,848 4,160 11,415 15,575 3,165 12,410 1997
Mill Company Gardens 2,646 384 1,671 1,082 384 2,753 3,137 673 2,464 1982
Mill Towne Village 8,530 3,840 13,747 8,800 3,840 22,547 26,387 3,042 23,345 2001
Morningside
Heights Apts 17,555 6,147 28,699 20,515 6,147 49,214 55,361 12,014 43,347 1998
New Orleans
Park Apts 19,478 2,920 13,215 8,135 2,920 21,350 24,270 5,014 19,256 1997&1999
Newcastle Apts 197 4,007 3,684 4,031 197 11,722 11,919 5,939 5,980 1982
Northwood Apts 8,084 804 14,286 457 804 14,743 15,547 738 14,809 2004
Oak Manor Apts 6,344 616 4,111 2,370 616 6,481 7,097 1,601 5,496 1998
Oak Park (e) 4,577 1,192 9,188 4,900 1,192 14,088 15,280 3,432 11,848 1997
Orleans Village 65,993 8,510 58,912 14,178 8,510 73,090 81,600 11,071 70,529 2000
Owings Run
Consolidation 31,212 5,537 32,622 3,243 5,537 35,865 41,402 6,139 35,263 1999
Paradise Lane Apt 8,639 972 7,134 4,400 972 11,534 12,506 3,635 8,871 1997
Park Shirlington Apts 15,255 4,410 10,180 6,944 4,410 17,124 21,534 4,470 17,064 1998
Patricia Apartments 5,285 600 4,196 2,461 600 6,657 7,257 1,537 5,720 1998
Pearl Street 1,091 49 1,189 883 49 2,072 2,121 664 1,457 1995
Peppertree Farm Apts 80,500 12,571 83,751 2 12,571 83,753 96,324 180 96,144 2005
Perinton Manor Apts 9,161 224 6,120 3,629 3,494 224 13,243 13,467 6,897 6,570 1982
Pleasant View Gardens 51,370 5,710 47,816 18,443 5,710 66,259 71,969 15,119 56,850 1998
Pleasure Bay Apts 15,276 1,620 6,234 6,221 1,620 12,455 14,075 2,534 11,541 1998
Racquet Club
East Apts 32,162 1,868 23,107 5,853 1,868 28,960 30,828 6,222 24,606 1998
Racquet Club South 2,834 309 3,891 1,790 309 5,681 5,990 1,266 4,724 1999
Raintree
Island Apts 6,691 - 6,654 3,217 9,855 - 19,726 19,726 9,009 10,717 1985
Redbank Village Apts 16,324 2,000 14,030 7,799 2,000 21,829 23,829 4,794 19,035 1998
Regency Club Apts 26,675 2,604 34,825 1,452 2,604 36,277 38,881 1,283 37,598 2004
Rider Terrace 240 1,270 510 240 1,780 2,020 260 1,760 2000
Ridgeview at
Wakefield Village 2,300 17,107 1,199 2,300 18,306 20,606 474 20,132 2005
Ridley Brook Apts 9,841 1,952 7,719 2,956 1,952 10,675 12,627 2,033 10,594 1999
Riverton Knolls 5,954 240 6,640 2,523 5,650 240 14,813 15,053 7,976 7,077 1983
Royal Gardens Apt 32,368 5,500 14,067 12,621 5,500 26,688 32,188 7,361 24,827 1997
Sayville Commons 43,389 8,005 55,379 75 8,005 55,454 63,459 708 62,751 2005
Scotsdale (e) 9,104 1,692 11,920 4,201 1,692 16,121 17,813 3,671 14,142 1997
Selford Townhomes 3,960 1,224 4,200 2,141 1,224 6,341 7,565 1,207 6,358 1999
Seminary Hill Apts 9,900 2,960 10,194 7,200 2,960 17,394 20,354 3,065 17,289 1999
Seminary Towers Apts 28,617 5,480 19,348 12,782 5,480 32,130 37,610 5,791 31,819 1999
Shakespeare Park Apts 2,338 492 3,433 691 492 4,124 4,616 692 3,924 1999
Sherry Lake Apts 19,793 2,428 15,618 8,073 2,428 23,691 26,119 4,723 21,396 1998
Sherwood Consolidation 7,626 3,255 10,735 3,395 3,255 14,130 17,385 1,258 16,127 2002
South Bay Manor 8,000 1,098 1,958 3,730 1,098 5,688 6,786 971 5,815 2000
Southern Meadows 19,102 9,040 31,874 4,766 9,040 36,640 45,680 4,519 41,161 2001
Southpointe Square(e) 2,425 896 4,610 2,771 896 7,381 8,277 1,883 6,394 1997
Spanish Gardens 5,600 398 9,263 4,712 398 13,975 14,373 4,675 9,698 1994
Springwells Park(e) 1,515 16,840 4,981 1,515 21,821 23,336 4,052 19,284 1999
Stephenson House(e) 1,343 640 2,407 1,359 640 3,766 4,406 1,021 3,385 1997
Stone Ends Apts 23,236 5,600 28,428 1,350 5,600 29,778 35,378 2,267 33,111 2003
Stratford Greens Assoc 33,522 12,565 33,779 4,970 12,565 38,749 51,314 3,902 47,412 2002
Sunset Gardens Apts 8,685 696 4,663 4,046 696 8,709 9,405 2,414 6,991 1996
