Page 1 of 120
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, 2006
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 NO X
------ ------
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,
2006, was approximately $1,796,700,000.
As of February 16, 2007, there were 33,205,831 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 1, 2007
HOME PROPERTIES, INC.
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TABLE OF CONTENTS
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Page
----
PART I.
Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 16
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 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 54
Item 8. Financial Statements and Supplementary Data 55
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 55
Item 9A. Controls and Procedures 55
Item 9B. Other Information 56
PART III.
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters 60
Item 13. Certain Relationships and Related Transactions 60
Item 14. Principal Accountant Fees and Services 60
PART IV.
Item 15. Exhibits, Financial Statement Schedules 61
PART I
Forward-Looking Statements
--------------------------
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Our actual results could differ materially from those set forth in each
forward-looking statement. Certain factors that might cause such a difference
are discussed in this report, included in the section entitled "Overview" on
page 31 of this Form 10-K.
Item 1. Business
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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 primarily in select Northeast,
Mid-Atlantic 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 71.4%
partnership interest as of December 31, 2006 (65.2% at December 31, 2005) (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 a management company
- Home Properties Resident Services, Inc. ("HPRS"), which is a Maryland
corporation. Formerly, a portion of the Company's business was also conducted by
Home Properties Management, Inc. also a Maryland corporation, which was merged
into HPRS on November 21, 2006.
Home Properties, through its affiliates described above, as of December 31,
2006, operated 127 communities with 39,136 apartment units. Of these, 36,954
units in 123 communities are owned outright (the "Owned Properties"), 868 units
in one community are managed and partially owned by the Company as general
partner, and 1,314 units in three 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 Washington, D.C. 9,579 - - 9,579
Suburban New York City 8,340 - - 8,340
Baltimore, MD 6,632 - 1,314 7,946
Philadelphia, PA 6,467 - - 6,467
Chicago, IL 2,242 - - 2,242
Boston, MA 2,143 - - 2,143
Southeast Florida 836 - - 836
Portland, ME 715 - - 715
Columbus, OH - 868 - 868
------ --- ----- ------
Total # of Units 36,954 868 1,314 39,136
====== === ===== ======
Total Number of Communities 123 1 3 127
The Company's mission is to maximize long-term shareholder value by acquiring,
repositioning, developing 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, located in selected high
barrier, high growth markets. The areas we have targeted for growth are the
Baltimore, Boston, New York City, Philadelphia, Southeast Florida and
Washington, D.C. regions. 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) developing new apartment communities on raw land, on land
adjacent to existing owned communities and where there are density opportunities
to replace existing garden apartments with mid- or high-rise structures; (iv)
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 (v) 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, 2006, it owned a
72.8% interest in the Operating Partnership (such interest has been calculated
as the percentage of outstanding common and preferred units in the Operating
Partnership 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, 2006 consisted of all of the Series F
Limited Partnership Units (2,400,000 units, or 4.9% 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 (32,615,310 or 66.9% 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.
HPRS is and HP Management was, prior to its merger into HPRS in November 2006, a
wholly owned subsidiary of the Company, and as a result the accompanying
consolidated financial statements include the accounts of both companies. HPRS
is and HP Management was a taxable REIT subsidiary under the Tax Relief
Extension Act of 1999. HP Management was formed in January 1994 and HPRS was
formed in December 1995. Both 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 HPRS and HP Management was minimal in 2006
and HP Management therefore was merged into HPRS.
In September 1997, Home Properties Trust ("QRS") was formed as a Maryland real
estate trust and as a qualified REIT subsidiary. The QRS is wholly owned by Home
Properties I, LLC which is owned 100% by the Company. The QRS is a limited
partner of the Operating Partnership and holds all of the Company's interest in
the Operating Partnership, except for the 1% held directly by the Company as
sole general partner.
The Company currently has approximately 1,200 employees and its executive
offices are located at 850 Clinton Square, Rochester, New York 14604. Its
telephone number is (585) 546-4900.
Operating Strategies
--------------------
The Company will continue to focus on enhancing investment returns by:
(i) developing new apartments and acquiring apartment communities and
repositioning those apartment communities 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, high average single-family home
prices and stable or moderate job growth. The Company currently expects that its
growth will be focused primarily within suburban sub-markets of selected
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 $400 million in its budget
for 2007.
During 2006, the Company acquired eight communities with a total of 3,067 units
for an aggregate consideration of $360.1 million, or an average of approximately
$117,400 per apartment unit. The weighted average expected first year
capitalization rate for the acquired communities was 6.7%. 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 Boston, Baltimore and Washington, D.C.
During 2006, the Company completed the sale of 39 communities with a total of
9,705 units for an aggregate consideration of $495.3 million, at a weighted
average expected first-year cap rate of 7.6%. Of the properties, 37 sold were in
markets that management viewed as mature markets (Detroit and Upstate New York)
where the properties had reached their potential. The Company recycled the
proceeds from those properties, which were expected to produce a weighted
average unleveraged internal rate of return ("IRR") of 7.4%, with the purchase
of properties expected to produce an unleveraged IRR of 9.0%. IRR is defined as
the discount rate at which the present value of the future cash flows of the
investment is equal to the cost of the investment. Several of the properties
sold were originally acquired through transactions where the sellers received
UPREIT Units as consideration in order 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, tax
deferred Section 1031 exchanges were used to continue to defer taxable gains of
the UPREIT investor.
The Company will continue to contemplate the sale of some of its communities.
Typically, a property will be targeted for sale if management is of the opinion
that it has reached its potential or if it is located in a slower growth market
or is less efficient to operate. A certain number of the properties may
originally have been acquired through UPREIT transactions. Therefore, those
sales will have to be matched with suitable acquisitions using a tax deferred
exchange. The Company has anticipated closing on sales of $50 million in its
budget for 2007.
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, 2006, the Company's debt was approximately $2.1 billion and the
debt-to-total market capitalization ratio was 42.9% based on the year-end
closing price of the Company's common stock of $59.27. The weighted average
interest rate on the Company's mortgage debt as of December 31, 2006 was 5.8%
and the weighted average maturity was approximately six and one-half years. Debt
maturities are staggered, ranging from June 2007, through January 2042. As of
December 31, 2006, 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 0.75% over the one-month LIBOR
rate. As of December 31, 2006, the one-month LIBOR rate was 5.3% and there was
nothing 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 2006, the Company issued $20.4 million of
UPREIT Units as consideration for one acquired property. During 2005, the
Company issued $55.6 million worth of UPREIT Units as consideration for three
acquired properties. It is difficult to predict the level of demand from sellers
for this type of transaction.
During periods when the Company's shares are trading at a premium to its
estimate of net asset value ("NAV"), it is unlikely that management would engage
in share repurchases. In such circumstances, it is more likely that management
would pursue issuing equity in order to raise capital to be used to pay down
existing indebtedness. This should be neutral to both earnings per share and
NAV, increase the level of unencumbered assets and better position the Company
to fund future acquisition and development pipeline needs.
The Company's Board of Directors has 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, 2004, there was approval remaining to purchase 2,000,000 shares. 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. 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. During 2006,
the Company repurchased 2,613,747 shares of its outstanding common stock at a
cost of $142.5 million at a weighted average price of $54.53 per share. On
October 27, 2006, the Board of Directors approved an additional 2,000,000-share
increase in the stock repurchase program, resulting in a remaining authorization
level of 2,606,448 shares as of December 31, 2006.
Competition
-----------
The Company's properties are primarily located in developed areas where there
are other multi-family properties which directly compete for residents. There is
also competition from single family homes and condominiums for sale or rent. The
competitive environment may have a detrimental effect on the Company's ability
to lease apartments at existing and at newly developed properties, as well as on
rental rates.
In addition, the Company competes with other real estate investors in seeking
property for acquisition and development. These competitors include pension and
investment funds, insurance companies, private investors, local owners and
developers and other apartment REITs. This competition could increase prices for
properties that the Company would like to purchase and impact the Company's
ability to achieve its long-term growth targets.
The Company believes, however, that it is well positioned to compete effectively
for both residents and properties as a result of its:
* focus on service and resident satisfaction, as evidenced by The Home
Properties Pledge, which provides a money-back service guarantee and lease
flexibility;
* ability to issue UPREIT Units in purchase transactions, which provides
sellers with the opportunity to defer taxes; and
* unique re-positioning strategy that differentiates the Company from its
competitors both for residents and properties.
Market Environment
------------------
The markets in which Home Properties operates could be characterized as stable,
with moderate levels of job growth. For 2006, there continues to be the trend of
slightly lower job growth in the Company's markets of 1.2% compared to 1.7% 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. In 2006,
Home Properties' markets represented 27.7% of the total estimated existing U.S.
multifamily housing stock, but only 19.9% 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 2006, net new multifamily supply as a percent of net new multifamily
demand in Home Properties' markets was approximately 65%, compared to a national
average of 68%. Both Home Properties' markets and the country as a whole seem to
be tightening on a measurement of supply/demand equilibrium. In 2005, these same
percentages were 71% and 81% for the Company and the country, respectively. On a
year over year basis, there seems to be less supply to meet the estimated
demand.
The third to the last column in the Multifamily Supply and Demand table on Page
10 shows the estimated 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 0.8% of the multifamily
housing stock.
Market Demographics
-------------------
December December 2006
Job Job Multifamily
Growth Growth 2006 Units as a % 2006
% of 2006 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)
--------------- ----- ---------- -------- ------ ---- ----- --------- ---------
Northern VA/DC 25.9% 1,980,700 2.4% 71,200 2.9% 314,752 30.9% 642,981
Suburban New York City (1) 22.6% 6,842,970 0.6% 54,400 3.7% 385,095 44.9% 3,272,898
Baltimore, MD 18.0% 1,032,049 1.1% 14,800 3.8% 246,006 21.9% 240,707
Eastern PA (2) 17.5% 2,526,694 1.2% 38,000 3.9% 185,800 19.3% 521,041
Chicago, IL 6.0% 3,416,814 1.1% 52,000 3.9% 232,978 32.5% 1,181,709
Boston, MA 5.8% 1,710,643 0.7% 17,000 4.4% 379,590 33.2% 593,994
Southeast Florida (3) 2.3% 2,055,392 2.3% 56,700 3.1% 206,634 41.8% 971,424
Portland, ME 1.9% 212,885 0.5% 1,000 3.3% 217,379 17.2% 43,266
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Home Properties Markets 100.0% 19,778,147 1.2% 305,100 3.6% 290,192 35.3% 7,468,020
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United States 112,267,302 1.7% 2,301,000 4.6% 161,602 21.7% 26,915,288
(1) Suburban New York City is defined for this report as New York-Northern New
Jersey-Long Island, NY-NJ-PA MSA.
(2) Eastern Pennsylvania is defined for this report as
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA &
Allentown-Bethlehem-Easton PA-NJ MSA.
(3) Southeast Florida is defined for this report as Miami-Fort Lauderdale-Miami
Beach, FL MSA.
(4) Based on Claritas 2006 estimates calculated from the 2000 U.S. Census
figures.
(5) 2006 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 8, 2007 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
Estimated 2006 Net New Net New
2006 Estimated Estimated New Multifamily Multifamily Expected
New 2006 2006 Multifamily Supply as a Supply as a Excess
Supply of Multifamily Net New Household % of New % of Expected Revenue
Multifamily Obsolescence Multifamily Demand Multifamily Multifamily Excess Growth
MSA Market Area (6) (7) Supply (8) (9) Demand Stock Demand (10) (11)
--------------- --- --- ---------- --- ------ ----- ----------- ----
Northern VA/DC 8,745 3,215 5,530 14,675 37.7% 0.9% 9,145 1.4%
Suburban New York City (1) 29,692 16,364 13,328 16,292 81.8% 0.4% 2,964 0.1%
Baltimore, MD 1,699 1,204 495 2,162 22.9% 0.2% 1,667 0.7%
Eastern PA ((2)) 3,643 2,605 1,038 4,892 21.2% 0.2% 3,854 0.7%
Chicago, IL 14,432 5,909 8,523 11,272 75.6% 0.7% 2,749 0.2%
Boston, MA 6,301 2,970 3,331 3,765 88.5% 0.6% 434 0.1%
Southeast Florida 17,738 4,857 12,881 15,808 81.5% 1.3% 2,927 0.3%
Portland, ME 220 216 4 115 3.5% 0.0% 111 0.3%
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Home Properties Markets 82,470 37,340 45,130 68,981 65.4% 0.6% 23,851 0.3%
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United States 360,999 134,576 226,423 333,044 68.0% 0.8% 106,621 0.4%
(1)-(5) see footnotes prior page
(6) Estimated 2006 New Supply of Multifamily = Multifamily permits (2006
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 2006 Multifamily Obsolescence = 0.5% of Estimated 2006
multifamily housing stock.
(8) Estimated 2006 Net New Multifamily Supply = Estimated 2006 New Supply of
Multifamily - Estimated 2006 multifamily obsolescence.
(9) Estimated 2006 New Multifamily Household Demand = Trailing 12 month job
growth (Nonfarm, not seasonally adjusted payroll employment figures)
(12/31/2005-12/31/2006) 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 2006 New Multifamily Household Demand -
Estimated 2006 Net New Multifamily Supply.
(11) Expected Excess Revenue Growth = Expected Excess Demand divided by 2006
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.
Environmental Matters
---------------------
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. Environmental laws include those regulating the existence of
asbestos-containing materials, management of surfaces with lead-based paints
(including related required notices to residents), use of and/or the existence
of underground storage tanks and waste management activities. 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.
Available Information
---------------------
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and other reports required by Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are electronically
filed with the Securities and Exchange Commission ("SEC"). The public may read
and copy any materials the Company files with the SEC at the SEC's Public
Reference Room at 100 F Street NE, Washington, DC 20549-2521. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. The SEC maintains a Web site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
Company Web Site
----------------
The Company maintains an Internet Web site at www.homeproperties.com. The
Company provides free of charge access to its reports filed with the SEC, and
any amendments thereto, 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
at no charge 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 Code of Business Conduct and Ethics, Code of
Ethics for Senior Financial Officers, 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 Web site under the heading "Investors/Corporate
Governance/Highlights." Copies of the these documents are also available at no
charge upon request addressed to the Corporate Secretary at Home Properties,
Inc., 850 Clinton Square, Rochester, New York 14604. The address is also
included on the Company's Web site under "Investors/Shareholder Services/Contact
Information".
The reference to our Web site does not incorporate by reference the information
contained in the Web site and such information should not be considered a 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 HPRS.
The following risks apply to Home Properties, the Operating Partnership, and
HPRS, in addition to other risks and factors set forth elsewhere in this Form
10-K.
Real Estate Investment Risks
----------------------------
We are subject to risks that are part of owning real estate.
------------------------------------------------------------
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, our cash flow and ability to
make distributions to our stockholders will be adversely affected. A multifamily
apartment community's revenues and value may be adversely affected by the
general economic conditions; local economic conditions; 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.
We depend on rental income for cash flow to pay expenses and make distributions.
--------------------------------------------------------------------------------
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 we are responsible.
Real estate investments are relatively illiquid, and we may not be able to
--------------------------------------------------------------------------------
respond to changing conditions quickly.
---------------------------------------
Real estate investments are relatively illiquid and, therefore, we have limited
ability to 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.
Our business is subject to 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. Competition for the
acquisition of properties could increase prices for the types of properties we
would like to pursue and adversely affect our financial performance.
Repositioning and development risks could affect our profitability.
-------------------------------------------------------------------
A key component of our strategy is to acquire properties and to reposition them
for long-term growth. In addition, we have developed and are in the process of
developing new apartment units. We plan to continue to expand our development
activities. A variety of factors could negatively impact our ability to timely
complete repositioning activities and to develop new units within anticipated
budgets and time-lines. These include delays in obtaining necessary governmental
permits and authorizations and increased costs of construction. Our inability to
charge rents that will be sufficient to offset the effects of these delays and
any increase in costs may impair our profitability.
Short-term leases expose us to the effects of declining market conditions.
--------------------------------------------------------------------------
Virtually all of the leases for our Properties are short-term leases (generally,
one year or less). Typically, our residents can leave after the end of a
one-year lease term. As a result, our rental revenues are impacted by declines
in market conditions more quickly than if our leases were for longer terms.
A significant uninsured property or liability loss could adversely affect us in
a material way.
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).
Compliance with laws and regulations may be costly.
---------------------------------------------------
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 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.
Real Estate Financing Risks
---------------------------
There are general risks related to debt.
----------------------------------------
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.
There is no legal limit on the amount of debt we can incur.
-----------------------------------------------------------
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, 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 increase the risk of default on our indebtedness. Our net
asset value fluctuates based on a number of factors. Our line of credit
agreement and agreement with holders of our preferred stock limit the amount of
indebtedness we may incur.
We may not be able to refinance our debt when it matures.
---------------------------------------------------------
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 a significant amount 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.
Financing may not be available and issuing equity could dilute our stockholders'
--------------------------------------------------------------------------------
interests.
----------
Our ability to execute our business strategy depends on our access to an
appropriate blend of debt financing, including unsecured lines of credit and
other forms of secured and unsecured debt, and equity financing, including
common and preferred equity. Debt or equity financing may not be available in
sufficient amounts, or on favorable terms or at all. If we issue additional
equity securities to finance developments and acquisitions instead of incurring
debt, the interests of our existing stockholders could be diluted.
Federal Income Tax Risks
------------------------
There is no assurance that we will continue to qualify as a REIT.
-----------------------------------------------------------------
We believe that we have been organized and have operated in such manner so as to
qualify as a REIT under the Code, commencing with our taxable year ended
December 31, 1994. A REIT generally is not taxed at the corporate level on
income it currently distributes to its shareholders as long as it distributes
currently at least 90% of its taxable income (excluding net capital 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.
We are required to make certain distributions to qualify as a REIT, and there is
no assurance that we will have the funds necessary to make the distributions.
In order to continue to qualify as a REIT, we currently are required each year
to distribute to our stockholders at least 90% of our taxable income (excluding
net capital 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.
Our failure to qualify as a REIT would have adverse consequences.
-----------------------------------------------------------------
If we fail to qualify as a REIT, we will be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. In addition, unless entitled to relief under certain
statutory provisions, we will be disqualified from treatment as a REIT for the
four taxable years following the year during which REIT qualification is lost.
The additional tax burden on us would significantly reduce the cash available
for distribution by us to our stockholders. Our failure to qualify as a REIT
could reduce materially the value of our common stock and would cause all our
distributions to be taxable as ordinary income to the extent of our current and
accumulated earnings and profits (although, subject to certain limitations under
the Code, corporate distributees may be eligible for the dividends received
deduction with respect to these distributions).
The Operating Partnership intends to qualify as a partnership but there is no
--------------------------------------------------------------------------------
guaranty that it will qualify.
------------------------------
We believe that the Operating Partnership qualifies as a partnership for federal
income tax purposes. No assurance can be provided, however, that the Internal
Revenue Service (the "IRS") will not challenge its status as a partnership for
federal income tax purposes, or that a court would not sustain such a challenge.
If the IRS were to be successful in treating the Operating Partnership as an
entity that is taxable as a corporation, we would cease to qualify as a REIT
because the value of our ownership interest in the Operating Partnership would
exceed 5% of our assets and because we would be considered to hold more than 10%
of the voting securities of another corporation. Also, the imposition of a
corporate tax on the Operating Partnership would reduce significantly the amount
of cash available for distribution to 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).
Other Risks
-----------
The ability of our stockholders to effect a change of control is limited by
--------------------------------------------------------------------------------
certain provisions of our Articles of Incorporation as well as by Maryland law
--------------------------------------------------------------------------------
and our Executive Retention Plan.
---------------------------------
Our 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.
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
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.
As a Maryland corporation, we are subject to the provisions of the Maryland
General Corporation Law. Maryland law imposes restrictions on some business
combinations and requires compliance with statutory procedures before some
mergers and acquisitions may occur, which may delay or prevent offers to acquire
us or increase the difficulty of completing any offers, even if they are in our
stockholders' best interests. In addition, other provisions of the Maryland
General Corporation Law permit the Board of Directors to make elections and to
take actions without stockholder approval (such as classifying our Board such
that the entire Board is not up to re-election annually) that, if made or taken,
could have the effect of discouraging or delaying a change in control.
Also, to assure that our management has appropriate incentives to focus on our
business and Properties in the face of a change of control situation, we have
adopted an executive retention plan which provides some key employees with
salary, bonus and some benefits continuation in the event of a change of
control.
Potential conflicts of interest could affect some directors' decisions.
-----------------------------------------------------------------------
Unlike persons acquiring common stock, certain of our directors, who constitute
less than a majority of the Board of Directors, own a significant portion of
their interest in us through UPREIT Units. As a result of their status as
holders of UPREIT Units, those 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, those 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 directors and the stockholders may
have different objectives regarding the appropriate pricing and timing of any
sale or refinancing of Properties. In addition, those 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.
The future sale of shares may negatively impact our stock price.
----------------------------------------------------------------
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 and outstanding
approximately 13.3 million UPREIT Units as of December 31, 2006, 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. 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, 2006, 2,348,014
options remained outstanding and unexercised.
Item 1B. Unresolved Staff Comments
-------- -------------------------
None.
Item 2. Properties
------- ----------
As of December 31, 2006, the Owned Properties consisted of 123 multifamily
residential communities containing 36,954 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. In 2006, Home Properties acquired 3,067
apartment units in eight communities for a total purchase price of
$360.1 million. Also in 2006, the Company sold 39 communities with a total of
9,705 units for total consideration of $495.3 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 93.9% for 2006. 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 44% for 2006, which is significantly below
the national average of approximately 60% 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-39 to F-42).
The table on the following pages illustrates certain of the important
characteristics of the Owned Properties as of December 31, 2006.