Tamarron Apts 5,200 1,320 8,474 1,169 1,320 9,643 10,963 1,695 9,268 1999
Terry Apts 650 3,439 836 650 4,275 4,925 615 4,310 2000
The Apts at
Wellington Trace 25,968 3,060 23,904 2,537 3,060 26,441 29,501 1,225 28,276 2004
The Brooke at Peachtree 992 15,145 104 992 15,249 16,241 165 16,076 2005
The Colony 7,830 34,121 9,733 7,830 43,854 51,684 7,780 43,904 1999
The Hamptons 54,871 5,749 50,647 2,944 5,749 53,591 59,340 2,022 57,318 2004
The Lakes Apts(e) 2,821 23,086 4,353 2,821 27,439 30,260 4,614 25,646 1999
The Landings 12,722 2,459 16,753 7,587 2,459 24,340 26,799 6,117 20,682 1996
The Manor Apts(MD) 22,578 8,700 27,703 6,234 8,700 33,937 42,637 4,124 38,513 2001
The Manor Apts (VA) 5,600 1,386 5,738 3,667 1,386 9,405 10,791 2,149 8,642 1999
The Meadows Apts 3,334 208 2,776 1,216 1,781 208 5,773 5,981 2,992 2,989 1984
The New Colonies 20,820 1,680 21,350 9,761 1,680 31,111 32,791 7,778 25,013 1998
The Sycamores 4,625 15,725 1,404 4,625 17,129 21,754 1,440 20,314 2002
The Village
at Marshfield 24,274 3,158 28,351 580 3,158 28,931 32,089 1,386 30,703 2004
Timbercroft
Consolidation 6,269 1,704 6,826 2,963 1,704 9,789 11,493 1,691 9,802 1999
Trexler Park Apts 10,140 2,490 13,802 5,355 2,490 19,157 21,647 3,188 18,459 2000
Valley View Apts 3,788 1,056 4,960 3,962 1,056 8,922 9,978 2,343 7,635 1997
Village Green Apt 9,120 1,103 13,223 6,643 1,103 19,866 20,969 6,948 14,021 1994-1996
Village Square(PA) 4,026 768 3,582 3,254 768 6,836 7,604 1,838 5,766 1997
Village Square Apts(MD) 21,075 2,590 13,306 6,275 2,590 19,581 22,171 3,256 18,915 1999
Vinings at
Hampton Village 1,772 12,214 911 1,772 13,125 14,897 498 14,399 2004
Virginia Village 8,949 5,160 21,918 6,115 5,160 28,033 33,193 3,918 29,275 2001
Wayne Village 14,939 1,925 12,895 5,689 1,925 18,584 20,509 4,374 16,135 1998
West Springfield Terrace 2,440 31,758 2,014 2,440 33,772 36,212 2,778 33,434 2002
Westminster Place 6,536 861 5,763 3,627 861 9,390 10,251 2,793 7,458 1996
Westwood Village Apts 34,370 7,260 22,757 7,887 7,260 30,644 37,904 3,339 34,565 2002
William Henry Apts 22,940 4,666 22,220 8,519 4,666 30,739 35,405 5,018 30,387 2000
Windsor Realty Co 4,730 402 3,300 1,650 402 4,950 5,352 1,168 4,184 1998
Woodgate Place 3,127 480 3,797 2,374 480 6,171 6,651 1,698 4,953 1997
Woodholme Manor Apts 3,751 1,232 4,599 3,491 1,232 8,090 9,322 1,146 8,176 2001
Woodland Gardens(e) 5,506 2,022 10,480 4,263 2,022 14,743 16,765 3,630 13,135 1997
Woodleaf Apts 2,862 17,716 670 2,862 18,386 21,248 895 20,353 2004
Woodmont Village Apts 2,880 5,699 1,890 2,880 7,589 10,469 796 9,673 2002
Yorkshire
Village Apts 1,490 1,200 2,016 681 1,200 2,697 3,897 295 3,602 2002
Other Assets(d) 585 3,479 22,214 3,479 22,214 25,693 10,988 14,705 Various
Limited Partnerships(c) 16,989 1,203 9,963 17,913 1,203 27,876 29,079 8,320 20,759
---------------------------------------------------------------------------------------------------------
$1,842,086 $430,119$2,191,198 $20,436 $743,390 $430,119 $2,955,024 $3,385,143 $500,592 $2,884,551
Less Held for Sale
(Note 14) 73,603 27,820 175,066 - 71,115 27,820 246,181 274,001 54,225 219,776
---------------------------------------------------------------------------------------------------------
$1,768,483 $402,299$2,016,132 $20,436 $672,275 $402,299 $2,708,843 $3,111,142 $446,367 $2,664,775
========== ======== ========== ====== ======== ======== ========= ========= ======= =========
(a) Represents the excess of fair value over the historical cost of partnership
interests as a result of the application of purchase accounting for the
acquisition of non-controlled interests.