Communities Wholly Owned and Managed by Home Properties
(2) (3) (3) 2006 2005
Average 2006 2006 2005 Avg Mo Avg Mo 12/31/2006
# Age Apt % Average Average Rent Rent Total
Of In Year Size Resident % % Rate Rate Cost
Regional Area Apts Years Acq (Sq Ft) Tumover Occupancy Occupancy per Apt per Apt (000)
------------- ---- ----- --- ------- ------- --------- --------- ------- ------- -----
Core Communities (1)
--------------------
FL-Southeast The Hamptons 668 17 2004 1,052 52% 94% 96% $979 $878 $63,628
FL-Southeast Vinings at
Hampton Village 168 17 2004 1,207 42% 94% 95% 1,060 956 15,843
IL-Chicago Blackhawk
Apartments 371 45 2000 793 49% 92% 91% 845 827 23,486
IL-Chicago Courtyards
Village 224 35 2001 674 50% 96% 94% 771 751 16,579
IL-Chicago Cypress Place 192 36 2000 852 40% 95% 93% 904 887 13,981
IL-Chicago The Colony 783 33 1999 704 50% 95% 93% 816 807 53,939
IL-Chicago The New Colonies 672 32 1998 657 55% 93% 91% 701 699 34,072
MA-Boston Gardencrest
Apartments 696 58 2002 847 32% 96% 95% 1,380 1,326 105,291
MA-Boston Stone Ends
Apartments 280 27 2003 815 44% 96% 96% 1,212 1,175 37,008
MA-Boston The Village at
Marshfield 276 34 2004 735 41% 94% 94% 1,128 1,099 34,014
MD-Baltimore Bonnie Ridge
Apartments 960 40 1999 998 39% 93% 92% 1,008 984 77,817
MD-Baltimore Canterbury
Apartments 618 28 1999 934 46% 95% 93% 869 829 35,695
MD-Baltimore Country Village
Apartments 344 35 1998 776 48% 93% 93% 837 803 22,716
MD-Baltimore Falcon Crest
Townhomes 396 37 1999 993 50% 91% 91% 929 883 22,676
MD-Baltimore Fenland Field 234 36 2001 934 45% 92% 94% 1,057 1,025 19,630
MD-Baltimore Gateway Village
Apartments 132 17 1999 963 47% 92% 93% 1,205 1,144 10,335
MD-Baltimore Mill Towne
Village 384 33 2001 812 42% 94% 95% 816 787 28,200
MD-Baltimore Morningside
Heights
Apartments 1,050 41 1998 864 45% 94% 94% 830 807 60,667
MD-Baltimore Owings Run
Apartments 504 11 1999 1,136 44% 94% 94% 1,080 1,008 43,827
MD-Baltimore Selford
Townhomes 102 19 1999 987 44% 94% 92% 1,229 1,193 8,102
MD-Baltimore Shakespeare
Park Apartments 84 23 1999 793 19% 98% 97% 825 810 4,973
MD-Baltimore The Manor
Apartments (MD) 435 37 2001 1,004 39% 93% 92% 1,123 1,113 46,259
MD-Baltimore Timbercroft
Townhomes 284 34 1999 998 17% 99% 99% 797 767 12,858
MD-Baltimore Village Square
(MD) 370 38 1999 948 45% 95% 96% 1,085 1,034 24,281
MD-Baltimore Woodholme Manor
Apartments 177 37 2001 817 26% 94% 91% 788 733 10,263
ME-Portland Mill Company
Gardens 95 55 1998 542 68% 94% 95% 758 747 3,383
ME-Portland Redbank Village
Apartments 500 62 1998 735 40% 93% 92% 805 793 25,621
NJ-Northern Chatham Hill
Apartments 308 39 2004 944 33% 96% 95% 1,574 1,503 55,508
NJ-Northern East Hill
Gardens 33 48 1998 654 24% 98% 96% 1,441 1,386 3,092
NJ-Northern Lakeview
Apartments 106 57 1998 492 35% 98% 97% 1,247 1,195 8,424
NJ-Northern Northwood
Apartments 134 41 2004 937 38% 94% 97% 1,194 1,139 16,426
NJ-Northern Oak Manor
Apartments 77 50 1998 918 26% 98% 97% 1,713 1,682 7,742
NJ-Northern Pleasant View
Gardens 1,142 38 1998 746 35% 94% 93% 1,060 1,022 77,204
NJ-Northern Pleasure Bay
Apartments 270 35 1998 685 43% 94% 96% 1,054 999 15,626
NJ-Northern Regency Club
Apartments 372 32 2004 941 48% 92% 94% 1,105 1,072 41,167
NJ-Northern Royal Gardens
Apartments 550 38 1997 874 33% 93% 92% 1,128 1,083 34,709
NJ-Northern Wayne Village 275 41 1998 760 37% 97% 96% 1,281 1,219 22,257
NJ-Northern Windsor Realty
Company 67 53 1998 628 48% 94% 95% 1,136 1,101 5,720
NY-Alb/Hudson Carriage Hill
Valley Apartments 140 33 1996 898 64% 95% 93% 1,196 1,211 8,501
NY-Alb/Hudson Cornwall Park
Valley 75 39 1996 1,320 48% 94% 88% 1,591 1,624 8,243
NY-Alb/Hudson Lakeshore Villa
Valley Apartments 152 31 1996 952 53% 90% 93% 1,056 1,049 9,350
NY-Alb/Hudson Patricia
Valley Apartments 100 32 1998 725 26% 94% 95% 1,376 1,345 7,888
NY-Alb/Hudson Sherwood
Valley Consolidation 224 37 2002 831 33% 96% 97% 1,189 1,090 19,128
NY-Alb/Hudson Sunset Garden
Valley Apartments 217 35 1996 840 50% 94% 95% 926 912 10,375
NY-Long Island Bayview &
Colonial 160 39 2000 884 31% 95% 96% 1,186 1,150 14,849
NY-Long Island Cambridge
Village
Associates 82 39 2002 747 39% 96% 97% 1,536 1,454 8,064
NY-Long Island Coventry
Village
Apartments 94 31 1998 831 34% 95% 96% 1,357 1,336 6,389
NY-Long Island Devonshire Hills 297 38 2001 803 37% 95% 96% 1,720 1,662 55,348
NY-Long Island East Winds
Apartments 96 40 2000 888 40% 95% 93% 1,145 1,117 8,987
NY-Long Island Hawthorne Court 434 38 2002 678 43% 93% 94% 1,361 1,331 48,962
NY-Long Island Heritage Square 80 57 2002 718 25% 98% 97% 1,529 1,441 9,172
NY-Long Island Holiday Square 144 27 2002 570 15% 96% 95% 1,087 1,033 11,638
NY-Long Island Lake Grove
Apartments 368 36 1997 836 49% 94% 93% 1,391 1,368 34,138
NY-Long Island Maple Tree 84 55 2000 936 31% 95% 93% 1,153 1,136 7,679
NY-Long Island Mid-Island
Apartments 232 41 1997 546 42% 93% 95% 1,257 1,227 16,676
NY-Long Island Rider Terrace 24 45 2000 825 50% 93% 91% 1,245 1,223 2,125
NY-Long Island South Bay Manor 61 46 2000 849 51% 90% 93% 1,536 1,519 7,658
NY-Long Island Southern Meadows 452 35 2001 845 36% 95% 95% 1,352 1,325 49,322
NY-Long Island Stratford
Greens
Associates 359 32 2002 725 49% 96% 96% 1,399 1,384 54,326
NY-Long Island Terry Apartments 65 30 2000 722 34% 95% 96% 1,151 1,107 5,249
NY-Long Island Westwood
Village
Apartments 242 37 2002 829 34% 95% 96% 2,154 2,088 40,463
NY-Long Island Woodmont
Village
Apartments 96 38 2002 704 35% 95% 95% 1,283 1,240 11,180
NY-Long Island Yorkshire
Village
Apartments 40 37 2002 779 40% 97% 97% 1,560 1,489 4,277
PA-Philadelphia Beechwood
Gardens 160 39 1998 875 43% 94% 94% 830 826 7,130
PA-Philadelphia Castle Club
Apartments 158 39 2000 878 42% 93% 95% 930 807 13,598
PA-Philadelphia Chesterfield
Apartments 247 33 1997 812 39% 96% 96% 901 872 15,453
PA-Philadelphia Curren Terrace 318 35 1997 782 53% 94% 93% 907 906 20,279
PA-Philadelphia Executive House
Apartments 100 41 1997 700 55% 92% 95% 938 927 7,088
PA-Philadelphia Glen Brook
Apartments 174 43 1999 707 46% 91% 91% 813 771 9,133
PA-Philadelphia Glen Manor
Apartments 174 30 1997 667 45% 92% 91% 762 763 8,177
PA-Philadelphia Golf Club
Apartments 399 37 2000 857 54% 92% 91% 1,010 1,009 37,789
PA-Philadelphia Hill Brook
Place Apartments 274 38 1999 699 49% 94% 96% 874 849 16,923
PA-Philadelphia Home Properties
of Bryn Mawr 316 55 2000 822 57% 92% 93% 1,051 1,037 31,491
PA-Philadelphia Home Properties
of Devon 631 43 2000 917 58% 93% 90% 1,088 1,062 64,751
PA-Philadelphia Home Properties
of Newark 432 38 1999 860 47% 93% 94% 852 827 28,455
PA-Philadelphia New Orleans
Park 442 35 1997 685 38% 95% 93% 818 792 25,797
PA-Philadelphia Racquet Club
East Apartments 466 35 1998 911 42% 94% 96% 1,022 1,000 33,243
PA-Philadelphia Racquet Club
South 103 37 1999 816 45% 94% 96% 876 858 6,398
PA-Philadelphia Ridley Brook
Apartments 244 44 1999 925 37% 95% 95% 877 842 13,262
PA-Philadelphia Sherry Lake
Apartments 298 41 1998 812 44% 94% 94% 1,159 1,132 27,662
PA-Philadelphia The Landings 384 33 1996 912 52% 95% 93% 960 961 28,310
PA-Philadelphia Trexler Park
Apartments 249 32 2000 921 49% 90% 93% 1,051 1,030 22,662
PA-Philadelphia Valley View
Apartments 177 33 1997 764 66% 89% 91% 833 807 10,534
PA-Philadelphia Village Square
(PA) 128 33 1997 795 41% 95% 93% 909 909 8,033
PA-Philadelphia William Henry
Apartments 363 35 2000 938 57% 91% 92% 1,095 1,098 37,114
VA-Suburban DC Braddock Lee
Apartments 255 51 1998 757 37% 97% 95% 1,200 1,184 19,251
VA-Suburban DC Brittany Place 591 38 2002 922 42% 92% 92% 1,072 1,051 58,597
VA-Suburban DC Cider Mill 864 28 2002 834 46% 93% 94% 1,055 1,034 92,616
VA-Suburban DC East Meadow
Apartments 150 35 2000 1,034 46% 96% 96% 1,262 1,229 14,898
VA-Suburban DC Elmwood Terrace 504 33 2000 946 44% 93% 90% 848 831 28,631
VA-Suburban DC Falkland Chase
Apartments 450 69 2003 759 35% 95% 93% 1,220 1,162 64,518
VA-Suburban DC Orleans Village 851 38 2000 1,015 42% 93% 94% 1,254 1,193 86,359
VA-Suburban DC Park
Shirlington
Apartments 294 51 1998 858 36% 96% 93% 1,185 1,159 23,109
VA-Suburban DC Seminary Hill
Apartments 296 46 1999 888 60% 93% 93% 1,186 1,172 22,232
VA-Suburban DC Seminary Towers
Apartments 539 42 1999 879 37% 94% 93% 1,211 1,186 41,922
VA-Suburban DC Tamarron
Apartments 132 19 1999 1,075 33% 96% 95% 1,325 1,243 12,051
VA-Suburban DC The Apartments
at Wellington
Trace 240 4 2004 1,106 53% 96% 97% 1,201 1,166 30,756
VA-Suburban DC The Manor
Apartments (VA) 198 32 1999 845 49% 94% 94% 981 973 11,653
VA-Suburban DC The Sycamores 185 28 2002 876 43% 96% 97% 1,285 1,200 23,077
VA-Suburban DC Virginia Village 344 39 2001 1,010 51% 95% 95% 1,210 1,204 35,858
VA-Suburban DC West
Springfield
Terrace 244 28 2002 1,019 51% 95% 96% 1,336 1,268 37,940
VA-Suburban DC Woodleaf
Apartments 228 21 2004 709 35% 93% 93% 1,050 998 22,814
Core Total/
Weighted Average 31,253 37 856 44% 94% 94% $1,073 $1,040 $2,702,570
2005 Acquisition Communities (4)
--------------------------------
MD-Baltimore Ridgeview at
Wakefield Valley 204 9 2005 916 51% 94% 93% $1,013 $1,007 $22,373
NJ-Northern Barrington
Gardens 148 33 2005 922 22% 97% 95% 853 792 10,029
NJ-Northern Hackensack
Gardens 198 58 2005 636 14% 98% 97% 865 805 15,980
NY-Long Island Sayville Commons 342 5 2005 1,106 15% 98% 97% 1,395 1,333 65,079
PA-Philadelphia The Brooke at
Peachtree
Village 146 20 2005 1,261 34% 97% 97% 1,014 972 17,291
VA-Suburban DC Cinnamon Run 511 46 2005 1,006 35% 95% 98% 1,112 1,041 70,174
VA-Suburban DC Peppertree Farm 881 52 2005 1,051 39% 87% 92% 1,095 1,050 101,744
2005 Total/
Weighted Average 2,430 32 1,009 33% 93% 96% $1,096 $996 $302,670
2006 Acquisition Communities (4)
--------------------------------
MA-Boston Highland House 172 37 2006 733 32% 94% N/A $1,108 N/A $18,257
MA-Boston Liberty Place 107 18 2006 994 50% 93% N/A 1,344 N/A 15,234
MA-Boston The Heights at
Marlborough 348 33 2006 876 56% 92% N/A 1,179 N/A 50,604
MA-Boston The Meadows at
Marlborough 264 34 2006 855 58% 90% N/A 1,189 N/A 35,452
MD-Baltimore Heritage Woods 164 33 2006 965 41% 97% N/A 928 N/A 14,127
MD-Baltimore The Coves at
Chesapeake 469 24 2006 986 57% 89% N/A 1,152 N/A 66,889
MD-Baltimore Top Field 156 33 2006 1,149 27% 97% N/A 1,072 N/A 18,348
ME-Portland Liberty Commons
(5) 120 1 2006 1,064 35% 96% N/A 1,074 N/A 14,738
VA-Suburban DC Mount Vernon
Square 1,387 32 2006 868 42% 93% N/A 1,076 N/A 143,266
2006 Total/
Weighted Average 3,187 27 908 46% 93% N/A $1,142 N/A $376,915
2006 Construction Communities (6)
---------------------------------
PA-Philadelphia Trexler Park
West 84 0 2006 1,071 15% 67% N/A $1,204 N/A $12,042
Owned Portfolio
Total/
Weighted Avg 36,954 36 871 44% 94% 94% $1,076 $1,040 $3,394,197
(1) "Core Communities" represents the 31,253 apartment units owned consistently
throughout 2005 and 2006.
(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, 2005 and 2006.
(4) For communities acquired during 2005 and 2006, this is the average
occupancy from the date of acquisition.
(5) Liberty Commons was constructed during a period spanning from 2004 to 2006.
As construction was completed and 100% of the units were all in service for
some part of 2006, this property has been grouped with the 2006 Acquisition
Communities.
(6) Trexler Park West is under construction. Upon completion, there will be a
total of 216 apartment units. As of December 31, 2006, 84 apartment units
were in service.
Property Development
--------------------
The Company has the ability to develop new market-rate communities. It plans to
engage in development activity only in markets in which it currently is doing
business to add net asset value and supplement future earnings and growth. It
expects to develop new apartment communities on raw land and on land adjacent to
existing owned properties, as well as to increase the density of units at some
communities currently owned.
The Company has completed the development of 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, consisting of 48 units, was completed in
the summer of 2005. The second and third phases added 72 units which were
completed in the summer of 2006. The total construction cost of this community
was $14.6 million, or approximately $122,000 per unit. In addition, the Company
is developing a 216-unit apartment community in Allentown, Pennsylvania,
adjacent to a market-rate community purchased in 2000. At year-end 2006, 84
units were completed at a cost of $10.6 million. The entire project is expected
to be completed in the fourth quarter of 2008. The total construction cost for
this development is anticipated to be $25.9 million upon completion. The costs
associated with construction in progress for this development was $1.4 million
as of December 31, 2006. An additional project was in the pre-construction stage
during 2006. That project is Falkland Chase, located in Silver Spring, Maryland,
with 450 garden apartments constructed between 1936 and 1939. The Company
acquired the property in 2003 for $58.9 million. The property is well located
within walking distance of the metro line into Washington and is near seven
million square feet of office space. The Company is planning on redeveloping the
North parcel, which will be renamed Falkland North. This parcel currently
contains 182 apartments that will be demolished and redeveloped into 1,020 units
in four high-rise buildings with a community center, exercise room, swimming
pool, convenience retail shops and a major supermarket. If this project
progresses as expected, approvals will be obtained in 2007, design completed in
2008, construction started in 2009, and units placed in service in 2011 and
2012. The pre-construction costs for this project, included in other assets on
the balance sheet, was $755,000 as of December 31, 2006. Based on preliminary
budgets, the total construction cost for this development is anticipated to be
$306 million.
During 2006, the Company hired a Vice President of Development who has extensive
multifamily development experience in the Mid-Atlantic region and has
demonstrated his ability to source projects in that region. The Company's
management of an extensive property portfolio and its acquisition activities
also provide a source of potential new development opportunities.
On February 2, 2007, the Company purchased two land parcels located in Silver
Spring, MD and Alexandria, VA from a single seller for total consideration of
$46.5 million. The projects are fully designed and have obtained all
discretionary approvals. While several administrative approvals are still
necessary, construction on both projects is expected to start in 2007, with
completion anticipated in 2009 for the Maryland project and 2010 for the
Virginia project. The development in Silver Spring, Maryland is a 14-story
building which will contain 247 apartments and 10,600 square feet of retail or
nonresidential space. The property is approximately three blocks south of Home
Properties' Falkland Chase apartment community described above. The other
development parcel is adjacent to the Huntington Metro station just south of Old
Town Alexandria in Fairfax County, Virginia and consists of 421 units in four,
four-story buildings. Based on preliminary budgets, the Silver Spring project is
anticipated to cost approximately $74 million and the Alexandria project is
estimated to cost approximately $123 million upon completion.
Property Management
-------------------
As of December 31, 2006, 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) 1,314 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 was owned by Nelson and Norman
Leenhouts and is now owned by Nelson Leenhouts. Nelson and Norman Leenhouts are
the founders of the Company, 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. Subsequently, some of the
assets were transferred from Home Leasing to Broadstone Real Estate, LLC
("Broadstone"), which is owned in part by Norman Leenhouts, Amy L. Tait and Mrs.
Tait's spouse. 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 Broadstone
and its assigns in connection with the management of one of the commercial
properties for a period not to exceed 36 months. As Broadstone continued to
manage that property for three years, the Company received an additional
deferred purchase price of $139,000, for a total consideration of $221,000. The
gain on sale amounted to approximately $108,000 for the three years ended
December 31, 2006.
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 Managed by Home Properties by Market Area as of December 31, 2006
-----------------------------------------------------------------------------
Community Managed as General Partner
------------------------------------
MARKET AREA/Community City # of Apts.
--------------------- ---- ----------
NORTHERN/CENTRAL OHIO
---------------------
Briggs/Wedgewood Apartments Columbus 868
-----
Total Apt. Units in Community Managed as General Partner 868
Communities Fee Managed
-----------------------
MARYLAND
--------
Annapolis Roads Apartments Annapolis 282
Dunfield Townhomes Baltimore 312
Fox Hall Baltimore 720
-----
Total Apt. Units in Communities Fee Managed 1,314
Total 2,182
Supplemental Property Information
---------------------------------
At December 31, 2006, 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 2006. 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, 2006.
Item 3. Legal Proceedings
------- -----------------
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 16, 2007, the eight executive
officers of the Company, together with their respective ages, positions and
offices.
Name Age Position
---- --- --------
Edward J. Pettinella 55 President and Chief Executive Officer of Home Properties and HPRS
David P. Gardner 51 Executive Vice President and Chief Financial Officer of Home Properties and HPRS
Ann M. McCormick 50 Executive Vice President, General Counsel and Secretary of Home Properties and HPRS
Scott A. Doyle 45 Senior Vice President, Property Management of Home Properties and HPRS
Johanna A. Falk 42 Senior Vice President and Chief Administrative/Information Officer of Home
Properties and HPRS
Robert J. Luken 42 Senior Vice President, Chief Accounting Officer and Treasurer of Home Properties and
HPRS
Janine M. Schue 44 Senior Vice President, Human Resources of Home Properties and HPRS
John E. Smith 56 Senior Vice President and Chief Investment Officer of Home Properties 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 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 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
HPRS. He joined Home Properties in 1996 as a Regional Property Manager.
Mr. Doyle has been in property management for more than 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 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 title in HPRS.
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.
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.
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. Ms. Schue has notified the
Company that she is resigning her position effective March 31, 2007.
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 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
-----------------------------------------
Market Information, Holders and Dividends
-----------------------------------------
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
---- --- ------------
2006
----
First Quarter $52.47 $41.70 $.64
Second Quarter $55.51 $47.24 $.64
Third Quarter $58.98 $53.79 $.64
Fourth Quarter $63.52 $57.36 $.65
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
As of February 16, 2007, the Company had approximately 4,024 shareholders of
record, 33,205,831 common shares (plus 13,556,434 UPREIT Units convertible into
13,556,434 common shares) were outstanding, and the closing price was $62.50. 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.
Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------
The following table provides information as of December 31, 2006 with respect to
shares of our common stock that may be issued under the Stock Benefit Plans:
Number of Number of
Securities to Weighted Securities
be Issued Upon Average Remaining
Exercise of Exercise Price Available for
Outstanding of Outstanding Future
Plan Category Options Options Issuance
------------- ------- ------- --------
Options:
Equity compensation plans approved by security holders 2,170,612 $40.85 625,300
Equity compensation plans not approved by security holders 177,402 32.78 -
--------- ------ -------
Total Options 2,348,014 $40.24 625,300
--------- ------ -------
Restricted Stock Awards:
Equity compensation plans approved by security holders 218,305 N/A 66,534
Equity compensation plans not approved by security holders 52,100 N/A -
--------- ------ -------
Total Restricted Stock Awards 270,405 N/A 66,534
--------- ------ -------
Performance Graph
-----------------
The following graph compares the cumulative return on the Company's common stock
during the five year period ended December 31, 2006 to the cumulative return of
the NAREIT All Equity REIT Index and the Standard and Poor's 500 Index for the
same period. The total return assumes that dividends were reinvested quarterly
at the same discounted price as provided under the Company's DRIP and is based
on a $100 investment on December 31, 2001. Stockholders should note that past
performance does not predict future results.
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
---------- ---------- ---------- ---------- ---------- ----------
HME $100.00 $117.24 $147.28 $166.90 $168.35 $256.56
NAREIT Equity $100.00 $103.82 $142.37 $187.33 $210.12 $283.78
S&P 500 $100.00 $77.90 $100.24 $111.15 $116.61 $135.02
Our future filings with the SEC may "incorporate information by reference,"
including this Form 10-K. Unless we specifically state otherwise, this
Performance Graph shall not be deemed to be incorporated by reference and shall
not constitute soliciting material or otherwise be considered filed under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.
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, 2005 the Company
had authorization to repurchase 3,220,195 shares of common stock and UPREIT
Units under the stock repurchase program. During 2006, the Company repurchased
2,613,747 shares at a cost of $142,532,597. On October 27, 2006 the Board of
Directors approved a 2,000,000-share increase in the stock repurchase program,
resulting in a remaining authorization level of 2,606,448 shares as of December
31, 2006.
The following table summarizes the total number of shares (units) repurchased by
the Company during the year ended December 31, 2006:
Total Board
shares/units approved Maximum
purchased increase 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, 2006: 3,220,195
January, 2006 109,359 $41.54 107,800 - 3,112,395
February, 2006 2,188 $48.20 - - 3,112,395
March, 2006 22,341 $50.16 - - 3,112,395
April, 2006 1,189 $49.54 - - 3,112,395
May, 2006 313,968 $47.78 308,000 - 2,804,395
June, 2006 1,276,898 $51.67 1,264,721 - 1,539,674
July, 2006 2,651 $55.94 - - 1,539,674
August, 2006 1,582 $57.00 - - 1,539,674
September, 2006 8,802 $56.04 - - 1,539,674
October, 2006 934,871 $62.15 933,226 2,000,000 2,606,448
November, 2006 15,724 $61.50 - - 2,606,448
December, 2006 567 $60.32 - - 2,606,448
--------- ------ --------- --------- ---------
Balance December 31, 2006: 2,690,140 $54.51 2,613,747 2,000,000 2,606,448
========= ====== ========= ========= =========
(1) During 2006, and as permitted by the Company's stock option plans, 28,150
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 48,243 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).
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Revenues:
Rental income $420,988 $378,506 $348,932 $311,682 $268,468
Other income (1) 33,004 22,019 18,200 17,187 14,201
-------- ------- ------- ------- -------
Total Revenues 453,992 400,525 367,132 328,869 282,669
-------- ------- ------- ------- -------
Expenses:
Operating and maintenance 190,845 174,906 157,802 136,584 112,320
General and administrative 22,626 19,652 23,978 22,607 12,649
Interest 106,773 92,178 77,145 70,277 59,981
Depreciation and amortization 96,142 80,944 70,710 57,794 45,898
Prepayment penalties - - - - 3,275
Impairment of assets held as general partner - 400 1,116 2,518 3,533
-------- ------- ------- ------- -------
Total Expenses 416,386 368,080 330,751 289,780 237,656
-------- ------- ------- ------- -------
Income from operations 37,606 32,445 36,381 39,089 45,013
Equity in losses of unconsolidated affiliates - - (538) (1,892) (17,493)
-------- ------- ------- ------- -------
Income before minority interest, discontinued operations
and
extraordinary item 37,606 32,445 35,843 37,197 27,520
Minority interest in limited partnership - - 441 - -
Minority interest in operating partnerships (9,614) (8,629) (9,204) (9,171) (3,017)
-------- ------- ------- ------- -------
Income from continuing operations 27,992 23,816 27,080 28,026 24,503
Discontinued operations, net of minority interest 82,493 57,696 20,330 13,781 20,638
-------- ------- ------- ------- -------
Income before loss on disposition of property and
business and cumulative effect of change in accounting
principle 110,485 81,512 47,410 41,807 45,141
Loss on disposition of property and business, net of
minority interest - - (67) (9) (202)
-------- ------- ------- ------- -------
Income before cumulative effect of change in accounting
principle 110,485 81,512 47,343 41,798 44,939
Cumulative effect of change in accounting principle, net
of minority interest - - (321) - -
-------- ------- ------- ------- -------
Net income 110,485 81,512 47,022 41,798 44,939
Preferred dividends (5,400) (6,279) (7,593) (11,340) (14,744)
Premium on Series B preferred stock repurchase - - - - (5,025)
-------- ------- ------- ------- -------
Net income available to common shareholders $105,085 $75,233 $39,429 $30,458 $25,170
======== ======= ======= ======= =======
Basic earnings per share data:
Income from continuing operations $0.69 $0.55 $0.59 $0.57 $0.18
Discontinued operations 2.52 1.80 0.62 0.47 0.79
Cumulative effect of change in accounting principle - - (0.01) - -
----- ----- ----- ----- -----
Net income available to common shareholders $3.21 $2.35 $1.20 $1.04 $0.97
===== ===== ===== ===== =====
Diluted earnings per share data:
Income from continuing operations $0.68 $0.54 $0.58 $0.56 $0.17
Discontinued operations 2.47 1.79 0.61 0.47 0.79
Cumulative effect of change in accounting principle - - (0.01) - -
Net income available to common shareholders $3.15 $2.33 $1.18 $1.03 $0.96
===== ===== ===== ===== =====
Cash dividends declared per common share $2.57 $2.53 $2.49 $2.45 $2.41
===== ===== ===== ===== =====
Balance Sheet Data:
Real estate, before accumulated depreciation $3,451,762 $3,330,710 $3,123,901 $2,752,992 $2,597,278
Total assets 3,240,418 2,977,870 2,816,796 2,513,317 2,456,266
Total debt (including held for sale) 2,124,313 1,924,086 1,702,722 1,380,696 1,335,807
Redeemable/convertible preferred stock ((2)) 60,000 60,000 85,000 85,000 167,680
Stockholders' equity 755,617 656,812 720,422 741,263 726,242
Other Data:
Net cash provided by operating activities $162,996 $136,466 $159,342 $154,227 $135,581
Net cash provided by (used in) investing activities 159,653 (179,944) (160,654) (109,253) (297,680)
Net cash provided by (used in) financing activities (209,828) 40,944 3,284 (48,653) 160,162
Funds From Operations ((3)) 147,089 137,606 126,953 132,803 121,745
Adjusted Funds From Operations((4)) 125,530 115,720 104,787 111,020 100,654
Weighted average number of shares outstanding:
Basic 32,697,794 31,962,082 32,911,945 29,208,242 26,054,535
Diluted 33,337,557 32,328,105 33,314,038 29,575,660 26,335,316
Total communities owned at end of period 123 153 150 147 152
Total apartment units owned at end of period 36,954 43,432 41,776 40,946 41,776
(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
2006 and 2003, the Company added back debt extinguishment costs which were
incurred as a result of repaying property specific debt triggered upon sale
as a gain or loss on sale of the property. In 2002, the Company added back
the premium on the Series B preferred stock repurchase. 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 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.
(3) (continued)
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:
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Net income available to common shareholders $105,085 $ 75,233 $39,429 $30,458 $25,170
Convertible preferred dividends(a) - 880 2,194 5,939 10,589
Depreciation from real property(b) 99,421 97,686 91,564 79,577 67,919
Impairment on general partner investment - - 945 1,785 1,470
Loss from sale of property - - 50 260 202
Minority interest 9,614 8,629 9,204 9,171 3,017
Minority interest - discontinued operations 1,947 1,828 4,353 6,179 9,209
Impairment of real property - - - 423 1,565
Gain from sale of discontinued operations (78,748) (46,650) (21,107) (2,599) (5,696)
Prepayment penalties - - - - 3,275
Cumulative effect of change in accounting principle - - 321 - -
-------- -------- -------- -------- --------
FFO - Diluted, as defined by NAREIT 137,319 137,606 126,953 131,193 116,720
Loss from early extinguishment of debt in connection with
sale of real estate 9,770 - - 1,610 -
Premium paid on Series B repurchased - - - - 5,025
-------- -------- -------- -------- --------
FFO - Diluted, as adjusted by the Company 147,089 137,606 126,953 132,803 121,745
Reserve(4) (21,559) (21,886) (22,166) (21,783) (21,091)
-------- -------- -------- -------- --------
Adjusted Funds From Operations $125,530 $115,720 $104,787 $111,020 $100,654
======== ======== ======== ======== ========
Weighted average common shares/units outstanding:
Basic 47,262.7 47,714.3 48,675.0 45,276.7 42,062.1
======== ======== ======== ======== ========
Diluted(a) 47,902.4 48,411.3 49,910.5 47,873.8 46,466.4
======== ======== ======== ======== ========
FFO as adjusted by the Company per share diluted (a) $3.07 $2.84 $2.54 $2.77 $2.62
===== ===== ===== ===== =====
(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. The
diluted shares/units for the year ended December 31, 2004 used for Diluted
FFO are 49,910.5 instead of the regular diluted shares/units of 49,077.1.
(b) Includes amounts passed through from unconsolidated investments.
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 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: 2006 -
$101,723; 2005 - $100,013; 2004 - $102,700; 2003 - $106,346; and 2002 -
$115,692.
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 and development within anticipated budgets, the actual pace of future
development, acquisitions and sales, and continued access to capital to fund
growth. For this purpose, any statements contained in this 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 in the ownership, management, acquisition, rehabilitation
and development of residential apartment communities primarily in selected
Northeast, Mid-Atlantic and Southeast Florida markets. As of December 31, 2006,
the Company operated 127 apartment communities with 39,136 apartments. Of this
total, the Company owned 123 communities, consisting of 36,954 apartments,
managed as general partner one partnership that owned 868 apartments, and fee
managed three properties with 1,314 apartments for third parties.
Executive Summary
-----------------
The Company operated during 2006 and 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, 2005 and 2006, both the Company's markets
and the country as a whole experienced positive job growth; 1.0%, 1.1% and 1.2%
for the Company, and 1.7%, 1.5% and 1.7% for the country, respectively. An
increase in job growth leads to household formations, which creates an increase
in demand for rental housing. In addition, during 2005 and continuing into 2006,
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, leveling off at 19.6% in 2003, 19.5% for
2004 and 19.4% in 2005. In 2006 we experienced the first significant drop in
years, with the percentage reducing to 18.5%. A continued increase in home
mortgage rates could push this level down further, which should 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 2006 with 1.2% growth over 2005, on top of the approximate 1.0% growth in
2005 and 2004. 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 total revenue was up 1.8%. This improved to 4.0% for same property
total revenue growth for the second six months of 2005. During 2006 these
figures improved further with 5.0% same property revenue growth for the year.
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, 87 basis points for 2004, 105 basis points for
2005 and 94 basis points for 2006. 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 levels of
concessions in 2006 are affected by two main components - our geographic
repositioning efforts and the utility recovery programs. With the Detroit and
Upstate New York regions sold in 2006 and out of the same store pool,
concessions have reduced as these were our two weakest markets needing support
from concessions. At the same time, the natural gas portion of the utility
recovery program was rolled out in 2006, leading to significant increases for
the recovery dollars in property other income and increased concession activity
for rents to counteract these aggressive increases.
The Company owned 106 communities with 31,253 apartment units throughout 2005
and 2006 where comparable operating results are available for the years
presented (the "2006 Core Properties"). Occupancies at the 2006 Core Properties
increased slightly by 20 basis points, from 93.8% to 94.0%. Occupancies in the
fourth quarter of 2006 averaged 93.5%, compared to 94.0% 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 third week of February,
2007, our ATR was 6.2%, compared to the same time period a year ago when ATR was
6.2%. For 2007, we are projecting occupancy averaging 0.1% better than 2006.
Total Same Store Properties (including Detroit and Upstate New York for at least
part of the year) rental revenue growth for 2006 was projected to be 3.8%,
consisting of 3.4% in rental rate growth, 0.3% in occupancy improvement, and
0.1% in reduction to concessions. Actual results were 3.1% in rental rate
growth, 0.2% increase in occupancy, and 0.1% reduction to concessions, totaling
3.4% total rental revenue growth, or 0.4% behind the guidance. It is difficult
to compare rental growth without including the utility recovery revenue which is
classified as property other income. The Company recorded $8.3 million of
recovery revenue in 2006 verses only $2.9 million in 2005. Actual results,
including utility recovery revenue, were 4.5% in rental rate growth, 0.2%
increase in occupancy, and 0.1% reduction to concessions, totaling 4.8% total
rental revenue growth including utility recovery income.
The guidance for 2007 Core Properties (apartment units owned throughout 2006 and
2007, the "2007 Core Properties") revenue growth is 5.1%. Rental rates are
projected to increase 3.6%, including above-average rental increases at certain
communities resulting from the continued efforts to upgrade the properties.
Occupancies are expected to increase 0.1% for the year, and concessions are
projected to increase slightly, reducing net rental income by 0.3%, such that
rental revenues are projected to increase 3.4%. Property other income is
expected to increase substantially year over year, increasing the 3.4% rental
revenue growth to 5.1% total revenue growth. The items driving the property
other income growth are a $0.8 million marginal increase in water and sewer
recovery revenue and a $7.8 million marginal increase in heating cost recovery
revenue from the utility recovery initiatives.
Expenses for 2007 Core Properties are projected to increase 5.4%. See below
under "Results of Operations" for more details on expense comparisons.
These revenue and expense projections result in 2007 Core Properties net
operating income ("NOI") growth of 4.9% at the mid-point of 2007 guidance.
Markets where the Company expects above average NOI growth include: Washington,
D.C. 5.6%; Philadelphia 5.6%; Florida 5.5% and Baltimore 5.0%. Markets with
below average expectations include: New York City Metro area 4.2%; Boston 3.7%
and Chicago 2.6%. 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 2007 with a range of $3.12 to $3.24 per share.
The Company has anticipated closing on acquisitions of $400 million in its
budget for 2007. 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 $50 million in
dispositions from properties that have reached their potential. The acquisition
market continues to be very competitive, making the 2007 acquisition goal of
$400 million slightly aggressive.
During 2005 and 2006, the Company increased its level of stock buy-back activity
substantially, repurchasing approximately 5.4 million shares at a weighted price
slightly in excess of $47.00 per share. The Company's strategy is to
opportunistically repurchase shares at a discount to its underlying net asset
value ("NAV"), thereby continuing to build value for shareholders. The Company
estimates its NAV per share at December 31, 2006 to be $62.08, based on
capitalizing at 5.9% the annualized and seasonally adjusted fourth quarter
property net income, plus a 4% growth factor, minus a management fee. At the
present time, the 2007 guidance assumes no stock buy-back. The Company will
continue to monitor stock prices, the published NAV and acquisition alternatives
to determine the current best use of capital between stock buy-back,
acquisitions and leverage levels. During periods when our common shares are
trading at a premium to NAV, we are not likely to repurchase shares. In such
circumstances, it would be more likely that we would issue equity in order to
raise capital in order to pay down existing debt. This should be neutral to both
NAV and earnings per share, increase the level of unencumbered assets, and
better position the Company to fund future acquisition and development pipeline
needs. During 2007, the Company will target leverage of approximately 43% of
debt-to-total market capitalization in order to meet its above-described
acquisition goals.
Results of Operations
---------------------
Comparison of year ended December 31, 2006 to year ended December 31, 2005.
The Company owned 106 communities with 31,253 apartment units throughout 2005
and 2006 where comparable operating results are available for the years
presented (the "2006 Core Properties"). For the year ended December 31, 2006,
the 2006 Core Properties showed an increase in total revenues of 5.0% and a net
operating income increase of 6.8% over the 2005 period. Property level operating
expenses increased 2.8%. Average economic occupancy for the 2006 Core Properties
increased from 93.8% to 94.0%, with average monthly rental rates increasing 3.1%
to $1,073 per apartment unit.
A summary of the 2006 Core Property NOI is as follows (in thousands):
2006 2005 $ Change % Change
---- ---- -------- --------
Rent $ 378,289 $ 365,911 $12,378 3.4%
Utility recovery revenue 8,323 2,907 5,416 186.3%
--------- --------- ------- ---
Rent including recoveries 386,612 368,818 17,794 4.8%
Other income 17,710 16,093 1,617 10.0%
--------- --------- ------- ---
Total revenue 404,322 384,911 19,411 5.0%
Operating and maintenance (172,392) (167,770) (4,622) (2.8%)
--------- --------- ------- ---
Net operating income $ 231,930 $ 217,141 $14,789 6.8%
========= ========= ======= ===
NOI may fall within the definition of "non-GAAP financial measure" set forth in
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 communities.
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 2006, the Company acquired/developed a total of 3,271 apartment units in
ten communities (the "2006 Acquisition Communities"). In addition, the Company
experienced full-year results for the 2,430 apartment units in seven apartment
communities (the "2005 Acquisition Communities") acquired during 2005. The
inclusion of these acquired communities generally accounted for the significant
changes in operating results for the year ended December 31, 2006. In addition,
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 (in thousands):
2006 2005 $ Change % Change
---- ---- -------- --------
Rental income $ 420,988 $ 378,506 $42,482 11.2%
--------- --------- ------- ----
Utility recovery revenue 9,082 2,964 6,118 206.4%
Other income 18,693 16,451 2,242 13.6%
--------- --------- ------- ----
Total property other income 27,775 19,415 8,360 43.1%
--------- --------- ------- ----
Total revenue 448,763 397,921 50,842 12.8%
Operating and maintenance (190,845) (174,906) (15,939) (9.1%)
--------- --------- ------- ----
Net operating income $ 257,918 $ 223,015 $34,903 15.7%
========= ========= ======= ====
During 2006, the Company disposed of 39 properties with a total of 9,705 units,
which had partial results for 2006 and full year results for 2005 (the "2006
Disposed Communities"). During 2005, the Company sold four properties with a
total of 816 units, which had partial results for 2005 (the "2005 Disposed
Communities"). The results of these disposed properties have been reflected in
discontinued operations and are not included in the table above.
For the year ended December 31, 2006, income from operations (income before
equity in losses of unconsolidated affiliates, minority interest, discontinued
operations and loss on disposition of property and business) increased by
$5,161,000 when compared to the year ended December 31, 2005. The increase was
primarily attributable to the following factors: an increase in rental income of
$42,482,000, an increase in property other income of $8,360,000, an increase in
interest and other income of $2,625,000, and a decrease in impairment of assets
held as general partner of $400,000. These changes were partially offset by an
increase in operating and maintenance expense of $15,939,000, an increase in
general and administrative expense of $2,974,000, an increase in interest
expense of $14,595,000, and an increase in depreciation and amortization of
$15,198,000. Each of the items are described in more detail below.
Of the $42,482,000 increase in rental income, $21,578,000 is attributable to the
2005 Acquisition Communities, $8,228,000 is attributable to the 2006 Acquisition
Communities and $298,000 is attributable to the consolidation of the VIE. The
balance of $12,378,000 relates to a 3.4% increase from the 2006 Core Properties
due primarily to an increase of 3.1% in weighted average rental rates,
accompanied by an increase in average economic occupancy from 93.8% to 94.0%.
In the current improving economic environment, it is very difficult to project
rental rate and occupancy results. The Company has provided guidance for 2007,
which, at the mid-point of the range, anticipates same store revenue growth of
5.1%, including above-average rental increases from the continued efforts to
upgrade the properties. Occupancy levels are expected to slightly improve from
the level at the end of the fourth quarter of 2006, producing an expected
average for 2007 Same Store Properties of 94.0%, 10 basis points higher than all
of 2006.
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 2006 by
$8,360,000. Of this increase, $1,097,000 is attributable to the 2005 Acquisition
Communities, $259,000 is attributable to the 2006 Acquisition Communities and
partially offset by a $29,000 decrease attributable to the VIE. The balance of
$7,033,000 represents a 37.0% increase attributable to the 2006 Core Properties.
Included in the 2006 Core Properties increase is $5,416,000, which represents
increased utility recovery revenue compared to 2005.
Interest income increased $1,180,000 due to a higher level of invested excess
cash on hand available from sale proceeds of the 2006 Disposed Communities and
proceeds from exchangeable senior notes awaiting reinvestment into replacement
property.
Other income, which primarily reflects management and other real estate service
fees recognized by the Company, increased in 2006 by $1,445,000. This is due
primarily to the post closing consultation fees earned in connection with the
2006 Disposed Communities.
Of the $15,939,000 increase in operating and maintenance expenses, $8,521,000 is
attributable to the 2005 Acquisition Communities, $2,969,000 is attributable to
the 2006 Acquisition Communities partially offset by a $173,000 decrease
attributable to the VIE. The balance for the 2006 Core Properties, a $4,622,000
increase in operating expenses or 2.8%, is primarily a result of increases in
electricity, gas heating costs, repairs & maintenance and property insurance.
These increases were offset in part by reductions in personnel, advertising, and
snow removal costs.
The breakdown of operating and maintenance costs for the 2006 Core Properties by
line item is listed below (in thousands):
2006 2005 $ Variance % Variance
---- ---- ---------- ----------
Electricity $ 6,959 $ 6,414 $ (545) (8.5%)
Gas 20,113 18,871 (1,242) (6.6%)
Water & sewer 11,297 10,691 (606) (5.7%)
Repairs & maintenance 25,885 24,704 (1,181) (4.8%)
Personnel expense 33,818 34,199 381 1.1%
Site level incentive compensation 2,252 2,419 167 6.9%
Advertising 4,161 4,591 430 9.4%
Legal & professional 1,176 896 (280) (31.3%)
Office & telephone 5,425 5,535 110 2.0%
Property insurance 6,813 5,746 (1,067) (18.6%)
Real estate taxes 38,512 38,292 (220) (0.6%)
Snow 610 1,190 580 48.7%
Trash 2,438 2,452 14 0.6%
Property management G&A 12,933 11,770 (1,163) (9.9%)
--------- --------- ------- ----
Total $ 172,392 $ 167,770 $(4,622) (2.8%)
========= ========= ======= ====
With a $1,242,000 increase, natural gas heating costs were up 6.6% over 2005. We
experienced significant increases in the cost of natural gas per decatherm in
the first quarter. These increases were not unexpected, and rates and usage have
come down the balance of the year with positive comparisons to the other three
quarters.
As of December 31, 2006, the Company had fixed-price contracts covering
approximately 95% of its natural gas exposure for the balance of the 2006/2007
heating season. Risk is further diversified by staggering contract term
expirations. For the balance of the 2006/2007 heating season, the Company
estimates the average price per decatherm will be approximately $9.50. For
calendar year 2007, where the Company has coverage for 85% of its exposure, the
Company's negotiated average price per decatherm was approximately $9.22, with
an all-in weighted expectation of $8.99 including an estimate for the 15%
variable portion. For 2006, the average commodity cost for the year was $9.29.
The Company has provided guidance for 2007 which anticipates a 13.1% increase
(or $2,700,000) in natural gas heating costs. This is based on the thirty-year
average for the number of degrees days for 2007. Both the winter of the first
quarter and fourth quarter of 2006 were mild, making for a tough comparison in
2007. Even though the cost per decatherm is expected to go down slightly, usage
is expected to increase significantly. For guidance, the portion of the calendar
year not covered by fixed price contracts (15%) is assumed to be priced at a
level that reflects twelve month strip pricing as of February, 2007.
The increase in repairs and maintenance of 4.8% is mainly attributed to a
non-recurring $618,000 reduction in 2005 due to cost reimbursements from fire
losses. After factoring the fire reimbursement, the 2006 increase was only
$563,000, or 2.2%. The Company has provided guidance for 2007 which anticipates
a 4.3% increase in repairs and maintenance.
Personnel expenses were down 1.1% in 2006 versus 2005. The Company experienced
favorable variances in workers compensation and health insurance, down $322,000,
or 10%. For 2007 guidance, personnel costs are anticipated to increase 5.7%.