(b) The aggregate cost for Federal Income Tax purposes was approximately
$2,766,561.
(c) The net real-estate related to the limited partnership is presented on the
Consolidated Balance Sheet as held and used.
(d) The $585 in Other Assets Encumbrances consists of a note payable.
(e) Represents properties within the Detroit Portfolio that are presented on
the Consolidated Balance Sheet as held for sale.
(f) Construction completed August 1, 2005.
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2005
(IN THOUSANDS)
Depreciation and amortization of the Company's investments in buildings and
improvements reflected in the consolidated statements of operations are
calculated over the estimated useful lives of the assets as follows:
Buildings and improvements 3-40 years
The changes in total real estate assets are as follows:
2005 2004 2003
---- ---- ----
Balance, beginning of year $3,123,901 $2,752,992 $2,597,278
Management Companies - - 5,846
New property acquisition 283,363 256,208 96,801
Additions 100,013 102,700 106,346
Increase in real estate associated with the conversion of UPREIT Units 5,220 11,864 5,600
Assets held for sale associated with consolidated affordable limited
partnerships - 78,711 -
Disposals of assets held for sale associated with consolidated
affordable limited partnerships (50,627) - -
Disposals, retirements and impairments (76,727) (78,574) (58,879)
---------- ---------- ----------
Balance, end of year $3,385,143 $3,123,901 $2,752,992
========== ========== ==========
The changes in accumulated depreciation are as follows:
2005 2004 2003
---- ---- ----
Balance, beginning of year $405,919 $330,062 $257,284
Management Companies - - 2,287
Properties previously held for sale, changed to held and used 6,999
Depreciation for the year 99,322 90,787 79,187
Disposals and retirements (11,648) (14,930) (8,696)
-------- -------- --------
Balance, end of year $500,592 $405,919 $330,062
======== ======== ========
HOME PROPERTIES, INC.
FORM 10-K
For Fiscal Year Ended December 31, 2005
Exhibit Index
Exhibit
Number Exhibit Location
2.1 Agreement among Home Properties of New York, Inc. and Philip Incorporated by reference to the Form
J. Solondz, Daniel Solondz and Julia Weinstein Relating to 8- K filed by Home Properties of New
Royal Gardens I, together with Amendment No. 1 York, Inc. dated 6/6/97 (the "6/6/97
8-K")
2.2 Agreement among Home Properties of New York, Inc and Philip Incorporated by reference to the
Solondz and Daniel Solondz relating to Royal Gardens II, 6/6/97 8-K
together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Home Incorporated by reference to the Form
Properties of New York between Home Properties of New York, 8-K filed by Home Properties of New
L.P. and Berger/Lewiston Associates Limited Partnership; York, Inc. dated 10/7/97
Stephenson-Madison Heights Company Limited Partnership;
Kingsley- Moravian Company Limited Partnership; Woodland
Garden Apartments Limited Partnership; B&L Realty Investments
Limited Partnership; Southpointe Square Apartments Limited
Partnership; Greentrees Apartments Limited Partnership; Big
Beaver-Rochester Properties Limited Partnership; Century
Realty Investment Company Limited Partnership
2.24 Contribution Agreement dated March 2, 1998 among Home Incorporated by reference to the Form
Properties of New York, L.P., Braddock Lee Limited 8-K filed by Home Properties of New
Partnership and Tower Construction Group, LLC York, Inc., dated 3/24/98 (the
"3/24/98 8-K")
2.25 Contribution Agreement dated March 2, 1998 among Home Incorporated by reference to the
Properties of New York, L.P., Park Shirlington Limited 3/24/98 8-K
Partnership and Tower Construction Group, LLC
2.27 Form of Contribution Agreement among Home Properties of New Incorporated by reference to the Form
York, L.P. and Strawberry Hill Apartment Company LLLP, 8-K filed by Home Properties of New
Country Village Limited Partnership, Morningside Six, LLLP, York, Inc. on 5/22/98 (the "5/22/98
Morningside North Limited Partnership and Morningside Heights 8-K")