Part of this increase is attributable to a more normalized level of overtime
expected during winter months. As with heating costs described above, the more
mild winter in 2006 produced lower snowfall which reduces labor costs.
Site level incentive compensation was down $167,000, or 6.9%. The hurdle rate to
earn incentive compensation was set higher in 2006 due to increased optimism,
resulting in a slightly lower overall payout.
Advertising costs were down 9.4% as a result of property management decreasing
spending on major newspaper ads and focusing instead on internet advertising and
resident referral programs.
Legal and professional fees were up $280,000, or 31.3%, due in part to increased
efforts for property tax assessment appeals.
Property insurance costs were up 18.6% over 2005, primarily due to a general
increase in our property and general liability insurance premiums. Insurance
costs have continued to climb due to catastrophe rate increases and higher
reinsurance rates. The guidance for 2007 reflects a similar 18.8% increase in
insurance costs.
Real estate taxes were up only 0.6% in 2006, reflecting general increased
assessments and rates as tax authorities struggle to raise revenues in many
regions of the country, mostly offset by selected successful property tax
appeals which resulted in $555,000 savings in 2006. The Company expects real
estate taxes to increase only 3.0% in 2007 reflecting continued initiatives to
challenge assessments and obtain cost reductions.
Snow removal costs were down 580,000 or 48.7%. The year 2006 produced below
normal snowfalls compared to normal snowfall in 2005. Snow removal costs are
anticipated to revert to normal levels in 2007.
The operating expense ratio (the ratio of operating and maintenance expense
compared to rental and property other income) for the 2006 Core Properties was
42.6% and 43.6% for 2006 and 2005, respectively. This 1.0% decrease resulted
from the 5.0% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential and the Company's roll
out of its heating cost recovery program in 2006, offset by the 2.8% 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 and heating costs in its markets.
General and administrative expenses ("G&A") increased in 2006 by $2,974,000 or
15% from $19,652,000 in 2005 to $22,626,000 in 2006. General and administrative
expenses as a percentage of total revenues (including discontinued operations)
were 4.4% for 2006 as compared to 4.0% for 2005. The recently enacted accounting
rules effecting stock options and restricted stock, SFAS 123R, required the
Company to recognize compensation costs in 2006 for retirement-eligible and
near-retirement-eligible employees and directors over a shorter vesting period
than 2005, coupled with a significantly higher stock price, resulting in
$879,000 higher expense for 2006. Part of the increase ($1,667,000) is the
direct result of the increase in corporate incentive compensation bonus accrued
in 2006, partially offset by a $1,331,000 reduction in external costs incurred
for auditing, tax and consultation expense, including costs to comply with
Section 404 of Sarbanes-Oxley. G&A for 2006 also included $505,000 for the
development department which was non-existent in 2005. A significant portion of
the costs in 2005 related to the non-recurring first year efforts for Section
404 compliance. G&A is expected to decrease 6.5% for 2007, based on the
retirement as an employee of Norman Leenhouts, who will remain as Co-Chairman of
the Board; partially offset by the ramp up of the development department.
Interest expense increased in 2006 by $14,595,000 as a result of a full year of
interest expense for the 2005 Acquisition Communities, the increased borrowings
in connection with acquisition of the 2006 Acquisition Communities and interest
expense on the exchangeable senior notes, partially offset by lower interest on
line of credit expenses. In addition, amortization from deferred charges
relating to the financing of properties totaled $2,389,000 and $1,975,000, and
was included in interest expense for 2006 and 2005, respectively.
Included in 2005 interest expense are prepayment penalties of $147,000 in
connection with the refinancing or payoff of certain mortgages not in connection
with a sale any property.
Depreciation and amortization expense increased $15,198,000 due to the
additional depreciation expense on the 2006 Acquisition Communities and a full
year of depreciation expense for the 2005 Acquisition Communities, as well as
the incremental depreciation on the capital expenditures for additions and
improvements to the Core Properties in 2006 and 2005 of $67,787,000 and
$72,696,000, respectively.
The Company has sold virtually all of the assets associated with its general
partner interests in the affordable properties in order to focus solely on the
direct ownership and management of market rate apartment communities. During
2005, the Company recorded impairment charges of $400,000, which pertains to an
impairment charge taken on the one remaining VIE to reduce its investment to
fair market value.
Minority interest increased $985,000 as a direct result of the increase in
income from operations, partially offset by a decrease in the minority interest
percentage over the prior year.
Included in discontinued operations for 2006 are the operating results, net of
minority interest, of the 2006 Disposed Communities. Included in discontinued
operations for 2005 are the operating results, net of minority interest, of the
2006 Disposed Communities and the 2005 Disposed Communities. For purposes of the
discontinued operations presentation, the Company only includes interest expense
and losses from early extinguishment of debt associated with specific mortgage
indebtedness of the properties that are sold or held for sale.
Included in the $78,748,000 net gain on disposition of property for 2006 is the
sale of 39 apartment communities where the Company recorded a combined gross
gain on sale of $110,514,000, net of minority interest of $31,766,000.
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.
Net income increased $28,973,000 primarily due to the increase in gain on sale
of discontinued operations of $24,773,000 in 2006 compared to 2005; plus
$4,176,000 higher income from continuing operations in 2006 compared to 2005.
Comparison of year ended December 31, 2005 to year ended December 31, 2004.
The Company owned 98 communities with 28,855 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 total revenues of 3.6% and a net operating
income increase of 3.4% over the 2004 year-end period. Property level operating
expenses increased 4.0%. Average economic occupancy for the 2005 Core Properties
increased from 93.4% to 93.5%, with average monthly rental rates increasing
2.4%.
A summary of the 2005 Core Property NOI is as follows (in thousands):
2005 2004 $ Change % Change
---- ---- -------- --------
Rent $ 336,613 $ 327,737 $8,876 2.7%
Utility recovery revenue 2,595 95 2,500 2631.6%
--------- --------- ------ ------
Rent including recoveries 339,208 327,832 11,376 3.5%
Other income 15,179 14,168 1,011 7.1%
--------- --------- ------ ------
Total revenue 354,387 342,000 12,387 3.6%
Operating and maintenance (153,463) (147,628) (5,835) (4.0%)
--------- --------- ------ ------
Net operating income $ 200,924 $ 194,372 $6,552 3.4%
========= ========= ====== ======
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 2,394 apartment units in eight 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 VIE.
A summary of the NOI from continuing operations for the Company as a whole is as
follows (in thousands):
2005 2004 $ Change % Change
---- ---- -------- --------
Rental income $ 378,506 $ 348,932 $29,574 8.5%
--------- --------- ------- ------
Utility recovery revenue 2,964 133 2,831 2128.6%
Other income 16,451 14,804 1,647 11.1%
--------- --------- ------- ------
Total property other income 19,415 14,937 4,478 30.0%
--------- --------- ------- ------
Total revenue 397,921 363,869 34,052 9.4%
Operating and maintenance (174,906) (157,802) (17,104) (10.8%)
--------- --------- ------- ------
Net operating income $ 223,015 $ 206,067 $16,948 8.2%
========= ========= ======= ======
During 2004, the Company disposed of five properties with a total of 1,646
units, which had partial results for 2004 (the "2004 Disposed Communities"). The
results of the 2004 Disposed Communities, along with the 2006 and 2005 Disposed
Communities, 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 losses of unconsolidated affiliates, minority interest, discontinued
operations and gain on disposition of property and business) decreased by
$3,936,000 when compared to the year ended December 31, 2004. The decrease was
primarily attributable to the following factors: an increase in rental income of
$29,574,000, an increase in property other income of $4,478,000, 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 $17,104,000, an increase
in interest expense of $15,033,000, an increase in depreciation and amortization
of $10,234,000 and a decrease in interest and other income of $659,000. Each of
the items are described in more detail below.
Of the $29,574,000 increase in rental income, $11,451,000 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 $8,876,000 relates to a 2.7% 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%.
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
$4,478,000. Of this increase, $661,000 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 $3,511,000 represents a 24.6%
increase attributable to the 2005 Core Properties. Included in the 2005 Core
Properties increase is $2,500,000 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 $17,104,000 increase in operating and maintenance expenses, $6,439,000 is
attributable to the 2004 Acquisition Communities, $3,750,000 is attributable to
the 2005 Acquisition Communities and $1,080,000 is attributable to the VIE. The
balance for the 2005 Core Properties, a $5,835,000 increase in operating
expenses or 4.0%, 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 $ 6,115 $ 5,951 $ (164) (2.8%)
Gas 18,013 15,300 (2,713) (17.7%)
Water & sewer 9,617 9,142 (475) (5.2%)
Repairs & maintenance 22,838 22,894 56 0.2%
Personnel expense 31,449 30,937 (512) (1.7%)
Site level incentive compensation 2,220 1,323 (897) (67.8%)
Advertising 4,246 4,297 51 1.2%
Legal & professional 802 740 (62) (8.4%)
Office & telephone 5,172 5,428 256 4.7%
Property insurance 4,334 5,383 1,049 19.5%
Real estate taxes 34,563 32,889 (1,674) (5.1%)
Snow 1,018 877 (141) (16.1%)
Trash 2,146 2,070 (76) (3.7%)
Property management G&A 10,930 10,397 (533) (5.1%)
--------- --------- ------- ----
Total $ 153,463 $ 147,628 $(5,835) (4.0%)
The natural gas heating cost variance of 17.7% reflects significant increases in
the cost of natural gas per decatherm. For calendar year 2005, the Company's
average price per decatherm was $6.98. A year ago, the average commodity cost
for the year was approximately $6.00.
The 5.2% 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 0.2% is mainly attributed to a
$919,000 decrease in sales tax charges between periods. Included in contract
repairs in 2004 is $808,000 of sales tax expense, compared to a reduction in
sales tax expense of $111,000 in 2005.
Personnel expense was up 1.7% in 2005 versus 2004. Significant variances were
normal payroll increases of $958,000, or 2.7%, increase in workers compensation,
up $421,000, or 27%, and health insurance, down $867,000, or 33%.
Site level incentive compensation was up $897,000, or 67.8%. This represents an
increased focus on creating a higher level of property management compensation
coming from incentive based performance measures.
Advertising costs were down 1.2% 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 19.5% 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.
Real estate taxes were up 5.1% in 2005, reflecting increased assessments and
rates as tax authorities struggle to raise revenues in many regions of the
country.
Snow removal costs were up 16.1%. The year 2005 produced normal snowfalls
compared to 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 2005 Core Properties was
43.3% and 43.2% for 2005 and 2004, respectively. This 0.1% increase resulted
from the 3.6% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential being offset by the 4.0%
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.
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 below. 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.
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 was owned
by Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board
of Directors of 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 2005 by $15,033,000 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 $10,234,000 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 $64,592,000 and
$68,510,000, 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 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."
Minority interest decreased $575,000 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 2006 and 2005 Disposed Communities.
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 $5,192,000 lower income from the operation of discontinued operations
in 2005 compared to 2004.
Liquidity and Capital Resources
-------------------------------
The Company's principal liquidity demands are expected to be distributions to
the common stockholders and holders of UPREIT Units,, capital improvements and
repairs and maintenance for the properties, acquisition and development of
additional properties, stock repurchases, the redemption of the Series F
Perpetual Preferred shares described above, 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 $400 million in 2007, 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, 2006, the Company owned 19 properties, with
3,816 apartment units, which were unencumbered by debt.
During 2006, the Company sold 39 communities for a total sales price of $495.3
million. The Company sold four communities during 2005 for a total sales price
of $142.6 million. The Company was able to sell these properties at an average
capitalization rate of 6.8% and reinvest in the acquisition of properties with
more growth potential at an expected first year cap rate of 6.4%. Management has
included in its operating plan that the Company will strategically dispose of
assets totaling approximately $50 million in 2007, 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, 2006, the Company
continued to have available securities under the registration statement in the
aggregate amount of $144,392,000.
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 carried an annual
dividend rate equal to the greater of 8.775% or the actual dividend paid on the
Company's common shares into which the preferred shares could be converted. The
stock had a conversion price of $30 per share and a five-year, non-call
provision. On May 26, 2005, all 250,000 shares of the Series D Preferred Stock
were converted into 833,333 shares of common stock. The conversion of preferred
shares to common shares did not have an effect on the reported results of
operations.
In March, 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million. The net proceeds were used to fund the 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. The Company plans to redeem the
Series F Preferred on March 26, 2007. Each Series F Preferred share receives 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
rating in effect at December 31, 2006 (no change from initial rating) is a
corporate credit rating of "BBB" (Triple-B), with a rating of "BBB-" (Triple-B
Minus) for Series F Preferred Stock.
The Company issued $20,397,000, $55,600,000 and $12,100,000 of UPREIT Units as
consideration for acquired properties in 2006, 2005 and 2004, respectively.
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, 2004, there was approval remaining to purchase
2,000,000 shares. During 2005, the Company repurchased 2,779,805 shares at a
cost of $111,738,000. 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 3,220,195 shares at
December 31, 2005. During 2006, the Company repurchased 2,613,747 shares at a
cost of $142,532,597. On October 27, 2006 the Board of Directors approved a
2,000,000-share increase in the stock repurchase program, resulting in a
remaining authorization level of 2,606,448 shares as of December 31, 2006.
During 2007, 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 and Direct Stock Purchase 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 $10,000. 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
2006 and 2005, 48,243 and 66,525 shares of common stock, respectively, were
issued under this plan, which were covered by share repurchases. As the stock
has been trading at an amount close to NAV, in the fourth quarter of 2006, the
Company switched back to issuing new shares to meet demand.
Management monitors the relationship between the Company's stock price and its
estimated NAV. During times when the difference between these two values is
small, resulting in little "dilution" of NAV by common stock issuances, the
Company can choose to issue new shares. At times when the gap between NAV and
stock price is greater, the Company has the flexibility to satisfy the demand
for DRIP shares with stock repurchased in the open market. In addition, the
Company can issue waivers to DRIP participants to provide for investments in
excess of the $10,000 maximum monthly investment. No such waivers were granted
during 2006 or 2005.
On October 24, 2006, the Company issued $200 million of exchangeable senior
notes under an Indenture Agreement. This offering generated net proceeds of
$195.8 million. The coupon rate is 4.125%. The notes are exchangeable into cash
equal to the principal amount of the notes and, at the Company's option, cash or
common stock for the exchange value (to the extent that the market price of
common stock exceeds the initial exchange price of $73.34 per share) subject to
adjustment. Upon an exchange of the notes, the Company will settle any amounts
up to the principal amount of the notes in cash and the remaining exchange
value, if any, will be settled, at the Company's option, in cash, common stock
or a combination of both. The notes are not redeemable at the option of the
Company for five years, except to preserve the status of the Company as a REIT.
Holders of the notes may require the Company to repurchase the notes upon the
occurrence of certain designated events. In addition, prior to November 1, 2026,
the holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021. The notes will mature on November 1, 2026, unless previously
redeemed, repurchased or exchanged in accordance with their terms prior to that
date.
Noteholders may also require an exchange of the notes subsequent to December 31,
2006 should the closing sale price of common stock exceed 130% of the exchange
price for a certain period of time or should the trading price on the notes be
less than 98% of the product of the closing sales price of common stock
multiplied by the applicable exchange rate for a certain period of time.
The notes are structurally subordinated to the secured indebtedness of the
Company. The Company is not subject to any financial covenants under the
Indenture. In addition, the Indenture will not restrict the ability to pay
distributions, incur debt or issue or repurchase securities.
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 with 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 had 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 and it was terminated.
As of December 31, 2006, the Company had an unsecured line of credit of $140,000
of which there was no outstanding balance. 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, 2006. 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 0.75% over the one-month LIBOR. The
one-month LIBOR was 5.32% at December 31, 2006. The LIBOR interest rate plus
0.75% was 6.07% at December 31, 2006.
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 year ended December 31, 2006.
As of December 31, 2006, the weighted average rate of interest on the Company's
$1.9 billion mortgage debt was 5.8% and the weighted average maturity of such
indebtedness was approximately six and one half years. Approximately 98.6% of
total indebtedness (including the exchangeable senior notes) is at fixed rates.
This limits the exposure to changes in interest rates, minimizing the effect of
interest rate fluctuations on the Company's results of operations and
cash flows.
The Company's net cash provided by operating activities increased from
$136,466,000 for the year ended December 31, 2005, to $162,996,000 for the year
ended December 31, 2006. The increase was principally due to changes in other
assets, accounts payable and accrued liabilities. The change in other assets was
principally due to the use of a $7,303,000 deposit for the acquisition of a
property in 2006 and a $6,297,000 decrease in 2006 due to the 2006 Disposed
Communities. The increase in liabilities over the prior year was primarily due
to higher accrued interest of $1,541,000 for the exchangeable senior notes,
$1,089,000 accrued interest on debt associated with 2006 and 2005 Acquisition
Communities; $1,842,000 higher accrued bonus with the remaining increase due to
higher accounts payable and other accrued expenses at the end of 2006 as
compared to the prior year end.
Cash provided by (used in) investing activities increased from ($179,944,000)
used in 2005 to $159,653,000 provided by in 2006. The dramatic increase in 2006
is attributable to the $349,384,000 increase in proceeds from 2006 Disposed
Communities. Also, cash used in the purchase of properties was $31,848,000 lower
in 2006 as compared to 2005, and funds added to escrow were $38,713,000 higher
in 2006.
Cash provided by (used in) financing activities decreased from $40,944,000
provided by in 2005 to ($209,828,000) used in 2006 primarily due to $167,858,000
less cash provided by debt refinancings; $150,865,000 in mortgage retirements
for the 2006 Disposed Communities; $109,000,000 cash used to pay off the line of
credit and $34,449,000 higher repurchases of common stock, partially offset by
$195,800,000 proceeds from the sale of exchangeable senior notes and $16,536,000
higher proceeds from stock option exercises.
On February 7, 2007, the Board of Directors approved a dividend on the Company's
common shares of $.65 per share for the period from October 1, 2006 to December
31, 2006. This is the equivalent of an annual distribution of $2.60 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, 2007.
The dividends were paid on February 28, 2007 to shareholders of record on
February 16, 2007.
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 apartment units 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 $1,087,000, $1,096,000
and $763,000 of interest capitalized in 2006, 2005 and 2004, respectively.
Salaries and related costs capitalized for the years ended December 31, 2006,
2005 and 2004 were $2,097,000, $2,135,000 and $3,391,000, 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,
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.
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 defined 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 accrued expenses and other liabilities and are
amortized as an increase to rental income over the initial term of 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
resident relationships, which includes 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 and
included in depreciation and amortization expense over the initial term of the
respective leases.
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. During 2006 and 2005, there were 3.8 million and 0.2
million shares of UPREIT Units converted to common stock, respectively. The
Company made an adjustment in the amount of $124.6 million and $5.2 million,
respectively, to record the fair market value of the conversions.
Discontinued Operations
-----------------------
The Company reports its property dispositions as discontinued operations as
prescribed by the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). Pursuant to the definition of a
component of an entity in SFAS 144, assuming no significant continuing
involvement by the former owner after the sale, the sale of an apartment
community is considered a discontinued operation. In addition, apartment
communities classified as held for sale are also considered a discontinued
operation. The Company generally considers assets to be held for sale when all
significant contingencies surrounding the closing have been resolved, which
often corresponds with the actual closing date. As of December 31, 2005, the
Company classified 21 properties as held for sale. These 21 properties were sold
during 2006 and are included in discontinued operations for all periods
presented and classified as held for sale as of December 31, 2005.
Included in discontinued operations for the three years ended December 31, 2006
are the operating results, net of minority interest, of 48 apartment community
dispositions (39 sold in 2006, 4 sold in 2005 and 5 sold in 2004). In addition,
discontinued operations for the years ended December 31, 2005 and 2004 includes
the operating results of four VIEs sold during 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.
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.
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, 2006,
2005 and 2004, 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 $10,079,000 and $8,496,000 as of December 31, 2006 and 2005,
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
$10,078,000 and $8,421,000 for the years ended December 31, 2006 and 2005,
respectively. The deferred tax assets are associated with HPRS who performs
certain of the residential and development activities of the Company. HPRS
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 HPRS 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 had 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, 2006, 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 for funding operating deficits to the extent there
are any and can receive operating incentive awards if cash flows reach certain
levels. The effect on the consolidated balance sheets of including this VIE as
of December 31, 2006 and 2005 includes total assets of $20.5 and $21.3 million,
total liabilities of $17.9 and $17.9 million, and minority interest of $2.6 and
$3.4 million, respectively.
The Company believes the property operations conform to the applicable
requirements as set forth above.
Acquisitions and Dispositions
-----------------------------
In 2006, the Company acquired a total of eight communities with a total of 3,067
units for total consideration of $360,100,000, or an average of approximately
$117,400 per unit. For the same time period, the Company sold 39 properties with
a total of 9,705 units for total consideration of $495,300,000, or an average of
approximately $51,000 per unit. The weighted average expected first year cap
rate of the 2006 Acquisition Communities was 6.7% and of the 2006 Disposed
Communities was 7.6%. The weighted average unleveraged IRR during the Company's
ownership for the properties sold was 9.3%.
In 2005, the Company acquired a total of seven communities with a total of 2,430
units for total consideration of $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 IRR during the Company's ownership for
the properties sold was 20.0%.
Contractual Obligations and Other Commitments
---------------------------------------------
The primary obligations of the Company relate to its borrowings under the line
of credit, exchangeable senior notes and mortgage notes payable. The Company's
line of credit matures in September 2008, and has no balance outstanding at
December 31, 2006. The $1.9 billion in mortgage notes payable have varying
maturities ranging from 1 to 36 years. The principal payments on the mortgage
notes payable for the years subsequent to December 31, 2006, are set forth in
the table below as "long-term debt."
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."
Purchase obligations represent those costs that the Company is contractually
obligated to pay 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 2007. 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 2007 2008 2009 2010 2011 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt (1) $1,924,313 $171,500 $137,153 $68,351 $307,989 $285,509 $953,811
Operating lease 6,128 1,980 1,946 1,932 200 70 -
Purchase obligations 9,319 8,371 646 165 106 30 1
---------- -------- -------- ------- -------- -------- --------
Total (2) $1,939,760 $181,851 $139,745 $70,448 $308,295 $285,609 $953,812
========== ======== ======== ======= ======== ======== ========
(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
2006 2006 2006 2006
---- ---- ---- ----
EBITDA
Total revenues $ 118,748 $ 115,255 $ 121,947 $ 119,416
Net operating income from discontinued operations 3,975 5,125 4,950 5,017
Operating and maintenance expense (49,781) (45,650) (49,397) (58,135)
General and administrative expense (5,923) (5,607) (6,057) (5,039)
-------- -------- -------- --------
$ 67,019 $ 69,123 $ 71,443 $ 61,259
Fixed Charges
Interest expense $ 27,800 $ 26,637 $ 27,717 $ 27,195
Interest expense on discontinued operations 7,691 1,279 4,246 1,286
Preferred dividends 1,350 1,350 1,350 1,350
Capitalized interest 79 349 346 313
-------- -------- -------- --------
$ 36,920 $ 29,615 $ 33,659 $ 30,144
Fixed charge coverage ratio: 1.82 2.33 2.12 2.03
Capital Improvements
--------------------
The Company has a policy of capitalizing 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 table below 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 6 140 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
will be higher, or lower depending on the timing of certain longer life
expenditures.