Apartment Company Limited Partnership with schedule setting
forth material details in which documents differ from form
2.29 Form of Contribution Agreement dated June 7, 1999, relating Incorporated by reference to the Form
to the CRC Portfolio with schedule setting forth material 8-K filed by Home Properties of New
details in which documents differ from form York, Inc. on 7/2/99 (the "7/2/99 8-K")
2.30 Form of Contribution Agreement relating to the Mid-Atlantic Incorporated by reference to the Form
Portfolio with schedule setting forth material details in 8-K filed by Home Properties of New
which documents differ from form York, Inc. on 7/30/99
2.31 Contribution Agreement among Home Properties of New York, Incorporated by reference to the Form
L.P., Leonard Klorfine, Ridley Brook Associates and the 8-K filed by Home Properties of New
Greenacres Associates York, Inc. on 10/5/99 (the "10/5/99
8-K")
2.33 Contribution Agreement among Home Properties of New York, Incorporated by reference to the Form
L.P., Gateside-Bryn Mawr Company, L.P., Willgold Company, 8-K filed by Home Properties of New
Gateside-Trexler Company, Gateside-Five Points Company, York, Inc. on 4/5/00
Stafford Arms, Gateside-Queensgate Company, Gateside Malvern
Company, King Road Associates and Cottonwood Associates
2.34 Contribution Agreement between Old Friends Limited Incorporated by reference to the Form
Partnership and Home Properties of New York, L.P. and Home 8-K/A filed by Home Properties of New
Properties of New York, Inc., along with Amendments Number 1 York, Inc. on 12/5/00 (the "12/5/00
and 2 thereto 8-K")
2.35 Contribution Agreement between Deerfield Woods Venture Incorporated by reference to the
Limited Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.36 Contribution Agreement between Macomb Apartments Limited Incorporated by reference to the
Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.37 Contribution Agreement between Home Properties of New York, Incorporated by reference to the
L.P. and Elmwood Venture Limited Partnership 12/5/00 8-K/A
2.38 Sale Purchase and Escrow Agreement between Bank of America as Incorporated by reference to the
Trustee and Home Properties of New York, L.P. 12/5/00 8-K/A
2.39 Contribution Agreement between Home Properties of New York, Incorporated by reference to the
L.P., Home Properties of New York, Inc. and S&S Realty, a New 12/5/00 8-K/A
York General Partnership (South Bay)
2.40 Contribution Agreement between Hampton Glen Apartments Incorporated by reference to the
Limited Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.41 Contribution Agreement between Home Properties of New York, Incorporated by reference to the
L.P. and Axtell Road Limited Partnership 12/5/00 8-K/A
2.42 Contribution Agreement between Elk Grove Terrace II and III, Incorporated by reference to the Form
L.P., Elk Grove Terrace, L.P. and Home Properties of New 8-K filed by Home Properties of New
York, L.P. York, Inc. on 1/10/01
3.1 Articles of Amendment and Restatement of Articles of Incorporated by reference to Home
Incorporation of Home Properties of New York, Inc. Properties of New York, Registration
Statement on Form S-11, File No.
33-78862 (the "S-11 Registration
Statement")
3.2 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to the Home
Home Properties of New York, Inc. Properties of New York, Inc.
Registration Statement on Form S-3
File No. 333-52601 filed May 14, 1998
(the "5/14/98 S-3")
3.3 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to 7/2/99 8-K
Home Properties of New York, Inc.
3.4 Amended and Restated Articles Supplementary of Series A Incorporated by reference to the Home
Senior Convertible Preferred Stock of Home Properties of New Properties of New York, Inc.
York, Inc. Registration Statement on Form S-3,
File No. 333-93761, filed 12/29/99
(the "12/29/99 S-3")
3.5 Series B Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Home
Supplementary to the Amended and Restated Articles of Properties of New York, Inc.
Incorporation of Home Properties of New York, Inc. Registration Statement on Form S-3,
File No. 333-92023, filed 12/3/99
3.6 Series C Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form
Supplementary to the Amended and Restated Articles of 8-K filed by Home filed by Home
Incorporation of Home Properties of New York, Inc. Properties of New York, Inc. on
5/22/00 (the "5/22/00 8-K")
3.7 Series D Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form
Supplementary to the Amended and Restated Articles of 8-K filed by Home Properties of New
Incorporation of Home Properties of New York, Inc. York, Inc. on 6/12/00 (the "6/12/00
8-K")
3.8 Series E Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form
Supplementary to the Amended and Restated Articles of 8-K filed by Home Properties of New
Incorporation of Home Properties of New York, Inc. York, Inc. on 12/22/00 (the "12/22/00
8-K)
3.9 Amended and Restated By-Laws of Home Properties of New York, Incorporated by reference to the Form
Inc. (Revised 12/30/96) 8-K filed by Home Properties of New
York, Inc. dated December 23, 1996
(the "12/23/96 8- K")
3.10 Series F Cumulative Redeemable Preferred Stock Articles Incorporated by reference to the Form
Supplementary to the Amended and Restated Articles of 8-A12B filed by Home Properties of New
Incorporation of Home Properties of New York, Inc. York, Inc. on March 20, 2002
3.11 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to the Form
Home Properties of New York, Inc. 10-Q filed by Home Properties, Inc.
for the quarter ended 3/31/04 (the
"3/31/04 10-Q")
3.12 Amendment Number One to Home Properties of New York, Inc. Incorporated by reference to the
Amended and Restated By-laws 3/31/04 10-Q
4.1 Form of certificate representing Shares of Common Stock Incorporated by reference to the Form
10- K filed by Home Properties of New
York, Inc. for the period ended
12/31/94 (the "12/31/94 10-K")
4.2 Agreement of Home Properties of New York, Inc. to file Incorporated by reference to the
instruments defining the rights of holders of long-term debt 12/31/94 10-K
of it or its subsidiaries with the Commission upon request
4.7 Spreader, Consolidation, Modification and Extension Agreement Incorporated by reference to the Form
between Home Properties of New York, L.P. and John Hancock 10-K filed by Home Properties New
Mutual Life Insurance Company, dated as of October 26, 1995, York, Inc. for the period ended
relating to indebtedness in the principal amount of 12/31/95 (the "12/31/95 10-K")
$20,500,000
4.8 Amended and Restated Stock Benefit Plan of Home Properties of Incorporated by reference to the
New York, Inc. 6/6/97 8-K
4.9 Amended and Restated Dividend Reinvestment, Stock Purchase, Incorporated by reference to the Form
Resident Stock Purchase and Employee Stock Purchase Plan 8-K filed by Home Properties of New
York, Inc., dated 12/23/97
4.10 Amendment No. One to Amended and Restated Dividend Incorporated by reference to the Home
Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York, Inc.
Employee Stock Purchase Plan Registration Statement on Form S-3,
File No. 333-49781, filed on 4/9/98
(the "4/9/98 S-3")
4.11 Amendment No. Two to Amended and Restated Dividend Incorporated by reference to the Home
Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York Inc.
Employee Stock Purchase Plan Registration Statement on Form S-3,
File No. 333-58799, filed on 7/9/98
(the "7/9/98 S-3")
4.12 Amended and Restated Dividend Reinvestment, Stock Purchase, Incorporated by reference to Home
Resident Stock Purchase and Employee Stock Purchase Plan Properties of New York, Inc. Form 10-Q
for the Quarter ended 6/30/98 (the
"6/30/98 10-Q")
4.13 Amendment No. Three to Amended and Restated Dividend Incorporated by reference to the Home
Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York, Inc.