(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 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.
(4) Includes computers, office equipment/furniture, and maintenance vehicles.
(5) The level of exterior painting may be lower than other similar titled
presentations as the Company's portfolio has a significant amount of brick
exteriors. In addition, the other exposed surfaces are most often covered
in aluminum or vinyl.
(6) Includes items such as balconies, siding, and concrete/sidewalks.
In reviewing the breakdown of costs above, one must consider the Company's
unique strategy in operating apartments which has been 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 which is more than justified by higher revenue growth, higher net
operating income growth and a higher rate of property appreciation.
The Company estimates that during 2006, 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)
------------------------------------
2006 2005
------------------------------------------------------------------ -------------------------
Non-
Recurring (a) recurring (a) Total Capital (a) Total Capital (a)
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
------ -------- ------ -------- ------------ -------- ------------ --------
New buildings $ - $ - $ 2,392 $ 70 $ 2,392 $ 70 $ 4,433 $ 139
Major building
improvements 3,111 91 14,263 417 17,374 508 16,634 520
Roof replacements 1,128 33 2,803 82 3,931 115 4,676 146
Site improvements 1,128 33 7,222 211 8,350 244 7,659 240
Apartment upgrades 2,256 66 14,207 416 16,463 482 17,788 556
Appliances 1,915 56 1,923 56 3,838 112 3,701 116
Carpeting/flooring 5,846 171 3,914 114 9,760 285 8,417 263
HVAC/mechanicals 1,744 51 9,989 292 11,733 343 9,677 303
Miscellaneous 821 24 2,263 66 3,084 90 2,770 87
------- ---- ------- ------ ------- ------ ------- ------
Totals $17,949 $525 $58,976 $1,724 $76,925 $2,249 $75,755 $2,370
======= ==== ======= ====== ======= ====== ======= ======
(a) Calculated using the weighted average number of units outstanding,
including 31,253 core units, 2005 acquisition units of 2,430, and 2006
acquisition units of 505 for the year ended December 31, 2006 and 31,253
core units and 2005 acquisition units of 714 for the year ended December
31, 2005.
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)
------------------------------------
2006 2005
------------------------------------------------------------------ -------------------------
Non-
Recurring (a) recurring (a) Total Capital (a) Total Capital (a)
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
------ -------- ------ -------- ------------ -------- ------------ --------
Core Communities $16,408 $525 $51,379 $1,644 $67,787 $2,169 $72,696 $2,326
2006 Acquisition Communities 265 525 297 588 562 1,113 - -
2005 Acquisition Communities 1,276 525 7,300 3,004 8,576 3,529 3,059 4,284
Subtotal 17,949 525 58,976 1,724 76,925 2,249 75,755 2,370
2006 Disposed Communities 3,552 525 3,515 519 7,067 1,044 12,965 1,336
2005 Disposed Communities - - - - - - 3,313 4,882
Corporate office expenditures (1) - - - 3,560 - 1,117 -
------- ---- ------- ------ ------- ------ ------- ------
Totals $21,501 $525 $62,491 $1,526 $87,552 $2,051 $93,150 $2,173
======= ==== ======= ====== ======= ====== ======= ======
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office. Corporate office expenditures includes principally
computer hardware, software and office furniture and fixtures.
Environmental Issues
--------------------
Phase I environmental site assessments have been completed on substantially all
of the Owned Properties. As of December 31, 2006, there were no recorded amounts
resulting from environmental liabilities as there were 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 July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and measurement of
assets and liabilities associated with tax positions taken or expected to be
taken in a tax return. FIN 48 is effective January 1, 2007. The Company reviewed
its current tax positions for any potential uncertain tax positions that would
qualify under FIN 48. Based on its review, the Company does not anticipate that
the adoption of FIN 48 in January 2007 will have a material impact on the
Company's cash flows, results of operations, financial position or liquidity.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements; the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is required to adopt SFAS 157 in the first quarter of 2008.
The Company is currently evaluating the impact that SFAS 157 will have on its
financial statements.
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 and 2006, we have seen a reversal of these recessionary trends. In
light of this, we will continue to review our business strategy; however, we
believe that given our property type and the geographic regions in which we are
located, we do not anticipate any changes in our strategy or material effects on
financial performance.
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.
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, 2006 and December 31, 2005, approximately 89% and 91%, respectively, of the
Company's secured debt bore interest at fixed rates with a weighted average
maturity of approximately 6 and 7 years, respectively, and a weighted average
interest rate of approximately 5.77% and 5.95%, respectively, including the $28
million and $29 million, respectively, of secured debt which has been swapped to
a fixed rate. The remainder of the Company's secured debt bears interest at
variable rates with a weighted average maturity of approximately 21 and 12
years, respectively, and a weighted average interest rate of 4.95% and 4.54%,
respectively, at December 31, 2006 and December 31, 2005. The Company does not
intend to utilize a significant amount of permanent variable rate debt to
acquire properties in the future. On occasion, the Company may use its line of
credit in connection with a property acquisition or stock repurchase with the
intention of refinancing 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, 2006 and December 31, 2005, the interest rate risk on $28
million and $29 million, respectively, of such variable rate debt has been
mitigated through the use of interest rate swap agreements (the "Swaps") with
major financial institutions. The Company is exposed to credit risk in the event
of non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.
At December 31, 2006 and December 31, 2005, the fair value of the Company's
fixed and variable rate secured debt, including the $28 million and $29 million,
respectively, which was swapped to a fixed rate, amounted to a liability of
$1.93 billion and $1.89 billion, respectively, compared to its carrying amount
of $1.92 billion and $1.84 billion, respectively. The Company estimates that a
100 basis point increase in market interest rates at December 31, 2006 would
have changed the fair value of the Company's fixed and variable rate secured
debt to a liability of $1.85 billion.
The Company intends to continuously monitor and actively manage interest costs
on its variable rate debt portfolio and may enter into swap positions based upon
market fluctuations. In addition, the Company believes that it has the ability
to obtain funds through additional debt and/or equity offerings and/or the
issuance of UPREIT Units. Accordingly, the cost of obtaining such interest rate
protection agreements in relation to the Company's access to capital markets
will continue to be evaluated. The Company has not, and does not plan to, enter
into any derivative financial instruments for trading or speculative purposes.
As of December 31, 2006, 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, 2006, the effectiveness of the disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-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 Annual 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, 2006. 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, 2006 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, 2006.
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, 2006 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 2007
Shareholders' Meeting.
The information sets forth, as of February 16, 2007, 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 79 1994
Josh E. Fidler 51 2004
Alan L. Gosule 66 1996
Leonard F. Helbig, III 61 1994
Roger W. Kober 73 1994
Nelson B. Leenhouts 71 1993
Norman Leenhouts 71 1993
Edward J. Pettinella 55 2001
Clifford W. Smith, Jr. 60 1994
Paul L. Smith 71 1994
Thomas S. Summer 53 2004
Amy L. Tait 48 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. As a result of the Company's retirement
policy, Mr. Balderston will not stand for re-election at the Company's 2007
Annual Meeting of Stockholders.
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,
the Board of Johns Hopkins Medicine and President-elect of 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 its formation, he has also served as a director of HPRS, for
which he had also served in various officer capacities prior to his retirement.
Mr. Leenhouts also served as a Senior Advisor to the Company pursuant to an
Employment Agreement with a term that expired on December 31, 2006. In addition,
Nelson Leenhouts was employed by the Company to fulfill additional
responsibilities with respect to the Company's development activities pursuant
to a Development Agreement, the term of which also expired on December 31, 2006.
Mr. Leenhouts subsequently entered into an Employment Agreement with a term that
expires on December 31, 2007. Pursuant to the current Employment Agreement, Mr.
Leenhouts will continue to lead the Company's development activities. Nelson
Leenhouts is 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 its formation, he has also served as a director of
HPRS. Mr. Leenhouts also served as a Senior Advisor to the Company pursuant to
an Employment Agreement with a term that expired 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 and The Charles E. Finney School. 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 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 the Geneseo Foundation Board. 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. Mr. Summer and Constellation Brands have
announced that Mr. Summer is retiring from that position on or about May 15,
2007. Prior to his employment by Constellation Brands, 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. 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, Monroe County Center for Civic Entrepreneurship and the Simon
School Executive Advisory Committee. 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.
Section 16(a) Beneficial Ownership Reporting Compliance.
--------------------------------------------------------
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, 2006, all Section 16(a)
filing requirements applicable to its executive officers, directors and greater
than 10% beneficial owners were satisfied on a timely basis, except that each of
the following directors inadvertantly failed to report on a timely basis one
transaction involving the sale of common shares as follows: William Balderston -
sale of 666 shares of common stock; Norman Leenhouts - sale of 752 shares; and
Amy L. Tait - sale of 4,759 shares. The three sales were subsequently reported
on a Form 4.
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 1, 2007 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 1, 2007 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 Web site 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 1, 2007 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 1, 2007 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, and Director
--------------------------------------------------------------------------------
Independence
------------
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 1, 2007 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 Accounting 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 1, 2007 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 Schedules
The financial statements and schedules 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, 2006 and 2005 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2006, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2006, 2005 and 2004 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2006, 2005 and 2004 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2006, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8
Schedule II:
Valuation and Qualifying Accounts F-38
Schedule III:
Real Estate and Accumulated Depreciation
F-39
3. Exhibits
Exhibit
Number Exhibit
------ -------
1.0 Underwriting Agreement, dated May 9, 2006, between Home Properties, Inc., UBS Securities LLC and the
selling shareholders named therein.
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
2.24 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.
2.43 Agreement for Purchase and Sale of Interests Southeast Michigan Portfolio, dated April 26, 2006,
together with Second Amendment thereto (First Amendment superceded)
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.
3.9 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
4.8 Amended and Restated Stock Benefit Plan of Home Properties of New York, Inc.*
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*
4.23 Home Properties of New York, Inc. Amendment Number One to the Amended and Restated Stock Benefit 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*
4.29 Amendment No. Two to Deferred Bonus Plan*
4.31 Amended and Restated 2003 Stock Benefit Plan*
4.32 Second Amended and Restated Director Deferred Compensation Plan*
4.33 Seventh Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan
4.34 Indenture, dated October 24, 2006 between Home Properties, Inc., Home Properties, L.P. and Wells
Fargo Bank, N.A., as trustee including the form of 4.125% Exchangeable Senior Notes due 2026 of Home
Properties, L.P. and the Guarantee of Home Properties, Inc. with respect thereto
4.35 Registration Rights Agreement, dated October 24, 2006, between Home Properties, Inc., Home
Properties, L.P. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear
Stearns & Co., Inc.
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*
10.26 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*
10.41 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*
10.68 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, 2007*
10.73 Summary of Named Executive Compensation for 2007
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
10.76 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
10.82 Amendment No. Eighty to the Second Amended and Restated Limited Partnership Agreement
10.83 Amendment Nos. Eighty-One and Eighty-Two to the Second Amended and Restated Limited Partnership
Agreement
10.84 Amendment Nos. Eighty-Three and Eighty-Four to the Second Amended and Restated Limited Partnership
Agreement
10.85 Amendment Nos. Eighty-Five through Eighty-Seven to the Second Amended and Restated Limited
Partnership Agreement
10.86 Development Agreement, dated March 27, 2006 between Nelson B. Leenhouts and Home Properties, Inc.*
10.87 Amended and Restated Employment Agreement, dated November 20, 2006 between Edward J. Pettinella and
Home Properties, Inc.*
10.88 Employment Agreement between Nelson B. Leenhouts and Home Properties, Inc.*
10.89 Second Amended and Restated Incentive Compensation Plan*
10.90 Articles of Merger of Home Properties Management, Inc. into Home Properties Resident Services, Inc.
10.91 Purchase Agreement, dated October 18, 2006 between Home Properties, Inc., Home Properties, L.P. and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith and Bear Stearns & Co., Inc.
11 Computation of Per Share Earnings Schedule
21 List of Subsidiaries of Home Properties, Inc.
23 Consent of PricewaterhouseCoopers LLP
31.1** Section 302 Certification of Chief Executive Officer
31.2** Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer (furnished)
32.2 Section 906 Certification of Chief Financial Officer (furnished)
99 Additional Exhibits - Debt Summary Schedule
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
** 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, 2006.
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: February 28, 2007
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 February 28, 2007
---------------------------
Edward J. Pettinella
/s/ David P. Gardner Executive Vice President, Chief Financial Officer February 28, 2007
---------------------------
David P. Gardner (Principal Financial Officer)
/s/ Robert J. Luken Senior Vice President, Chief Accounting Officer February 28, 2007
---------------------------
Robert J. Luken and Treasurer (Principal Accounting Officer)
/s/ Kenneth O. Hall Vice President and Controller February 28, 2007
---------------------------
Kenneth O. Hall
/s/ Norman P. Leenhouts Director, Co-Chairman of the Board of Directors February 28, 2007
---------------------------
Norman P. Leenhouts
/s/ Nelson B. Leenhouts Director, Co-Chairman of the Board of Directors February 28, 2007
---------------------------
Nelson B. Leenhouts
/s/ William Balderston, III Director February 28, 2007
---------------------------
William Balderston, III
/s/ Josh E. Fidler Director February 28, 2007
---------------------------
Josh E. Fidler
/s/ Alan L. Gosule Director February 28, 2007
---------------------------
Alan L. Gosule
/s/ Leonard F. Helbig, III Director February 28, 2007
---------------------------
Leonard F. Helbig, III
/s/ Roger W. Kober Director February 28, 2007
---------------------------
Roger W. Kober
/s/ Clifford W. Smith, Jr. Director February 28, 2007
---------------------------
Clifford W. Smith, Jr.
/s/ Paul L. Smith Director February 28, 2007
---------------------------
Paul L. Smith
/s/ Thomas S. Summer Director February 28, 2007
---------------------------
Thomas S. Summer
/s/ Amy L. Tait Director February 28, 2007
---------------------------
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, 2006 and 2005 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2006, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2006, 2005 and 2004 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2006, 2005 and 2004 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2006, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8
Schedule II:
Valuation and Qualifying Accounts F-38
Schedule III:
Real Estate and Accumulated Depreciation F-39
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 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2006, 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,
2006 and 2005, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2006 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, 2006 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,
2006, 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.
/s/ PricewaterhouseCoopers LLP
---------------------------
Boston, Massachusetts
February 28, 2007
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 and 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005
---- ----
ASSETS
Real estate:
Land $ 493,017 $ 401,747
Construction in progress 1,409 4,471
Buildings, improvements and equipment 2,957,336 2,700,554
Real estate held for sale or disposal, net - 223,938
---------- ----------
3,451,762 3,330,710
Less: accumulated depreciation (450,129) (446,159)
---------- ----------
Real estate, net 3,001,633 2,884,551
Cash and cash equivalents 118,212 5,391
Cash in escrows 74,069 36,674
Accounts receivable 9,287 7,372
Prepaid expenses 15,059 16,141
Deferred charges 13,619 11,156
Other assets 8,539 12,536
Other assets held for sale - 4,049
---------- ----------
Total assets $3,240,418 $2,977,870
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,924,313 $1,768,483
Exchangeable senior notes 200,000 -
Line of credit - 82,000
Accounts payable 20,797 19,458
Accrued interest payable 10,473 8,274
Accrued expenses and other liabilities 24,697 22,565
Security deposits 21,979 21,657
Liabilities held for sale - 75,352
---------- ----------
Total liabilities 2,202,259 1,997,789
Commitments and contingencies
Minority interest 282,542 323,269
---------- ----------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares issued and
outstanding at December 31, 2006 and 2005, respectively 60,000 60,000
Common stock, $.01 par value; 80,000,000 shares authorized; 33,103,247 and
31,184,256 shares issued and outstanding at December 31, 2006 and 2005,
respectively 331 312
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or
outstanding - -
Additional paid-in capital 852,036 773,396
Accumulated other comprehensive income 171 206
Distributions in excess of accumulated earnings (156,921) (177,102)
---------- ----------
Total stockholders' equity 755,617 656,812
---------- ----------
Total liabilities and stockholders' equity $3,240,418 $2,977,870
========== ==========
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, 2006, 2005, AND 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2006 2005 2004
---- ---- ----
Revenues:
Rental income $ 420,988 $ 378,506 $ 348,932
Property other income 27,775 19,415 14,937
Interest income 1,761 581 481
Other income 3,468 2,023 2,782
---------- ---------- ----------
Total Revenues 453,992 400,525 367,132
---------- ---------- ----------
Expenses:
Operating and maintenance 190,845 174,906 157,802
General and administrative 22,626 19,652 23,978
Interest 106,773 92,178 77,145
Depreciation and amortization 96,142 80,944 70,710
Impairment of assets held as General Partner - 400 1,116
---------- ---------- ----------
Total Expenses 416,386 368,080 330,751
---------- ---------- ----------
Income from operations 37,606 32,445 36,381
Equity in losses of unconsolidated affiliates - - (538)
---------- ---------- ----------
Income before minority interest, discontinued operations and
extraordinary item 37,606 32,445 35,843
Minority interest in limited partnership - - 441
Minority interest in operating partnership (9,614) (8,629) (9,204)
---------- ---------- ----------
Income from continuing operations 27,992 23,816 27,080
---------- ---------- ----------
Discontinued operations:
Income from operations, net of $1,947, $1,828 and $4,354, in 2006,
2005 and 2004 allocated to minority interest, respectively 3,745 3,721 8,913
Gain on disposition of property, net of $31,766, $26,733 and
$5,382 in 2006, 2005 and 2004 allocated to minority interest,
respectively 78,748 53,975 11,417
---------- ---------- ----------
Discontinued operations 82,493 57,696 20,330
---------- ---------- ----------
Income before loss on sale of property and business and cumulative
effect of change in accounting principle 110,485 81,512 47,410
Loss on sale of property and business, net of $33 in 2004 allocated to
minority interest - - (67)
---------- ---------- ----------
Income before cumulative effect of change in accounting principle 110,485 81,512 47,343
Cumulative effect of change in accounting principle net of $159 in
2004 allocated to minority interest - - (321)
---------- ---------- ----------
Net income 110,485 81,512 47,022
Preferred dividends (5,400) (6,279) (7,593)
---------- ---------- ----------
Net income available to common shareholders $ 105,085 $ 75,233 $ 39,429
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $0.69 $ 0.55 $ 0.59
Discontinued operations 2.52 1.80 0.62
Cumulative effect of change in accounting principle - - (0.01)
---------- ---------- ----------
Net income available to common shareholders $3.21 $ 2.35 $ 1.20
========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $0.68 $ 0.54 $ 0.58
Discontinued operations 2.47 1.79 0.61
Cumulative effect of change in accounting principle - - (0.01)
---------- ---------- ----------
Net income available to common shareholders $3.15 $ 2.33 $ 1.18
========== ========== ==========
Weighted average number of shares outstanding:
Basic 32,697,794 31,962,082 32,911,945
========== ========== ==========
Diluted 33,337,557 32,328,105 33,314,038
========== ========== ==========
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, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Officer/
Preferred Distributions Accumulated Director
Stock at Common Stock Additional in Excess of Other Notes for
Liquidation ------------ Paid-In Accumulated Comprehensive Stock
Preference Shares Amount Capital Earnings Income Purchase Totals
---------- ------ ------ ------- -------- ------ -------- ------
Balance, January 1, 2004 $85,000 31,966,240 $320 $ 785,710 $ (128,910) $ (542) $ (315) $741,263
Issuance of common stock, net 1,251,949 12 43,086 43,098
Repurchase of common stock (1,280,196) (13) (53,783) (53,796)
Payments on notes for stock
purchase 307 307
Interest receivable on notes
for stock purchase 8 8
Net income 47,022 47,022
Change in fair value of
hedge instruments, net of
minority interest 180 180
Conversion of UPREIT Units
for stock 687,420 7 26,569 26,576
Adjustment of minority
interest 5,630 5,630
Preferred dividends (7,593) (7,593)
Dividends paid ($2.49 per
share) (82,273) (82,273)
------- ---------- ---- --------- ---------- ----- --- --------
Balance, December 31, 2004 85,000 32,625,413 326 807,212 (171,754) (362) - 720,422
Issuance of common stock, net 358,737 4 12,845 12,849
Repurchase of common stock (2,850,882) (28) (114,737) (114,765)
Conversion of Series D
preferred stock for
common stock (25,000) 833,333 8 24,992 -
Net income 81,512 81,512
Change in fair value of
hedge instruments, net of
minority interest 568 568
Conversion of UPREIT Units
for stock 217,655 2 9,228 - 9,230
Adjustment of minority
interest 33,856 33,856
Preferred dividends (6,279) (6,279)
Dividends paid ($2.53 per
share) (80,581) (80,581)
------- ---------- ---- --------- ---------- ----- --- --------
Balance, December 31, 2005 60,000 31,184,256 312 773,396 (177,102) 206 - 656,812
Issuance of common stock, net 832,687 8 31,674 31,682
Repurchase of common stock (2,683,429) (26) (146,273) (146,299)
Net income 110,485 110,485
Change in fair value of
hedge instruments, net of
minority interest (35) (35)
Conversion of UPREIT Units
for stock 3,769,733 37 195,750 195,787
Adjustment of minority
interest (2,511) (2,511)
Preferred dividends (5,400) (5,400)
Dividends paid ($2.57 per
share) - - - - (84,904) - - (84,904)
------- ---------- ---- --------- ---------- ----- --- --------
Balance, December 31, 2006 $60,000 33,103,247 $331 $ 852,036 $ (156,921) $ 171 $ - $755,617
======= ========== ==== ========= ========== ===== === ========
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, 2006, 2005 AND 2004
(IN THOUSANDS)
2006 2005 2004
---- ---- ----
Net income $110,485 $81,512 $ 47,022
Other comprehensive income:
Change in fair value of hedged instruments (35) 568 180
-------- ------- ------------
Net comprehensive income $110,450 $82,080 $ 47,202
======== ======= ============
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, 2006, 2005 AND 2004
(IN THOUSANDS)
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
-------- -------- ----------
Net income $110,485 $ 81,512 $ 47,022
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in losses of unconsolidated affiliates - - 538
Income allocated to minority interest 43,327 37,190 18,747
Depreciation and amortization 103,333 100,584 98,051
Impairment of assets held as General Partner - 400 1,116
Impairment of real property - 7,325 1,100
Gain on disposition of property and business (110,514) (81,679) (26,424)
Issuance of restricted stock, compensation cost of stock options
and deferred compensation 4,961 2,662 2,496
Changes in assets and liabilities:
Cash held in escrows 1,863 3,519 (2,349)
Other assets 4,969 (8,423) (1,431)
Accounts payable and accrued liabilities 4,572 (6,624) 20,476
-------- -------- ----------
Total adjustments 52,511 54,954 112,320
-------- -------- ----------
Net cash provided by operating activities 162,996 136,466 159,342
-------- -------- ----------
Cash flows from investing activities:
Purchase of properties and other assets, net of mortgage notes
assumed and UPREIT Units issued (188,004) (219,852) (153,535)
Additions to properties (101,839) (98,917) (102,700)
Advances to affiliates - - (820)
Payments on advances to affiliates - - 149
Proceeds from sale of affordable properties, net - - 2,412
Proceeds from sale of properties and business, net 488,457 139,073 89,028
Withdrawals from (additions to) funds held in escrow, net (38,961) (248) 4,812
-------- -------- ----------
Net cash provided by (used in) investing activities 159,653 (179,944) (160,654)
-------- -------- ----------
Cash flows from financing activities:
Proceeds from sale of exchangeable senior notes, net 195,779 - -
Proceeds from sale of common stock, net 26,721 10,185 40,599
Repurchase of common stock (146,299) (114,765) (53,796)
Proceeds from mortgage notes payable 202,894 370,752 191,772
Payments of mortgage notes payable (279,135) (119,939) (97,734)
Proceeds from line of credit 379,800 376,370 291,600
Payments on line of credit (461,800) (352,370) (233,600)
Payments of deferred loan costs (1,842) (2,991) (2,672)
Withdrawals from (additions to) cash escrows, net 137 (159) (4,416)
Repayment of officer and director loans - - 315
Dividends and distributions paid (126,083) (126,139) (128,784)
-------- -------- ----------
Net cash provided by (used in) financing activities (209,828) 40,944 3,284
-------- -------- ----------
Net increase (decrease) in cash and cash equivalents 112,821 (2,534) 1,972
Cash and cash equivalents:
Beginning of year 5,391 7,925 5,103
Cash assumed in connection with FIN 46 consolidation - - 850
-------- -------- ----------
End of year $118,212 $ 5,391 $ 7,925
======== ======== ==========
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, rehabilitation and development of residential apartment communities
primarily in select Northeast, Mid-Atlantic and Southeast Florida regions of the
United States. The Company conducts its business through Home Properties, L.P.