Employee Stock Purchase Plan Registration Statement on Form S-3,
Registration No. 333-67733, filed on
11/23/98 (the "11/23/98 S-3")
4.14 Directors' Stock Grant Plan Incorporated by reference to the
5/22/98 8-K
4.16 Home Properties of New York, Inc., Home Properties of New Incorporated by reference to the
York, L.P. Executive Retention Plan 7/2/99 8-K
4.17 Home Properties of New York, Inc. Deferred Bonus Plan Incorporated by reference to the
7/2/99 8-K
4.18 Fourth Amended and Restated Dividend Reinvestment, Stock Incorporated by reference to the
Purchase, Resident Stock Purchase and Employee Stock Purchase Registration Statement on Form S-3,
Plan File No. 333-94815 filed on 1/18/2000
4.19 Directors Deferred Compensation Plan Incorporated by reference to the Home
Properties of New York, Inc. Form 10-K
for the period ended 12/31/99 (the
"12/31/99 10-K")
4.23 Home Properties of New York, Inc. Amendment Number One to the Incorporated by reference to the Form
Amended and Restated Stock Benefit Plan 10-Q of Home Properties of New York,
Inc. for the quarter ended 3/31/00
(the "3/31/00 10-Q")
4.24 Fifth Amended and Restated Dividend Reinvestment, Stock Incorporated by reference to the
Purchase, Resident Stock Purchase and Employee Stock Purchase Registration Statement on Form S-3,
Plan file No. 333-54160, filed 1/23/01
4.25 Sixth Amended and Restated Dividend Reinvestment and Direct Incorporated by reference to the Form
Stock Purchase Plan 10-K filed by Home Properties of New
York, Inc., for the annual period
ended 12/31/00 (the "12/31/00 10-K")
4.26 Home Properties of New York, Inc. Amendment Number Two to the Incorporated by reference to the Form
Amended and Restated Stock Benefit Plan 10-K filed by Home Properties of New
York, Inc. for the annual period ended
12/31/01 (the "12/31/01 10-K")
4.27 Amendment No. One to Home Properties of New York, Inc. Incorporated by reference to the
Deferred Bonus Plan 12/31/01 10-K
4.28 Amended and Restated Director Deferred Compensation Plan Incorporated by reference to Form
10-K of Home Properties of New York,
Inc. filed for the annual period
ended 12/31/02 (the "12/31/02 10-K")
4.29 Amendment No. Two to Deferred Bonus Plan Incorporated by reference to the
12/31/02 10-K
4.30 Amendment Number One to Sixth Amended and Restated Dividend Incorporated by reference to Form 10-K
Reinvestment and Direct Stock Purchase Plan of Home Properties, Inc. for the
period ended 12/31/05 (the
"12/31/0510-K")
4.31 Amended and Restated 2003 Stock Benefit Plan Incorporated by reference to the Form
8-K filed by Home Properties, Inc.
dated May 6, 2005 (the "5/6/05 8-K")
4.32 Second Amended and Restated Director Deferred Compensation Incorporated by reference to the
Plan 5/6/05 8-K
10.1 Second Amended and Restated Agreement Limited Partnership of Incorporated by reference to the Form
Home Properties of New York, L.P. 8-K filed by Home Properties of New
York, Inc. dated 9/26/97 (the "9/26/97
8-K")
10.2 Amendments No. One through Eight to the Second Amended and Incorporated by reference to Form 10-K
Restated Agreement of Limited Partnership of Home Properties of Home Properties of New York, Inc.
of New York, L.P. for the period ended 12/31/97 (the
"12/31/97 10-K")
10.3 Articles of Incorporation of Home Properties Management, Inc. Incorporated by reference to the S-11
Registration Statement
10.4 By-Laws of Home Properties Management, Inc. Incorporated by reference to S-11
Registration Statement
10.5 Articles of Incorporation of Conifer Realty Corporation Incorporated by reference to 12/31/95
10-K
10.6 Articles of Amendment to the Articles of Incorporation of Incorporated by reference to the
Conifer Realty Corporation Changing the name to Home 12/31/00 10-K
Properties Resident Services, Inc.
10.7 By-Laws of Conifer Realty Corporation (now Home Properties Incorporated by reference to the
Resident Services, Inc.) 12/31/95 10-K
10.8 Home Properties Trust Declaration of Trust, dated September Incorporated by reference to the Form
19, 1997 8-K filed by Home Properties of New
York, Inc. dated 9/26/97 (the "9/26/97
10-K")
10.13 Indemnification Agreement between Home Properties of New Incorporated by reference to the Form
York, Inc. and certain officers and directors 10-Q filed by Home Properties of New
York, Inc. for the quarter ended
6/30/94 (the "6/30/94 10-Q")
10.15 Indemnification Agreement between Home Properties of New Incorporated by reference to the Form
York, Inc. and Alan L. Gosule 10-K filed by Home Properties of New
York, Inc. for the annual period ended
12/31/96 (the 12/31/96 10-K")
10.17 Agreement of Operating Sublease, dated October 1, 1986, among Incorporated by reference to the S-11
KAM, Inc., Morris Massry and Raintree Island Associates, as Registration Statement
amended by Letter Agreement Supplementing Operating Sublease
dated October 1, 1986
10.26 Amendment No. Nine to the Second Amended and Restated Incorporated by reference to 5/14/98
Agreement of Limited Partnership of the Operating Partnership S-3
10.27 Master Credit Facility Agreement by and among Home Properties Incorporated by reference to the Home
of New York, Inc., Home Properties of New York, L.P., Home Properties of New York, Inc. Form 10-Q
Properties WMF I LLC and Home Properties of New York, L.P. for the quarter ended 9/30/98 (the
and P-K Partnership doing business as Patricia Court and "9/30/98 10-Q")
Karen Court and WMF Washington Mortgage Corp., dated as of
August 28, 1998
10.28 First Amendment to Master Credit Facility Agreement, dated as Incorporated by reference to the Form
of December 11, 1998 among Home Properties of New York, Inc., 10-K filed by Home Properties of New
Home Properties of New York, L.P., Home Properties WMF I LLC York, Inc. for the annual period ended
and Home Properties of New York, L.P. and P-K Partnership 12/31/98 ( the "12/31/98 10-K")
doing business as Patricia Court and Karen Court and WMF
Washington Mortgage Corp. and Fannie Mae
10.29 Second Amendment to Master Credit Facility Agreement, dated Incorporated by reference to the
as of August 30, 1999 among Home Properties of New York, 12/31/99 10-K
Inc., Home Properties of New York, L.P., Home Properties WMF
I LLC and Home Properties of New York, L.P. and P-K
Partnership doing business as Patricia Court and Karen Court
and WMF Washington Mortgage Corp. and Fannie Mae
10.30 Amendments Nos. Ten through Seventeen to the Second Amended Incorporated by reference to the
and Restated Limited Partnership Agreement 12/31/98 10-K
10.31 Amendments Nos. Eighteen through Twenty- Five to the Second Incorporated by reference to the Home
Amended and Restated Limited Partnership Agreement Properties of New York, Inc. Form 10-Q
for the quarter ended 9/30/99 (the
"9/30/99 10-Q")
10.32 Credit Agreement, dated 8/23/99 between Home Properties of Incorporated by reference to the
New York, L.P., certain Lenders and Manufacturers and Traders 9/30/99 10-Q
Trust Company as Administrative Agent
10.33 Amendment No. Twenty-Seven to the Second Amended and Restated Incorporated by reference to the
Limited Partnership Agreement 12/29/99 S-3
10.34 Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to Incorporated by reference to the
the Second Amended and Restated Limited Partnership Agreement 12/31/99 10-K
10.37 2000 Stock Benefit Plan Incorporated by reference to the
12/31/99 10-K
10.39 Purchase Agreement between Home Properties of New York, Inc. Incorporated by reference to the
and The Equitable Life Assurance Society of the United States 6/12/00 8-K
10.41 Home Properties of New York, L.P. Amendment Number One to Incorporated by reference to the
Executive Retention Plan 3/31/00 10-Q
10.42 Amendments No. Thirty-One and Thirty-Two to the Second Incorporated by reference to the
Amended and Restated Limited Partnership Agreement 3/31/00 10-Q
10.49 Amendment No. Thirty Three to the Second Amended and Restated Incorporated by reference to the
Limited Partnership Agreement 12/31/00 10-K
10.50 Amendment No. Thirty Five to the Second Amended and Restated Incorporated by reference to the
Limited Partnership Agreement 12/31/00 10-K
10.51 Amendment No. Forty Two to the Second Amended and Restated Incorporated by reference to the
Limited Partnership Agreement 12/31/00 10-K
10.52 Amendments Nos. Thirty Four, Thirty Six through Forty One, Incorporated by reference to the
Forty Three and Forty Four to the Second Amended and Restated 12/31/00 10-K
Limited Partnership Agreement
10.57 Amendment Nos. Forty-Five through Fifty-One to the Second Incorporated by reference to the
Amendment and Restated Limited Partnership Agreement 12/31/01 10-K
10.58 Home Properties of New York, Inc. Amendment No. One to 2000 Incorporated by reference to the
Stock Benefit Plan 12/31/01 10-K
10.59 Home Properties of New York, Inc. Amendment No. Two to 2000 Incorporated by reference to the
Stock Benefit Plan 12/31/01 10-K
10.60 Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended Incorporated by reference to the Form
and Restated Limited Partnership Agreement 10-Q filed by Home Properties of New
York, Inc. for the quarter ended
9/30/02 (the "9/30/02 10-Q")
10.61 Amendment Nos. Fifty-Six to Fifty-Eight to the Second Incorporated by reference to the Form
Amended and Restated Limited Partnership Agreement 10-K filed by Home Properties of New
York, Inc. for the annual period ended
12/31/02 (the "12/31/02 10-K")
10.62 Amendment No. Two to Credit Agreement Incorporated by reference to the
9/30/02 10Q
10.63 Purchase and Sale Agreement, dated as of January 1, 2004 Incorporated by reference to the Form
among Home Properties of New York, L.P., Home Properties 10-K filed by Home Properties, Inc.