(the "Operating Partnership"), a New York limited partnership. As of December
31, 2006, the Company operated 127 apartment communities with 39,136 apartments.
Of this total, the Company owned 123 communities, consisting of 36,954
apartments, managed as general partner one partnership that owned 868
apartments, and fee managed three communities, consisting of 1,314 apartments,
for third parties.
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of the
Company and its 71.4% (65.2% at December 31, 2005) interest in the Operating
Partnership. Such interest has been calculated as the percentage of outstanding
common shares divided by the total outstanding common shares and Operating
Partnership Units ("UPREIT Units") outstanding. The remaining 28.6% (34.8% at
December 31, 2005) is reflected as Minority Interest in these consolidated
financial statements. The Company owns a 1.0% general partner interest in the
Operating Partnership and the remainder indirectly as a limited partner through
its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of the
limited partner, Home Properties Trust. Home Properties Trust was formed in
September 1997, as a Maryland real estate trust and as a qualified REIT
subsidiary ("QRS") and owns the Company's share of the limited partner interests
in the Operating Partnership. For financing purposes, the Company has formed a
limited liability company (the "LLC") and a partnership (the "Financing
Partnership"), which beneficially own certain apartment communities encumbered
by mortgage indebtedness. The LLC is wholly owned by the Operating Partnership.
The Financing Partnership is owned 99.9% by the Operating Partnership and 0.1%
by the QRS.
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. On November 21, 2006, Home Properties Management, Inc. was
merged into Home Properties Resident Services, Inc., with Home Properties
Resident Services, Inc. the surviving entity. 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
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, 2006 and 2005. These investments continued to be
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION (Continued)
- --------------------------------------------------
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, 2006 and 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, 2006 and 2005 and the results of operations are included
in continuing operations.
Reclassifications
-----------------
Certain reclassifications have been made to the 2005 and 2004 consolidated
financial statements to conform to the 2006 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 $1,087, $1,096 and $763
of interest capitalized in 2006, 2005 and 2004, respectively. Salaries and
related costs capitalized for the years ended December 31, 2006, 2005 and 2004
were $2,097, $2,135 and $3,391, 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.
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.
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 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 accrued expenses and other liabilities and are
amortized as an increase to rental income over the initial term of 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
resident relationships, which includes 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 and
included in depreciation and amortization expense over the initial term of the
respective leases.
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. During 2006 and 2005, there were 3.8 million and 0.2
million shares of UPREIT Units converted to common stock, respectively. The
Company made an adjustment in the amount of $124.6 million and $5.2 million,
respectively, to record the fair market value of the conversions.
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:
Land improvements 3-20 years
Buildings and improvements 3-40 years
Furniture, fixtures and equipment 5-10 years
Computer software 5 years
Depreciation expense charged to operations was $94,164, $80,146, and $69,616
from continuing operations and $5,543, $19,165 and $24,493 from discontinued
operations for the years ended December 31, 2006, 2005 and 2004, 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, resident security deposits for residential
properties and funds held in escrow from tax-free exchanges.
Allowance for Doubtful Receivables
----------------------------------
The allowance for doubtful receivables was $984, $513 and $567 as of December
31, 2006, 2005 and 2004, 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 financing agreement terms range from 1-18 years.
Accumulated amortization was $7,421, $5,832 and $5,640, as of December 31, 2006,
2005 and 2004, respectively.
Intangible Assets
-----------------
Intangible assets of $8,080, $5,080 and $3,281 at December 31, 2006, 2005 and
2004, 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 5 months to 3 years. Accumulated
amortization of intangible assets was $4,714, $2,797 and $2,005 as of December
31, 2006, 2005 and 2004, respectively. Amortization expense charged to
operations was $1,978, $798, and $1,094 from continuing operations and $10, $7
and $26 from discontinued operations for the years ended December 31, 2006, 2005
and
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------------------------------------------------------
Intangible Assets (continued)
-----------------------------
2004, 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 are less than their
carrying value. During 2004, 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 of intangible assets.
Revenue Recognition
-------------------
The Operating Partnership leases its residential apartment units 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, 2006, 2005 and 2004 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
$4,524, $4,719, and $4,608 from continuing operations, and $1,148, $1,889 and
$2,236 from discontinued operations, for the years ended December 31, 2006, 2005
and 2004, respectively.
Legal Settlement
----------------
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 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
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 Settlement (continued)
-----------------------------
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.
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, 2006,
2005 and 2004, 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 8)
The tax basis of assets is less than the amounts reported in the accompanying
consolidated financial statements by approximately $554,000 and $619,000 at
December 31, 2006 and 2005, respectively.
The following table reconciles net income to taxable income for the years ended
December 31, 2006, 2005 and 2004:
2006 2005 2004
---- ---- ----
Net income $110,485 $81,512 $47,022
Add back: Net loss of taxable REIT Subsidiaries included in net income above 243 172 987
Deduct: Net income of taxable REIT subsidiaries included in net income above (39) (27) -
-------- ------- -------
Net income from REIT operations 110,689 81,657 48,009
Add: Book depreciation and amortization 75,151 68,814 64,886
Less: Tax depreciation and amortization (68,874) (68,426) (69,532)
Book/tax difference on gains/losses from capital transactions (49,691) (45,906) (8,128)
Other book/tax differences, net (14,094) (6,450) (79)
-------- ------- -------
Adjusted taxable income subject to 90% REIT dividend requirement $ 53,181 $29,689 $35,156
======== ======= =======
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 $10,079 and $8,496 as of December 31, 2006 and 2005, 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 $10,078 and $8,421 as of December 31, 2006 and 2005, 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, 2006, 2005, and 2004, is as follows:
2006 2005 2004
---- ---- ----
Income from continuing operations $ 27,992 $ 23,816 $ 27,080
Add: Gain (loss) on sale of business, net of minority interest - - (67)
Less: Preferred dividends (5,400) (6,279) (7,593)
---------- ---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders 22,592 17,537 19,420
Basic weighted average number of shares outstanding 32,697,794 31,962,082 32,911,945
Effect of dilutive stock options 593,308 324,268 333,995
Effect of phantom and restricted shares 46,455 41,755 68,098
---------- ---------- ----------
Diluted weighted average number of shares outstanding 33,337,557 32,328,105 33,314,038
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $0.69 $0.55 $0.59
Discontinued operations 2.52 1.80 0.62
Cumulative effect of change in accounting principle - - (0.01)
---------- ---------- ----------
Net income available to common shareholders $3.21 $2.35 $1.20
========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $0.68 $0.54 $0.58
Discontinued operations 2.47 1.79 0.61
Cumulative effect of change in accounting principle - - (0.01)
---------- ---------- ----------
Net income available to common shareholders $3.15 $2.33 $1.18
========== ========== ==========
Unexercised stock options to purchase 18,900, 539,500 and zero 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, 2006, 2005 and 2004,
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. To
the extent the preferred stock was converted, the common shares would be
included in outstanding shares from the date of conversion. In conjunction with
the issuance of the Exchangeable Senior Notes, there are 490,880 potential
shares issuable under certain circumstances, of which none are considered
dilutive as of December 31, 2006.
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.
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
--------------------------------
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the recognition and measurement of
assets and liabilities associated with tax positions taken or expected to be
taken in a tax return. FIN 48 is effective January 1, 2007. The Company reviewed
its current tax positions for any potential uncertain tax positions that would
qualify under FIN 48. Based on its review, the Company does not anticipate that
the adoption of FIN 48 in January 2007 will have a material impact on the
Company's cash flows, results of operations, financial position or liquidity.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements; the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is required to adopt SFAS 157 in the first quarter of 2008.
The Company is currently evaluating the impact that SFAS 157 will have on its
financial statements.
HOME PROPERTIES, INC.
NOTES TO THE 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 Company had made the determination that
all 41 of the remaining limited partnerships at the time were VIEs.
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 had 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 losses
of unconsolidated affiliates" of $538. 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. It was
determined in the second quarter of 2005, that 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, 2006, 2005 and 2004. The effect on
the Consolidated Balance Sheets of including this VIE as of December 31, 2006
and 2005 includes total assets of $20,500 and $21,300, total liabilities of
$17,900 and $17,900 and minority interest of $2,600 and $3,400, respectively.
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, a $400 and $800
investment impairment charge was recorded in the periods ended December 31, 2005
and 2004, respectively, for this one remaining VIE, included as part of
"Impairment of assets held as general partner."
4 MORTGAGE NOTES PAYABLE
- ----------------------
The Company's mortgage notes payable are summarized as follows:
2006 2005
---- ----
Fixed rate mortgage notes payable $1,895,448 $1,749,127
Variable rate mortgage notes payable 28,865 92,959
---------- ----------
Total mortgage notes payable 1,924,313 1,842,086
Less: Mortgage notes payable classified as held for sale - 73,603
---------- ----------
Mortgage notes payable $1,924,313 $1,768,483
========== ==========
For 2006 and 2005, mortgage notes payable (including mortgage notes classified
as held for sale) are collateralized by certain apartment communities. The
mortgage notes payable outstanding as of December 31, 2006 mature at various
dates from 2007 through 2042. The weighted average interest rate of the
Company's fixed rate notes was 5.77% and 5.95% at December 31, 2006 and 2005,
respectively. The weighted average interest rate of the Company's variable rate
notes and line of credit facility was 4.95% and 4.82% at December 31, 2006 and
2005, respectively.
Principal payments on the mortgage notes payable for years subsequent to
December 31, 2006 are as follows:
2007 $ 171,500
2008 137,153
2009 68,351
2010 307,989
2011 285,509
Thereafter 953,811
----------
$1,924,313
==========
HOME PROPERTIES, INC.
NOTES TO 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 $1,930,555 and $1,890,232, at December 31, 2006 and 2005,
respectively.
At December 31, 2006 and 2005, the consolidated mortgage balance (including
mortgage notes payable classified as held for sale) of $1,924,313 and
$1,842,086, respectively, included mortgage notes payable related to the
Company's VIE consolidated in connection with the Company's adoption of FIN 46R,
in the amount of $16,763 and $16,989, respectively.
Prepayment penalties of $8,621, $147 and $305 were incurred for the years ended
December 31, 2006, 2005 and 2004, respectively. For 2006, the prepayment
penalties were incurred in connection with the sale of property and are included
in discontinued operations. For 2005, a prepayment penalty was incurred in
connection with the repayment of a mortgage and is included in interest expense.
For 2004, the prepayment penalties were incurred in connection with both debt
restructurings and the sale of property and are included in interest expense and
discontinued operations, respectively.
5 EXCHANGEABLE SENIOR NOTES
- -------------------------
On October 24, 2006, the Company issued $200 million of exchangeable senior
notes under an Indenture Agreement (the "Indenture"). This offering generated
net proceeds of $195.8 million. The coupon rate is 4.125%. The notes are
exchangeable into cash equal to the principal amount of the notes and, at the
Company's option, cash or common stock for the exchange value (to the extent
that the market price of common stock exceeds the initial exchange price of
$73.34 per share) subject to adjustment. Upon an exchange of the notes, the
Company will settle any amounts up to the principal amount of the notes in cash
and the remaining exchange value, if any, will be settled, at the Company's
option, in cash, common stock or a combination of both. The notes are not
redeemable at the option of the Company for five years, except to preserve the
status of the Company as a REIT.
Holders of the notes may require the Company to repurchase the notes upon the
occurrence of certain designated events. In addition, prior to November 1, 2026,
the holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021. The notes will mature on November 1, 2026, unless previously
redeemed, repurchased or exchanged in accordance with their terms prior to that
date.
Noteholders may also require an exchange of the notes subsequent to December 31,
2006 should the closing sale price of common stock exceed 130% of the exchange
price for a certain period of time or should the trading price on the notes be
less than 98% of the product of the closing sales price of common stock
multiplied by the applicable exchange rate for a certain period of time.
The notes are structurally subordinated to the secured indebtedness of the
Company. The Company is not subject to any financial covenants under the
Indenture. In addition, the Indenture will not restrict the ability to pay
distributions, incur debt or issue or repurchase securities.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 LINE OF CREDIT
- --------------
As of December 31, 2006, the Company had an unsecured line of credit of $140,000
of which there was no outstanding balance. 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, 2006. 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 5.32% at December 31, 2006. The LIBOR interest rate plus
..75% was 6.07% at December 31, 2006.
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 year ended December 31, 2006.
7 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 2006 and 2005, 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, 2006 and 2005 are as follows:
2006 2005
---- ----
Balance, beginning of year $ 323,269 $ 310,775
Issuance of UPREIT Units associated with property acquisitions 20,397 55,598
Adjustment between minority interest and stockholders' equity 2,511 (33,856)
Exchange of UPREIT Units for Common Shares (71,157) (4,010)
Net income 43,327 37,190
Accumulated other comprehensive loss (2) 278
Distributions (35,779) (39,279)
Effect of consolidating affordable limited partnerships under FIN 46R (24) (3,427)
--------- ----------
Balance, end of year $ 282,542 $ 323,269
========= ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock
---------------
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 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). The Company
anticipates redeeming the Series F preferred shares in March 2007.
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, 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.
During 2006, the Company repurchased 2,613,747 shares at a cost of $142,533. On
October 27, 2006 the Board of Directors of the Company authorized repurchase of
up to 2,000,000 additional shares. The Company has authorization to repurchase
2,606,448 shares as of December 31, 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 $10.
Effective December 10, 2004, the discount was reduced from 2% to 0%. In
addition, in the fourth quarter of 2004 and during the years ended 2006 and
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)
8 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 $2.57 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, 2006, 2005 and 2004, 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 Unrecaptured
Declaration Record Payable Distributions Taxable Qualified Return of Long-Term Sec. 1250
Dates Dates Dates Per Share Dividend Dividend Capital Capital Gain Gain
----- ----- ----- --------- -------- -------- ------- ------------ ----
2/7/2006 2/17/2006 2/28/2006 $0.64 29.79% 0.04% 32.86% 0.00% 37.31%
5/4/2006 5/16/2006 5/26/2006 $0.64 29.79% 0.04% 32.86% 0.00% 37.31%
8/1/2006 8/15/2006 8/25/2006 $0.64 29.79% 0.04% 32.86% 0.00% 37.31%
10/27/2006 11/17/2006 11/28/2006 $0.65 29.79% 0.04% 32.86% 0.00% 37.31%
----- ----- ---- ----- ---- -----
TOTALS $2.57 29.79% 0.04% 32.86% 0.00% 37.31%
===== ===== ==== ===== ==== =====
The taxable composition of cash distributions for each common share for 2005 and 2004 is as follows:
Distribution Type
-----------------
Ordinary Unrecaptured
Distributions Taxable Qualified Return of Long-Term Sec. 1250
Year Per Share Dividend Dividend Capital Capital Gain Gain
---- --------- -------- -------- ------- ------------ ----
2005 $2.53 42.95% 0.00% 55.34% 0.00% 1.71%
2004 $2.49 41.83% 0.00% 55.24% 0.00% 2.93%
Series F Cumulative Preferred Distribution Type
----------------------------- -----------------
Ordinary Unrecaptured
Declaration Record Payable Distributions Taxable Qualified Return of Long-Term Sec. 1250
Dates Dates Dates Per Share Dividend Dividend Capital Capital Gain Gain
----- ----- ----- --------- -------- -------- ------- ------------ ----
2/7/2006 2/17/2006 2/28/2006 $0.5625 44.37% 0.06% 0.00% 0.00% 55.57%
5/4/2006 5/16/2006 5/31/2006 $0.5625 44.37% 0.06% 0.00% 0.00% 55.57%
8/1/2006 8/15/2006 8/31/2006 $0.5625 44.37% 0.06% 0.00% 0.00% 55.57%
10/27/2006 11/17/2006 11/30/2006 $0.5625 44.37% 0.06% 0.00% 0.00% 55.57%
----- ---- ----- ---- -----
TOTALS $2.2500 44.37% 0.06% 0.00% 0.00% 55.57%
======= ===== ==== ==== ==== =====
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
- ----------------------------------------------------
The taxable composition of cash distributions for each preferred share for 2005
and 2004 is as follows:
Distribution Type
-----------------
Ordinary Unrecaptured
Distributions Taxable Qualified Return of Long-Term Sec. 1250
Year Per Share Dividend Dividend Capital Capital Gain Gain
---- --------- -------- -------- ------- ------------ ----
2005 $2.25 96.16% 0.00% 0.00% 0.00% 3.84%
2004 $2.25 93.44% 0.00% 0.00% 0.00% 6.56%
Total Shares/Units Outstanding
------------------------------
At December 31, 2006, 33,103,247 common shares, and 13,290,384 UPREIT Units were
outstanding for a total of 46,393,631 common share equivalents.
In addition, 2,400,000 shares of Series F Cumulative Redeemable Preferred shares
were outstanding as of December 31, 2006.
9 STOCK BENEFIT PLAN
- ------------------
The Company's 1994 Stock Benefit Plan (the "1994 Plan") was adopted by the
Company at the time of its initial public offering. On February 1, 2000, the
Company adopted the 2000 Stock Benefit Plan, which was subsequently amended (the
"2000 Plan"). On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan
and on May 6, 2005, the shareholders approved the Amended and Restated 2003
Stock Benefit Plan (the "2003 Plan"). No additional options will be issued under
the 1994 Plan and the 2000 Plan. Participants in each of the above referenced
plans (the "Stock Plans") include officers, non-employee directors, and key
employees of the Company. The 1994 Plan provided for the issuance of up to
1,596,000 options to officers and employees and 154,000 options to non-employee
directors. The 2000 Plan limits the number of shares issuable under the plan to
2,755,000, of which 205,000 were to be available for issuance to the
non-employee directors. The 2003 Plan limits the number of shares issuable under
the plan to 2,859,475, of which 249,475 are to be available for issuance to the
non-employee directors. Under the 1994 Plan, 1,542,381 shares have been granted
to employees and 153,654 shares have been granted to non-employee directors.
Awards for 2,451,922 shares have been granted to employees and awards for
166,460 shares have been granted to non-employee directors under the 2000 Plan.
Under the 2003 Plan and as of December 31, 2006, 2,280,626 awards for shares
have been issued to employees and 204,475 awards for shares have been issued to
non-employee directors and 646,834 and 45,000 common shares are available for
future grant of awards under the 2003 Plan for officers and employees and
non-employee directors, respectively. Options granted under the Stock Plans vest
20% for each year of service until 100% vested on the fifth anniversary, except
that options issued to certain officers (276,000) and all of the options issued
to non-employee directors under the 1994 Plan and 2000 Plan vested immediately
upon grant. The exercise price per share for stock options issued under all of
the Stock Plans may not be less than 100% of the fair market value of a share of
common stock on the date the stock option is granted. Options granted to
non-employee directors under the 1994 Plan and the 2000 Plan expire after five
years from the date of grant. All other options expire after ten years from the
date of grant. The Stock Plans allow for the grant of options, stock
appreciation rights and restricted stock awards. No stock appreciation rights
have been granted. The Company has a policy of issuing new shares upon the
exercise of stock options and upon the lapsing of restrictions with respect to
restricted stock.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
- ------------------------------
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, Share Based Payments ("SFAS 123R"). The statement is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS 123R
supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees and its
related implementation guidance. SFAS 123R requires that entities recognize the
cost of employee services received in exchange for awards of equity instruments
(i.e., stock options) based on the grant-date fair value of those awards. Prior
to January 1, 2006, the Company applied the provisions of SFAS No. 148
Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment to SFAS No. 123 ("SFAS 148"). Under SFAS 148, the Company recognized
compensation cost related to stock option grants, based on the fair value on the
date of the grant, over the expected service period of the employee receiving
the award.
The Company uses the Black-Scholes formula to estimate the fair value of stock
options granted to employees for both SFAS 123R and SFAS 148. SFAS 123R and SFAS
148 require the estimation of forfeitures when recognizing compensation expense
and that this estimate of forfeitures be adjusted over the requisite service
period should actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative catch-up adjustment,
which is recognized in the period of change and which impacts the amount of
unamortized compensation expense to be recognized in future periods. For options
granted prior to January 1, 2006, the Company uses the nominal vesting period
approach. For option grants after January 1, 2006, the Company applies the
non-substantive vesting period approach which resulted in $724 of additional
compensation costs for retirement eligible employees and directors than what
would have been recognized under SFAS 148. As a result of the adoption of SFAS
123R, the Company began capitalizing stock-based compensation costs as a
component of employee compensation that is capitalized as part of
self-constructed fixed assets which amounted to $36 for the year period ended
December 31, 2006. The Company applied the modified prospective application in
adopting SFAS 123R. The adoption of SFAS 123R reduced income from continuing
operations $601; net income $416 and basic and diluted earnings per share by
$.01 per share.