Management, Inc. and Home Leasing, LLC, dated January 1, 2004 for the period ended 12/31/2003 (the
"12/31/2003 10-K")
10.64 Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Incorporated by reference to
Amended and Restated Limited Partnership Agreement 12/31/2003 10-K
10.65 Home Properties of New York, Inc. Amendment No. Three to Incorporated by reference to
2000 Stock Benefit Plan 12/31/2003 10-K
10.66 Employment Agreement, dated as of October 28, 2003 between Incorporated by reference to the Form
Home Properties, L.P., Home Properties, Inc., and Nelson B. 8-K filed by Home Properties of New
Leenhouts York, Inc. on 10/29/03 (the "10/29/03
8-K")
10.67 Employment Agreement, dated as of October 28, 2003 between Incorporated by reference to the
Home Properties, L.P., Home Properties, Inc. and Norman B. 10/29/03 8-K
Leenhouts
10.68 Home Properties of New York, Inc. 2003 Stock Benefit Plan Incorporated by reference to Schedule
14A filed by Home Properties of New
York, Inc. on March 28, 2003
10.69 Amendment Number Two to Home Properties of New York, Inc. Incorporated by reference to
and Home Properties of New York, L.P. Executive Retention 12/31/2003 10-K
Plan
10.70 Employment Agreement, dated as of May 17, 2004, between Home Incorporated by reference to the
Properties, L.P., Home Properties, Inc. and Edward J. 12/31/05 10-K
Pettinella
10.71 Amendment Nos. Sixty-Eight through Seventy-Three to the Incorporated by reference to the
Second Amended and Restated Limited Partnership Agreement 12/31/05 10-K
10.72 Summary of Non-Employee Director Compensation Effective Incorporated by reference to the Form
January 1, 2006 8-K/A filed by Home Properties, Inc.
on January 6, 2006
10.73 Summary of Named Executive Compensation for 2006 Filed herewith
10.74 Amendment No. Three to Credit Agreement, dated April 1, 2004, Incorporated by reference to the
between Home Properties, L.P., certain Lenders, and 12/31/05 10-K
Manufacturers and Traders Trust Company as Administrative
Agent
10.75 Amended and Restated Incentive Compensation Plan Incorporated by reference to the
12/31/05 10-K
10.76 LIBOR Grid Note, dated November 23, 2004 from Home Incorporated by reference to the
Properties, L.P. to Manufacturers and Traders Trust Company 12/31/05 10-K
10.77 Mutual Release, dated January 24, 2005, given by Home Incorporated by reference to the Form
Properties, L.P. and Home Properties, Inc. and Boston Capital 8-K filed by Home Properties , Inc.
Tax Credit Fund XIV, a Limited Partnership, Boston Capital dated January 24, 2005
Tax Credit Fund XV, a Limited Partnership, and BCCC, Inc.
relating to certain obligations pertaining to Green Meadows
and related Letter Agreement.
10.78 Amendment No. Four to Credit Agreement, dated September 8, Incorporated by reference to Form 10-Q
2005 between Home Properties, L.P., certain Lenders, and filed by Home Properties, Inc. (the
Manufacturers and Traders Trust Company, as Administrative "9/30/05 10-Q")
Agent
10.79 Agreement, dated September 30, 2005, between General Electric Incorporated by reference to the
Credit Equities, Inc. and H.P. Knolls I Associates, L.P. 9/30/05 10-Q
10.80 Agreement, dated September 30, 2005, between General Electric Incorporated by reference to the
Credit Equities, Inc. and H.P. Knolls II Associates, L.P. 9/30/05 10-Q
10.81 Amendments Nos. Seventy-Four to through Seventy-Nine to the Filed herewith
Second Amended and Restated Limited Partnership
11 Computation of Per Share Earnings Schedule Filed herewith
14.1 Home Properties , Inc. Code of Ethics for Senior Finance Incorporated by reference to
Officers 12/31/2003 10-K
14.2 Home Properties, Inc. Code of Business Conduct and Ethics Incorporated by reference to
12/31/2003 10-K
21 List of Subsidiaries of Home Properties, Inc. Filed herewith
23 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Section 302 Certification of Chief Executive Officer Furnished herewith
31.2 Section 302 Certification of Chief Financial Officer Furnished herewith
32.1 Section 906 Certification of Chief Executive Officer Filed herewith
32.2 Section 906 Certification of Chief Financial Officer Filed herewith
99 Additional Exhibits - Debt Summary Schedule Filed herewith
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Edward J Pettinella, certify that:
1. I have reviewed this annual report on Form 10-K of Home Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ Edward J. Pettinella
Edward J. Pettinella
President and Chief Executive Officer
March 13, 2006
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, David P. Gardner, certify that:
1. I have reviewed this annual report on Form 10-K of Home Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions): (a) all
significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and (b) any fraud, whether or not material,
that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
/s/ David P. Gardner
David P. Gardner
Executive Vice President and Chief Financial Officer
March 13, 2006