A summary of stock option activity for the year ended December 31, 2006 is as
follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Price Contractual Intrinsic
Number of Options Per Option Term Value
----------------- ---------- ---- -----
Options outstanding at December 31, 2005 2,662,581 $36.18
Granted 569,430 51.32
Exercised (732,811) 34.21
Cancelled (151,186) 39.72
-------- -----
Options outstanding at December 31, 2006 2,348,014 $ 40.24 7.3 $ 44,683
========= ======= === ========
Options exercisable at December 31, 2006 912,520 $ 34.56 5.8 $ 22,548
========= ======= === ========
Options nonvested at December 31, 2006 1,435,494 $ 43.85 8.2 $ 22,135
========= ======= === ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
- ------------------------------
The total cash received from the exercise of options was $25,070, $7,029 and
$16,473 during the years ended December 31, 2006, 2005 and 2004, respectively.
The weighted-average grant-date fair value of options granted during the years
2006, 2005 and 2004 was $6.69, $3.52 and $3.33, respectively. The total
intrinsic value of options exercised was $14,419, $2,367and $6,867 during the
years ended December 31, 2006, 2005 and 2004, respectively.
A summary of nonvested stock option activity for the year ended December 31,
2006 is as follows:
Weighted Average
Exercise Price
Number of Options Per Option
----------------- ----------
Nonvested stock options at December 31, 2005 1,488,976 $38.67
Granted 569,430 51.32
Vested (471,726) 37.84
Cancelled (151,186) 39.72
--------- -------
Nonvested stock options at December 31, 2006 1,435,494 $ 43.85
========= =======
As of December 31, 2006, there was $3,336 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the stock option plans; that cost is expected to be recognized over a
weighted-average period of 2.22 years. The total fair value of options vested
during the years ended December 31, 2006, 2005 and 2004 was $1,279, $987 and
$890, 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 for the years ended December 31, 2006, 2005 and 2004 as follows:
Assumption 2006 2005 2004
---------- ---- ---- ----
Expected dividend yields 5.26% 6.55% 6.74%
Expected volatility 18.73% 18.76% 19.79%
Expected lives of the options with a lifetime of ten years 6.5 Years 7.5 Years 7.5 Years
Expected lives of the options with a lifetime of five years N/A 5.0 Years 5.0 Years
Risk free interest rate 5.09% 4.10% 4.04%
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
- ------------------------------
The computation of expected dividend yield is computed using an anticipated
increase of the dividend by approximately 2% to 5% a year based on the annual
dividend exercised each year over the Black-Scholes stock value. The expected
volatility is based on the historical volatility of our stock over a time period
from the initial public offering and ending on the grant date. Commencing in
2006, the expected lives of the options with a lifetime of ten years was
determined by applying the "simplified method" approach (median between the
average vesting term and the contractual term) for plain vanilla option grants
made prior to January 1, 2008 as prescribed by Staff Accounting Bulletin No.
107, Share-Based Payment ("SAB 107"). Prior to 2006, the median point between
the vesting date and expiration date was used. The risk-free interest rates are
based on the U.S. Treasury yield curve in effect at the time of grant.
In 2006, 2005 and 2004, the Company recognized $1,793, $872 and $948,
respectively, in stock compensation costs related to its outstanding stock
options.
A summary of restricted stock activity for the year ended December 31, 2006
is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Grant Price Contractual Outstanding
Number of Shares Per Share Term Value
---------------- --------- ---- -----
Restricted stock outstanding and nonvested at
December 31, 2005 277,822 $36.74
Granted 62,066 51.00
Vested and issued (65,833) 36.94
Cancelled (3,650) 38.35
------- ------
Restricted stock outstanding and nonvested at
December 31, 2006 270,405 $39.94 1.4 $10,800
======= ====== === =======
In 2006, 2005 and 2004, the Company granted a total of 62,066, 57,375 and 65,932
shares of restricted stock to both employees and directors, respectively. The
directors' grants included above for 2006, 2005 and 2004 were 9,000, 7,875 and
3,600 shares, respectively. All the directors' shares vest 100% on the fifth
anniversary of the date of grant. All of the 53,066, 49,500 and 62,332 shares of
restricted stock granted to employees during 2006, 2005 and 2004 vest 25% on
each anniversary of the date of grant for a period of four years. The restricted
stock outstanding at December 31, 2006, 2005 and 2004 was 270,405, 277,822 and
267,928 shares, respectively.
Effective January 1, 2006, the Company began recognizing expense for the
restricted stock grants based on the expected service period of the grantee. For
grant recipients that have met or exceeded the retirement eligible age (59.5 for
employees and 75 for directors), the expense is recognized upon grant. For
recipients approaching retirement, the expense is recognized ratably over the
lesser of the term between the grant date and the expected retirement date or
the vesting period. All other grants are expensed ratably over the vesting
period of 5 and 4 years for director and employee grants, respectively. Prior to
2006, grants were expensed ratably over the vesting period of 5 and 4 years for
director and employee grants, respectively
The restricted shares were granted during 2006, 2005 and 2004 at a weighted
average price of $51.00, $41.47 and $40.10 per share, respectively. The total
fair value of restricted shares vested during the years ended December 31, 2006,
2005 and 2004 was $3,562, $1,629, and $1,208, respectively. Total compensation
cost recorded for the years ended December 31, 2006, 2005 and 2004 for the
restricted share grants was $2,656, $1,557, and $1,171, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 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 131. The operating segments are
aggregated as Core and Non-core properties.
Non-segment revenue to reconcile to 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 2005 and
2006 where comparable operating results are available. Therefore, the Core
Properties represent communities owned as of January 1, 2005. Non-core
properties consist of apartment communities acquired during 2005 and 2006, such
that full year comparable operating results are not available. In addition, the
core properties segment does not include assets held for sale as of December 31,
2006, 2005 and 2004.
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.
The revenues and net operating income for each of the reportable segments are
summarized as follows for the years ended December 31, 2006, 2005, and 2004.
2006 2005 2004
---- ---- ----
Revenues
Apartments owned
Core properties $404,322 $384,911 $363,869
Non-core properties 44,441 13,010 -
Reconciling items 5,229 2,604 3,263
-------- -------- --------
Total Revenue $453,992 $400,525 $367,132
======== ======== ========
Net operating income
Apartments owned
Core properties $231,930 $217,141 $206,067
Non-core properties 25,988 5,874 -
Reconciling items 5,229 2,604 3,263
-------- -------- --------
Net operating income 263,147 225,619 209,330
General & administrative expenses (22,626) (19,652) (23,978)
Interest expense (106,773) (92,178) (77,145)
Depreciation and amortization (96,142) (80,944) (70,710)
Impairment of assets held as general partner - (400) (1,116)
Equity in losses of unconsolidated affiliates - - (538)
Minority interest in limited partnership - - 441
Minority interest in operating partnership (9,614) (8,629) (9,204)
-------- -------- --------
Income from continuing operations $ 27,992 $ 23,816 $ 27,080
======== ======== ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 SEGMENT REPORTING (Continued)
-- -----------------------------
The assets for each of the reportable segments are summarized as follows as of
December 31, 2006 and 2005:
Assets 2006 2005
------ ---- ----
Apartments owned
Core properties $2,286,589 $2,193,661
Held for sale properties - 223,938
Non-core properties 715,044 466,952
Reconciling items 238,785 93,319
---------- ----------
Total assets $3,240,418 $2,977,870
========== ==========
11 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 133"). At that time, the Company
designated all of its interest rate swaps as cash flow hedges in accordance with
the requirements of SFAS 133.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
-- --------------------------------------------
As of December 31, 2006, the aggregate fair value of the Company's interest rate
swaps was $149 prior to the allocation of minority interest, and is included in
other assets in the Consolidated Balance Sheets. For the year ending December
31, 2006, as the critical terms of the interest rate swaps and the hedged items
are the same, no ineffectiveness was recorded in the consolidated statements of
operations. All components of the interest rate swaps were included in the
assessment of hedge effectiveness. The Company expects that within the next
twelve months it will reclassify as a charge to earnings $149, 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.
12 TRANSACTIONS WITH AFFILIATES
-- ----------------------------
The Company and the HPRS recognized management and development fee revenue,
interest income and other miscellaneous income from affiliated entities of $59,
$230 and $696 for the years ended December 31, 2006, 2005, and 2004,
respectively. The Company had accounts receivable outstanding due from
affiliated entities of $157, $157 and $12 at December 31, 2006, 2005 and 2004,
respectively.
On January 1, 2004, the Company sold certain assets of its commercial property
management division to Home Leasing, LLC, which was owned by Nelson and Norman
Leenhouts and is now owned by Nelson Leenhouts. This division managed
approximately 2.2 million square feet of gross leasable area, as well as certain
planned communities. Subsequently, some of the assets were sold to Broadstone
Real Estate LLC ("Broadstone"), which is owned in part by Norman Leenhouts, Amy
L. Tait and Mrs. Tait's spouse. The initial amount received was $82. In addition
to the initial amount, the Company was entitled to receive a percentage of the
management fee received by Broadstone in connection with the management of one
of the commercial properties for a period not to exceed 36 months. The expected
monthly fee as outlined in the contract was approximately $4.6 or $55 per year
and was adjusted to $3.4, or $40 per year after the first year. Broadstone
continued to manage the property for three years, and accordingly, the Company
received a total additional deferred purchase price of $139, of which $44 has
been received for the year ended December 31, 2006. The cumulative gain
recognized on the sale of these assets through December 31, 2006 amounted to
$108.
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
$1,699, $1,693 and $1,694 for the years ended December 31, 2006, 2005, and 2004,
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)
13 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 had a term of five years, but after two years (from
the 24th month to the 36th month), the owner could require the Company to buy
the property. From the 36th month to the end of the lease term, the Company had
the right to require the owner to sell the property to the Company. The
agreement required an initial deposit of $5,000, a deposit in 2005 of $1,230,
with an additional $2,081 deposit requirement during 2006, representing capital
improvements paid by the owner. The net operating income of the property (as
defined in the lease agreement) was remitted back to the owner as rent on a
monthly basis. In exchange for services, the Company was 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 $1,451, $1,278 and $98, for the years
ended December 31, 2006, 2005 and 2004, respectively. On December 27, 2006, the
Company closed on the acquisition of the property. The acquisition price of the
property was $144,768.
Ground Lease
------------
The Company had a non-cancelable operating ground lease for one of its
properties. The lease had an expiration date of May 1, 2020, with options to
extend the term of the lease for two successive terms of twenty-five years each.
The lease provided for contingent rental payments based on certain variable
factors. The lease also required the Company to pay real estate taxes, insurance
and certain other operating expenses applicable to the leased property. Ground
lease expense was $194, $210 and $226, including contingent rents of $130, $140
and $156, for the years ended December 31, 2006, 2005 and 2004, respectively.
Effective December 2006, the ground lease was sold to an unrelated party.
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 $832, $802 and $690 for the years ended December 31,
2006, 2005 and 2004, respectively.
Incentive Compensation Plan
---------------------------
The Incentive Compensation Plan for 2005 and 2006 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, 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 $4,983, $2,582 and $3,414 for the years ended December 31, 2006,
2005 and 2004, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued)
-- -----------------------------------------
Contingencies
-------------
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 (52% of the
owned portfolio) for a period of 7 to 15 years except through a tax deferred
Internal Revenue Code Section 1031 like-kind exchange. The remaining terms on
the sale restrictions range from 1 to 9 years.
Debt Covenants
--------------
The line of credit loan agreement contains restrictions which, among other
things, require maintenance of certain financial ratios (See Note 6).
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 year ended December 31, 2006, the Company
maintained the required fixed charge coverage ratio.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued)
-- -----------------------------------------
Guarantees
----------
As of December 31, 2006, the Company, through its general partnership interest
in an affordable property limited partnership, has guaranteed the Low Income
Housing Tax Credits to limited partners totaling approximately $3,000. As of
December 31, 2006, there were no known conditions that would make such payments
necessary relating to these guarantees. In addition, the Company, acting as
general partner in this partnership, is obligated to advance funds to meet
partnership operating deficits.
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.
14 PROPERTY ACQUISITIONS
-- ---------------------
For the years ended December 31, 2006, 2005, and 2004, the Company has acquired
the communities listed below:
Cost of
Market Date Year Number Cost of Acquisition
Apartment Community Area Acquired Constructed of Units Acquisition Per Unit
------------------- ---- -------- ----------- -------- ----------- --------
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
Highland House Boston 5/31/06 1965-1969 172 $17,889 $104
Liberty Place Boston 6/6/06 1988 107 $14,892 $139
The Heights at Marlborough Boston 9/7/06 1973 348 $48,914 $141
The Meadows at Marlborough Boston 9/7/06 1969-1972 264 $34,162 $129
Heritage Woods Baltimore 10/4/06 1972-1973 164 $14,042 $86
Top Field Baltimore 10/4/06 1973 156 $18,391 $118
The Coves at Chesapeake Baltimore 11/20/06 1976 & 1982 469 $67,043 $143
Mount Vernon Square Northern VA 12/27/06 1968-1974 1,387 $144,768 $104
During 2006, the Company completed construction and placed into service a
120-unit apartment community located in Portland, ME (Liberty Commons) at a
total cost of $14,598.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 DISCONTINUED OPERATIONS
-- -----------------------
The Company reports its property dispositions as discontinued operations as
prescribed by the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). Pursuant to the definition of a
component of an entity in SFAS 144, assuming no significant continuing
involvement by the former owner after the sale, the sale of an apartment
community is considered a discontinued operation. In addition, apartment
communities classified as held for sale are also considered a discontinued
operation. The Company generally considers assets to be held for sale when all
significant contingencies surrounding the closing have been resolved, which
often corresponds with the actual closing date. As of December 31, 2005, the
Company classified 21 properties as held for sale. These 21 properties were sold
during 2006 and are included in discontinued operations for all periods
presented and classified as held for sale as of December 31, 2005.
Included in discontinued operations for the three years ended December 31, 2006
are the operating results, net of minority interest, of 48 apartment community
dispositions (39 sold in 2006, 4 sold in 2005 and 5 sold in 2004). In addition,
discontinued operations for the years ended December 31, 2005 and 2004 includes
the operating results of four VIEs sold during 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.
A summary of community dispositions is as follows:
Number of Number of
Disposed Number of Related Total Sales Sales Price Total Gain On
Year Communities Disposed Units Transactions Price Per Unit Sale
---- ----------- -------------- ------------ ----- -------- ----
2006 39 9,705 3 $495,300 $51 $110,500
2005 4 816 3 $142,600 $175 $73,200
2004 5 1,646 4 $92,500 $56 $26,600
The operating results of discontinued operations are summarized as follows for
the years ended December 31, 2006, 2005, and 2004:
2006 2005 2004
---- ---- ----
Revenues:
Rental income $ 56,142 $ 91,900 $ 114,652
Property other income 6,498 7,538 7,425
-------- --------- ---------
Total revenues 62,640 99,438 122,077
-------- --------- ---------
Operating and maintenance 34,317 54,155 64,573
Interest expense 17,078 13,215 19,451
Depreciation and amortization 5,553 19,171 24,519
Impairment of real property - 7,325 1,100
-------- --------- ---------
Total Expenses 56,948 93,866 109,643
-------- --------- ---------
Income from discontinued operations before minority interest and gain
on disposition of property 5,692 5,572 12,434
Minority interest in limited partnership - (23) 833
Minority interest in operating partnership (1,947) (1,828) (4,354)
-------- --------- ---------
Income from discontinued operations $ 3,745 $ 3,721 $ 8,913
======== ========= =========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 DISCONTINUED OPERATIONS (Continued)
-- -----------------------------------
The results of discontinued operations in the tables below have been presented
for the years ended December 31, 2005 and 2004 only, as the discontinued
operations for 2006 solely represents the results from owned communities.
Year ended December 31, 2005
----------------------------
Owned
Communities VIEs Total
----------- ---- -----
Revenues:
Rental income $ 88,686 $3,214 $ 91,900
Property other income 7,397 141 7,538
-------- ------- -------
Total revenues 96,083 3,355 99,438
-------- ------- -------
Expenses:
Operating and maintenance 51,534 2,621 54,155
Interest expense 13,204 11 13,215
Depreciation and amortization 19,171 - 19,171
Impairment of real property - 7,325 7,325
-------- ------- -------
Total expenses 83,909 9,957 93,866
-------- ------- -------
Income (loss) from discontinued operations before minority interest and
gain on disposition of property 12,174 (6,602) 5,572
Minority interest in limited partnership - (23) (23)
Minority interest in operating partnership (4,021) 2,193 (1,828)
-------- ------- -------
Income (loss) from discontinued operations $ 8,153 $(4,432) $ 3,721
======== ======= =======
Year ended December 31, 2004
----------------------------
Owned
Communities VIEs Total
----------- ---- -----
Revenues:
Rental income $102,259 $ 12,393 $114,652
Property other income 7,143 282 7,425
-------- ------- -------
Total revenues 109,402 12,675 122,077
-------- ------- -------
Expenses:
Operating and maintenance 55,288 9,285 64,573
Interest expense 16,370 3,081 19,451
Depreciation and amortization 21,966 2,553 24,519
Impairment of real property 1,100 - 1,100
-------- ------- -------
Total expenses 94,724 14,919 109,643
-------- ------- -------
Income (loss) from discontinued operations before minority interest and
gain on disposition of property 14,678 (2,244) 12,434
Minority interest in limited partnership - 833 833
Minority interest in operating partnership (4,751) 397 (4,354)
-------- ------- -------
Income (loss) from discontinued operations $ 9,927 $ (1,014) $ 8,913
======== ======== ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 DISCONTINUED OPERATIONS (Continued)
-- -----------------------------------
The major classes of assets and liabilities held for sale as of December 31,
2005 were as follows:
2005
----
Real estate:
Land $ 28,372
Buildings, improvements and equipment 249,999
--------
278,371
Less: accumulated depreciation (54,433)
--------
Real estate held for sale or disposal, net 223,938
--------
Other assets:
Cash in escrows 434
Accounts receivable 664
Prepaid expenses and other assets 2,951
--------
Other assets held for sale 4,049
--------
Liabilities:
Mortgage notes payable 73,603
Accrued expenses and other liabilities 431
Security deposits 1,318
--------
Liabilities held for sale 75,352
--------
Net assets held for sale $152,635
========
16 PROFORMA CONDENSED FINANCIAL INFORMATION
-- ----------------------------------------
The Company acquired eight apartment communities ("2006 Acquired Communities")
with a combined 3,067 units in six unrelated transactions during the year ended
December 31, 2006. The total combined purchase price (including closing costs)
of $360,100 equates to approximately $117 per unit. Consideration for the
communities was funded through the assumption or placement of new debt of
$156,900 of debt, $182,800 from the Company's line of credit and disposed
property proceeds, and $20,400 of UPREIT Units.
The Company acquired seven apartment communities ("2005 Acquired Communities")
with a combined 2,430 units in six unrelated transactions during the year 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 2006
transactions related to the acquisition of the 2006 Acquired Communities
occurred as of the beginning of each period, and (ii) the 2005 transactions
related to the acquisition of the 2005 Acquired Communities 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, 2004 or 2005, nor does it
purport to represent the results of operations for future periods. Adjustments
to the proforma condensed combined statement of operations for the years ended
December 31, 2006, 2005, and 2004 consist principally of providing net operating
activity and recording interest, depreciation and amortization from January 1,
2004 or 2005 to the acquisition date as appropriate.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16 PROFORMA CONDENSED FINANCIAL INFORMATION (Continued)
-- ----------------------------------------------------
Proforma (i)
For the years ended
December 31, (unaudited)
------------------------
2006 2005
---- ----
Total revenues $481,746 $456,184
Net income available to common shareholders 24,303 19,519
Per common share data:
Net income available to common shareholders:
Basic $0.74 $0.61
Diluted $0.73 $0.60
Weighted average numbers of shares outstanding:
Basic 32,697.794 31,962.082
========== ==========
Diluted 33,337.557 32,328.105
========== ==========
Proforma (ii)
For the years ended
December 31, (unaudited)
------------------------
2005 2004
---- ----
Total revenues $421,869 $405,511
Net income available to common shareholders before cumulative effect of change in
accounting principle 17,139 19,990
Net income available to common shareholders 17,139 19,669
Per common share data:
Net income available to common shareholders before cumulative effect of change in
accounting principle
Basic $0.54 $0.61
Diluted $0.53 $0.60
Net income available to common shareholders:
Basic $0.54 $0.60
Diluted $0.53 $0.59
Weighted average numbers of shares outstanding:
Basic 31,962.082 32,911.945
========== ==========
Diluted 32,328.105 33,314.038
========== ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17 SUPPLEMENTAL CASH FLOW DISCLOSURES
-- ----------------------------------
Supplemental cash flow information including non cash financing and investing
activities for the years ended December 31, 2006, 2005, and 2004 are as follows:
2006 2005 2004
---- ---- ----
Cash paid for interest $120,781 $104,674 $ 92,150
Mortgage loans assumed associated with property acquisitions 159,782 7,916 90,568
Issuance of UPREIT Units associated with property and other acquisitions 20,397 55,598 12,105
Increase in real estate associated with the purchase of UPREIT Units 124,631 5,220 12,470
Exchange of UPREIT Units for common shares 71,157 4,010 14,106
Fair value of hedge instruments (35) 845 659
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)
18 QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED)
-- -----------------------------------------------------
Quarterly financial information for the years ended December 31, 2006 and 2005
are as follows:
2006
----
First Second Third Fourth
----- ------ ----- ------
Total revenue $108,789 $111,200 $115,255 $118,748
Net income available to common shareholders 4,138 11,003 10,361 79,583
Basic earnings per share data:
Net income (loss) available to common shareholders $0.13 $0.33 $0.31 $2.39
Diluted earnings per share data:
Net income (loss) available to common shareholders $0.13 $0.33 $0.30 $2.33
2005
----
First Second Third Fourth
----- ------ ----- ------
Total revenue $ 95,731 $ 98,252 $102,520 $104,022
Net income available to common shareholders (1,870) 8,038 15,353 53,712
Basic earnings per share data:
Net income available to common shareholders $(0.06) $0.25 $0.47 $1.70
Diluted earnings per share data:
Net income available to common shareholders $(0.06) $0.25 $0.47 $1.68
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, 2006 and
2005 have been reclassified to reflect discontinued operations in accordance
with SFAS 144.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19 SUBSEQUENT EVENTS
-- -----------------
On February 2, 2007, the Company acquired two land parcels located in Silver
Spring, MD and Alexandria, VA from a single seller for total consideration of
$46.5 million. The transaction was funded in cash. Both parcels are entitled for
development. The projects are fully designed and have obtained all discretionary
approvals. While several administrative approvals are still necessary,
construction on both projects should start in 2007, with completion anticipated
in 2009.
On February 7, 2007, the Board of Directors declared a dividend of $0.65 per
share for the quarter ended December 31, 2006. This is the equivalent of an
annual distribution of $2.60 per share. The dividend is payable February 28,
2007 to shareholders of record on February 16, 2007.
On February 7, 2007, the Board of Directors declared a regular dividend of
$0.5625 per share on its Series F Cumulative Redeemable Preferred Stock, for the
quarter ending February 28, 2007. The dividend on the preferred shares is
payable on February 28, 2007 to shareholders of record on February 16, 2007.
This dividend is equivalent to an annualized rate of $2.25 per share.
On February 15, 2007, the Company acquired two communities in unrelated
transactions: The Townhomes of Beverly (204 units) in Beverly, MA for $36.4
million and Jacob Ford Village (270 units) in Morristown, NJ for $26.7 million.
Consideration for Jacob Ford Village included $22.3 million of Operating
Partnership UPREIT Units with the balance paid in cash. The Townhomes of Beverly
were purchased with cash.
SCHEDULE II
HOME PROPERTIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31:
(IN THOUSANDS)
Balance at Charged to Adjustments/
Beginning Costs and Amounts Balance at
of Year Expenses Written Off End of Year
------- -------- ----------- -----------
Allowance for Doubtful Receivables
----------------------------------
December 31, 2006: $ 513 $4,289 ($3,818) $ 984
------ ------ ------- ------
December 31, 2005: 567 3,472 (3,526) 513
------ ------ ------- ------
December 31, 2004: 241 3,527 (3,201) 567
------ ------ ------- ------
Deferred Tax Asset Valuation Allowance
--------------------------------------
December 31, 2006: 8,421 - 1,657 10,078
------ ------ ------- ------
December 31, 2005: 8,680 - (259) 8,421
------ ------ ------- ------
December 31, 2004: 8,185 495 - 8,680
------ ------ ------- ------
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
(IN THOUSANDS)
Total
Initial Total Cost
Cost Costs Cost Net of
Buildings, Capitalized Buildings, Accumu- Accumu-
Improve- Subsequent Improve- lated lated Year of
Encum- ments & to ments & Total Depre- Depre- Acqui-
Community brances Land Equipment Acquisition Land Equipment (a) ciation ciation sition
--------- ------- ---- --------- ----------- ---- --------- --- ------- ------- ------
Barrington Gardens 4,170 914 6,556 2,559 914 9,115 10,029 466 9,563 2005
Bayview & Colonial 11,487 1,652 8,471 4,726 1,652 13,197 14,849 2,416 12,433 2000
Beechwood Gardens - 591 3,442 3,097 591 6,539 7,130 1,695 5,435 1998
Blackhawk
Apartments 13,267 3,026 14,568 5,892 3,026 20,460 23,486 3,942 19,544 2000
Bonnie Ridge
Apartments 33,996 5,129 42,769 29,919 5,129 72,688 77,817 15,424 62,393 1999
Braddock Lee
Apartments 21,232 3,923 8,842 6,486 3,923 15,328 19,251 4,353 14,898 1998
Brittany Place 17,323 4,929 39,608 14,060 4,929 53,668 58,597 6,624 51,973 2002
Cambridge Village
Associates 3,061 2,502 3,188 2,374 2,502 5,562 8,064 764 7,300 2002
Canterbury
Apartments 29,067 5,117 21,384 9,194 5,117 30,578 35,695 5,830 29,865 1999
Carriage Hill
Apartment 5,688 615 3,827 4,059 615 7,886 8,501 2,497 6,004 1996
Castle Club
Apartments 6,630 990 8,909 3,699 990 12,608 13,598 2,312 11,286 2000
Chatham Hill
Apartments 45,000 2,067 46,150 7,291 2,067 53,441 55,508 4,013 51,495 2004
Chesterfield
Apartments 9,735 1,547 8,206 5,700 1,547 13,906 15,453 3,841 11,612 1997
Cider Mill 61,199 15,920 65,938 10,758 15,920 76,696 92,616 8,701 83,915 2002
Cinnamon Run
Apartments 52,300 7,923 59,646 2,605 7,923 62,251 70,174 1,738 68,436 2005
Cornwall Park 5,497 469 2,947 4,827 469 7,774 8,243 2,408 5,835 1996
Country Village
Apartments 19,885 2,318 11,149 9,249 2,318 20,398 22,716 4,964 17,752 1998
Courtyards Village 4,711 3,397 9,824 3,358 3,397 13,182 16,579 2,076 14,503 2001
Coventry Village
Apartments - 819 2,328 3,242 819 5,570 6,389 1,472 4,917 1998
Curren Terrace 14,537 1,989 10,957 7,333 1,989 18,290 20,279 5,118 15,161 1997
Cypress Place 5,991 2,335 7,861 3,785 2,335 11,646 13,981 2,243 11,738 2000
Devonshire Hills 44,257 15,099 32,934 7,315 15,099 40,249 55,348 5,761 49,587 2001
East Hill Gardens - 249 1,560 1,283 249 2,843 3,092 716 2,376 1998
East Meadow
Apartments 7,140 2,315 10,803 1,780 2,315 12,583 14,898 2,078 12,820 2000
East Winds
Apartments 6,523 989 5,079 2,919 989 7,998 8,987 1,503 7,484 2000
Elmwood Terrace 21,050 6,161 14,680 7,790 6,161 22,470 28,631 3,995 24,636 2000
Executive House
Apartments 3,903 628 3,420 3,040 628 6,460 7,088 1,845 5,243 1997
Falcon Crest
Townhomes 18,279 2,891 11,116 8,669 2,891 19,785 22,676 4,148 18,528 1999
Falkland Chase
Apartments 38,909 9,251 49,705 5,562 9,251 55,267 64,518 4,635 59,883 2003
Fenland Field 11,874 3,604 11,050 4,976 3,604 16,026 19,630 2,405 17,225 2001
Gardencrest
Apartments - 25,071 61,525 18,695 25,071 80,220 105,291 10,006 95,285 2002
Gateway Village
Apartments 6,872 1,373 6,621 2,341 1,373 8,962 10,335 1,752 8,583 1999
Glen Brook
Apartments - 1,447 4,816 2,870 1,447 7,686 9,133 1,638 7,495 1999
Glen Manor
Apartments 5,796 1,076 4,564 2,537 1,076 7,101 8,177 1,813 6,364 1997
Golf Club
Apartments 15,363 4,127 21,236 12,426 4,127 33,662 37,789 6,881 30,908 2000
Hackensack Gardens 9,286 2,417 10,916 2,647 2,417 13,563 15,980 678 15,302 2005
Hawthorne Court 37,197 9,147 23,447 16,368 9,147 39,815 48,962 5,520 43,442 2002
Heritage Square 6,285 2,046 4,805 2,321 2,046 7,126 9,172 917 8,255 2002
Heritage Woods
Apartments 5,138 1,640 12,455 32 1,640 12,487 14,127 81 14,046 2006
Highland House 6,543 3,414 14,761 82 3,414 14,843 18,257 257 18,000 2006
Hill Brook Place
Apartments 11,185 2,253 9,118 5,552 2,253 14,670 16,923 2,880 14,043 1999
Holiday Square 3,387 3,635 6,109 1,894 3,635 8,003 11,638 949 10,689 2002
Home Properties
of Bryn Mawr 14,939 3,275 17,907 10,309 3,275 28,216 31,491 5,633 25,858 2000
Home Properties
of Devon 28,892 6,524 35,545 22,682 6,524 58,227 64,751 11,333 53,418 2000
Home Properties
of Newark 16,261 2,694 12,713 13,048 2,694 25,761 28,455 5,858 22,597 1999
Lake Grove
Apartments 37,057 7,555 11,952 14,631 7,555 26,583 34,138 7,854 26,284 1997
Lakeshore Villa
Apartments 4,915 615 3,849 4,886 615 8,735 9,350 2,579 6,771 1996
Lakeview
Apartments 8,639 679 4,552 3,193 679 7,745 8,424 2,011 6,413 1998
Liberty Commons - 1,344 - 13,394 1,344 13,394 14,738 590 14,148 2005
Liberty Place
Apartments 6,467 2,033 13,125 76 2,033 13,201 15,234 199 15,035 2006
Maple Tree - 866 4,445 2,368 866 6,813 7,679 1,260 6,419 2000
Mid-Island
Apartments 19,913 4,256 6,567 5,853 4,256 12,420 16,676 3,702 12,974 1997
Mill Company
Gardens 2,592 406 1,671 1,306 406 2,977 3,383 785 2,598 1982
Mill Towne Village 24,239 3,958 13,747 10,495 3,958 24,242 28,200 3,948 24,252 2001
Morningside
Heights Apartments 17,019 6,450 28,699 25,518 6,450 54,217 60,667 14,229 46,438 1998
Mount Vernon
Square Apartments 89,724 56,300 86,923 43 56,300 86,966 143,266 207 143,059 2006
New Orleans Park
Apartments 19,169 3,008 13,215 9,574 3,008 22,789 25,797 5,877 19,920 1997
Northwood
Apartments 10,675 858 14,286 1,282 858 15,568 16,426 1,164 15,262 2004
Oak Manor
Apartments 6,932 668 4,111 2,963 668 7,074 7,742 1,868 5,874 1998
Orleans Village 65,993 8,822 58,912 18,625 8,822 77,537 86,359 13,709 72,650 2000
Owings Run
Consolidation 43,081 5,722 32,622 5,483 5,722 38,105 43,827 7,334 36,493 1999
Park Shirlington
Apartments 18,537 4,524 10,180 8,405 4,524 18,585 23,109 5,232 17,877 1998
Patricia
Apartments 5,213 637 4,196 3,055 637 7,251 7,888 1,822 6,066 1998
Peppertree Farm
Apartments 80,500 12,843 83,751 5,150 12,843 88,901 101,744 2,505 99,239 2005
Pleasant View
Gardens 51,824 6,067 47,816 23,321 6,067 71,137 77,204 17,507 59,697 1998
Pleasure Bay
Apartments 15,019 1,711 6,234 7,681 1,711 13,915 15,626 3,115 12,511 1998
Racquet Club East
Apartments 31,690 2,035 23,107 8,101 2,035 31,208 33,243 7,272 25,971 1998
Racquet Club South 2,786 335 3,891 2,172 335 6,063 6,398 1,498 4,900 1999
Redbank Village
Apartments 15,925 2,126 14,030 9,465 2,126 23,495 25,621 5,600 20,021 1998
Regency Club
Apartments 26,126 2,761 34,825 3,581 2,761 38,406 41,167 2,356 38,811 2004
Rider Terrace - 248 1,270 607 248 1,877 2,125 330 1,795 2000
Ridgeview at
Wakefield Valley - 2,360 17,107 2,906 2,360 20,013 22,373 1,080 21,293 2005
Ridley Brook
Apartments 9,661 2,006 7,719 3,537 2,006 11,256 13,262 2,446 10,816 1999
Royal Gardens
Apartment 31,774 5,690 14,067 14,952 5,690 29,019 34,709 8,554 26,155 1997
Sayville Commons 42,735 8,163 55,379 1,537 8,163 56,916 65,079 2,158 62,921 2005
Selford Townhomes 3,960 1,266 4,200 2,636 1,266 6,836 8,102 1,465 6,637 1999
Seminary Hill
Apartments 9,900 3,059 10,194 8,979 3,059 19,173 22,232 3,817 18,415 1999
Seminary Towers
Apartments 27,715 5,695 19,348 16,879 5,695 36,227 41,922 7,148 34,774 1999
Shakespeare Park
Apartments 2,275 514 3,433 1,026 514 4,459 4,973 840 4,133 1999
Sherry Lake
Apartments 19,450 2,548 15,618 9,496 2,548 25,114 27,662 5,642 22,020 1998
Sherwood
Consolidation 7,324 3,330 10,735 5,063 3,330 15,798 19,128 1,825 17,303 2002
South Bay Manor 8,000 1,133 1,958 4,567 1,133 6,525 7,658 1,218 6,440 2000
Southern Meadows 18,691 9,317 31,874 8,131 9,317 40,005 49,322 5,796 43,526 2001
Stone Ends
Apartments 22,812 5,729 28,428 2,851 5,729 31,279 37,008 3,163 33,845 2003
Stratford Greens
Associates 33,078 12,764 33,779 7,783 12,764 41,562 54,326 5,133 49,193 2002
Sunset Gardens
Apartments 8,561 753 4,663 4,959 753 9,622 10,375 2,814 7,561 1996
Tamarron
Apartments 5,200 1,387 8,474 2,190 1,387 10,664 12,051 2,054 9,997 1999
Terry Apartments - 668 3,439 1,142 668 4,581 5,249 774 4,475 2000
The Apts at
Wellington Trace 25,603 3,188 23,904 3,664 3,188 27,568 30,756 1,938 28,818 2004
The Brooke at
Peachtree - 1,033 15,145 1,113 1,033 16,258 17,291 602 16,689 2005
The Colony - 7,967 34,121 11,851 7,967 45,972 53,939 9,334 44,605 1999
The Coves at
Chesapeake - 8,915 57,953 21 8,915 57,974 66,889 248 66,641 2006
The Hamptons 54,201 5,984 50,647 6,997 5,984 57,644 63,628 3,706 59,922 2004
The Heights at
Marlborough 23,523 6,253 44,264 87 6,253 44,351 50,604 380 50,224 2006
The Landings 12,488 2,579 16,753 8,978 2,579 25,731 28,310 7,035 21,275 1996
The Manor
Apartments (MD) 24,448 8,900 27,703 9,656 8,900 37,359 46,259 5,353 40,906 2001
The Manor
Apartments (VA) 5,600 1,450 5,738 4,465 1,450 10,203 11,653 2,582 9,071 1999
The Meadows at
Marlborough 21,553 6,598 28,736 118 6,598 28,854 35,452 250 35,202 2006
The New Colonies 20,353 1,788 21,350 10,934 1,788 32,284 34,072 8,999 25,073 1998
The Sycamores - 4,729 15,725 2,623 4,729 18,348 23,077 1,995 21,082 2002
The Village at
Marshfield 24,076 3,263 28,351 2,400 3,263 30,751 34,014 2,241 31,773 2004
Timbercroft
Consolidation 5,875 1,774 6,826 4,258 1,774 11,084 12,858 2,130 10,728 1999
Top Field 6,352 1,635 16,684 29 1,635 16,713 18,348 108 18,240 2006
Trexler Park
Apartments 10,140 2,574 13,802 6,286 2,574 20,088 22,662 3,895 18,767 2000
Trexler Park West
Phase - 2,669 9,373 2,669 9,373 12,042 198 11,844 2006
Valley View
Apartments 5,231 1,090 4,960 4,484 1,090 9,444 10,534 2,726 7,808 1997
Village Square 4,651 799 13,306 (6,072) 799 7,234 8,033 2,151 5,882 1997
Village Square
Apartments 20,699 2,732 3,582 17,967 2,732 21,549 24,281 4,038 20,243 1999
Vinings at
Hampton Village - 1,830 12,214 1,799 1,830 14,013 15,843 924 14,919 2004
Virginia Village 8,771 5,322 21,918 8,618 5,322 30,536 35,858 4,983 30,875 2001
Wayne Village - 2,057 12,895 7,305 2,057 20,200 22,257 5,085 17,172 1998
West Springfield
Terrace 23,004 2,589 31,758 3,593 2,589 35,351 37,940 3,795 34,145 2002
Westwood Village
Apts 33,520 7,471 22,757 10,235 7,471 32,992 40,463 4,449 36,014 2002
William Henry
Apartments 22,548 4,804 22,220 10,090 4,804 32,310 37,114 6,071 31,043 2000
Windsor Realty
Company 4,650 427 3,300 1,993 427 5,293 5,720 1,367 4,353 1998
Woodholme Manor
Apartments 3,697 1,278 4,599 4,386 1,278 8,985 10,263 1,532 8,731 2001
Woodleaf
Apartments - 2,955 17,716 2,143 2,955 19,859 22,814 1,466 21,348 2004
Woodmont Village
Apartments - 2,930 5,699 2,551 2,930 8,250 11,180 1,083 10,097 2002
Yorkshire Village
Apartments 1,443 1,221 2,016 1,040 1,221 3,056 4,277 405 3,872 2002
Other Assets 6,098 303 5,915 21,977 303 27,892 28,195 12,899 15,296 Various
Limited
Partnerships 16,763 1,203 9,963 18,204 1,203 28,167 29,370 9,502 19,868 1995
---------- -------- ---------- -------- -------- ---------- ---------- -------- ----------
$1,924,313 $493,017 $2,174,366 $784,379 $493,017 $2,958,745 $3,451,762 $450,129 $3,001,633
========== ======== ========== ======== ======== ========== ========== ======== ==========
(a) The aggregate cost for Federal Income Tax purposes was approximately
$2,868,000.
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
(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:
Land improvements 3-20 years
Buildings and improvements 3-40 years
Furniture, fixtures and equipment 5-10 years
Computer software 5 years
The changes in total real estate assets are as follows:
2006 2005(a) 2004
---- ------- ----
Balance, beginning of year $3,385,143 $3,123,901 $2,752,992
New property acquisition 368,301 283,363 256,208
Additions 101,723 100,013 102,700
Increase in real estate associated with the conversion of UPREIT Units 124,292 5,220 11,864
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 (527,697) (76,727) (78,574)
---------- ---------- ----------
Balance, end of year $3,451,762 $3,385,143 $3,123,901
========== ========== ==========
The changes in accumulated depreciation are as follows:
2006 2005(a) 2004
Balance, beginning of year $ 500,592 $ 405,919 $ 330,062
Properties previously held for sale, changed to held and used - 6,999 -
Depreciation for the year 99,694 99,322 90,787
Disposals and retirements (150,157) (11,648) (14,930)
---------- ---------- ----------
Balance, end of year $ 450,129 $ 500,592 $ 405,919
========== ========== ==========
(a) $54,433 of accumulated depreciation was included in assets held for sale as
of December 31, 2005.
HOME PROPERTIES, INC.
FORM 10-K
For Fiscal Year Ended December 31, 2006
Exhibit Index
Exhibit
Number Exhibit Location
------ ------- --------
1.0 Underwriting Agreement, dated May 9, 2006, between Home Incorporated by reference to the Form
Properties, Inc., UBS Securities LLC and the selling 8-K filed by Home Properties, Inc. on
shareholders named therein May 10, 2006
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
2.24 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
2.43 Agreement for Purchase and Sale of Interests Southeast Incorporated by reference to the Form
Michigan Portfolio, dated April 26, 2006, together with 8-K filed by Home Properties, Inc. on
Second Amendment thereto (First Amendment superceded) June 30, 2006
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.
3.9 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
4.8 Amended and Restated Stock Benefit Plan of Home Properties of Incorporated by reference to the
New York, Inc. 6/6/97 8-K
4.14 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
4.23 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")
4.26 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
4.29 Amendment No. Two to Deferred Bonus Plan Incorporated by reference to the
12/31/02 10-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
4.33 Seventh Amended and Restated Dividend Reinvestment and Direct Incorporated by reference to the Form
Stock Purchase Plan 8-K filed by Home Properties, Inc. on
September 28, 2006
4.34 Indenture, dated October 24, 2006 between Home Properties, Incorporated by reference to the Form
Inc., Home Properties, L.P. and Wells Fargo Bank, N.A., as 8-K filed by Home Properties, Inc. on
trustee including the form of 4.125% Exchangeable Senior October 25, 2006 (the "10/25/06 8-K")
Notes due 2026 of Home Properties, L.P. and the Guarantee of
Home Properties, Inc. with respect thereto
4.35 Registration Rights Agreement, dated October 24, 2006, Incorporated by reference to the
between Home Properties, Inc., Home Properties, L.P. and 10/25/06 8-K
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Bear Stearns & co., Inc.
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")
10.26 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
10.41 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
10.68 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 Filed herewith
January 1, 2007
10.73 Summary of Named Executive Compensation for 2007 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
10.76 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. for the
Manufacturers and Traders Trust Company, as Administrative quarter ended 9/30/05 (the "9/30/05
Agent 10-Q")
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 Incorporated by reference to the
Second Amended and Restated Limited Partnership 12/31/05 10-K
10.82 Amendment No. Eighty to the Second Amended and Restated Incorporated by reference to the Form
Limited Partnership Agreement 10-Q filed by Home Properties, Inc.
for the quarter ended 3/31/06
10.83 Amendment Nos. Eighty-One and Eighty-Two to the Second Incorporated by reference to the Form
Amended and Restated Limited Partnership Agreement 10-Q filed by Home Properties, Inc.
for the quarter ended 6/30/06
10.84 Amendment Nos. Eighty-Three and Eighty-Four to the Second Incorporated by reference to the Form
Amended and Restated Limited Partnership Agreement 10-Q filed by Home Properties, Inc.
for the quarter ended 9/30/06
10.85 Amendment Nos. Eighty-Five through Eighty-Seven to the Second Filed herewith
Amended and Restated Limited Partnership Agreement
10.86 Development Agreement, dated March 27, 2006 between Nelson B. Incorporated by reference to the Form
Leenhouts and Home Properties, Inc. 8-K filed by Home Properties, Inc. on
March 27, 2006
10.87 Amended and Restated Employment Agreement, dated November 20, Incorporated by reference to the Form
2006 between Edward J. Pettinella and Home Properties, Inc. 8-K filed by Home Properties, Inc. on
November 21, 2006
10.88 Employment Agreement between Nelson B. Leenhouts and Home Incorporated by reference to the Form
Properties, Inc. 8-K filed by Home Properties, Inc. on
February 16, 2007 (the "2/16/07 8-K")
10.89 Second Amended and Restated Incentive Compensation Plan Incorporated by reference to the
2/16/07 8-K
10.90 Articles of Merger of Home Properties Management, Inc. into Filed herewith
Home Properties Resident Services, Inc.
10.91 Purchase Agreement, dated October 18, 2006 between Home Incorporated by reference to the Form
Properties, Inc., Home Properties, L.P. and Merrill Lynch & 8-K filed by Home Properties, Inc. on
Co., Merrill Lynch, Pierce Fenner & Smith and Bear Stearns & October 19, 2006
Co., Inc.
11 Computation of Per Share Earnings Schedule Filed herewith
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 Furnished herewith
32.2 Section 906 Certification of Chief Financial Officer Furnished herewith
99 Additional Exhibits - Debt Summary Schedule Filed herewith