Edgar Filing: HOME PROPERTIES INC

hme10q2q2009.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

JUNE 30, 2009

¨	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 of incorporation or organization)		(I.R.S. Employer Identification No.)

850 Clinton Square, Rochester, New York		14604
(Address of principal executive offices)		(Zip Code)
(585) 546-4900
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

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

Yes

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

(The Registrant is not yet required to submit Interactive Data)

Yes

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer þ	Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

Yes

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		Outstanding at July 31, 2009
$.01 par value		33,044,369

Page 1

HOME PROPERTIES, INC.

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets – June 30, 2009 and December 31, 2008	3
	Consolidated Statements of Operations – Three months ended June 30, 2009 and 2008	4
	Consolidated Statements of Operations – Six months ended June 30, 2009 and 2008	5
	Consolidated Statements of Equity – Six months ended June 30, 2009 and year ended December 31, 2008	6
	Consolidated Statements of Cash Flows – Six months ended June 30, 2009 and 2008	7
	Notes to Consolidated Financial Statements	8-18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	33
	Signatures	34

Page 2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOME PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009 AND DECEMBER 31, 2008

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	2009			2008
ASSETS
Real estate:
Land	$	511,404		$	515,610
Construction in progress		146,301			111,039
Buildings, improvements and equipment		3,219,647			3,245,741
		3,877,352			3,872,390
Less: accumulated depreciation		(684,663	)		(636,970	)
Real estate, net		3,192,689			3,235,420
Cash and cash equivalents		6,473			6,567
Cash in escrows		28,418			27,904
Accounts receivable		11,568			14,078
Prepaid expenses		11,174			16,277
Deferred charges		9,660			11,360
Other assets		3,667			5,488
Total assets	$	3,263,649		$	3,317,094
LIABILITIES AND EQUITY
Mortgage notes payable	$	2,067,698		$	2,112,331
Exchangeable senior notes		135,138			134,169
Line of credit		104,000			71,000
Accounts payable		20,921			23,731
Accrued interest payable		10,770			10,845
Accrued expenses and other liabilities		26,909			32,043
Security deposits		20,773			21,443
Total liabilities		2,386,209			2,405,562
Commitments and contingencies
Equity:
Common stock, $.01 par value; 80,000,000 shares authorized; 33,040,252 and 32,431,304 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		330			324
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding		-			-
Additional paid-in capital		870,350			857,415
Distributions in excess of accumulated earnings		(234,180	)		(206,961	)
Total common stockholders' equity		636,500			650,778
Noncontrolling interest		240,940			260,754
Total equity		877,440			911,532
Total liabilities and equity	$	3,263,649		$	3,317,094

The accompanying notes are an integral part of these consolidated financial statements.

Page 3

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	2009			2008
Revenues:
Rental income	$	117,538		$	114,034
Property other income		8,980			9,946
Interest income		6			19
Other income		90			86
Total revenues		126,614			124,085
Expenses:
Operating and maintenance		51,612			49,691
General and administrative		6,249			6,620
Interest		30,257			28,795
Depreciation and amortization		30,243			27,842
Total expenses		118,361			112,948
Income from continuing operations		8,253			11,137
Discontinued operations:
Income from discontinued operations		45			867
Loss on disposition of property		(16	)		(1	)
Discontinued operations		29			866
Net income		8,282			12,003
Net income attributable to noncontrolling interest		(2,262	)		(3,552	)
Net income attributable to common shareholders	$	6,020		$	8,451

Basic earnings per share:
Income from continuing operations	$	0.18		$	0.25
Discontinued operations		-			0.02
Net income attributable to common shareholders	$	0.18		$	0.27

Diluted earnings per share:
Income from continuing operations	$	0.18		$	0.24
Discontinued operations		-			0.02
Net income attributable to common shareholders	$	0.18		$	0.26

Weighted average number of shares outstanding:
Basic		32,868,812			31,641,975
Diluted		32,919,406			32,111,791

Dividends declared per share	$	0.67		$	0.66

The accompanying notes are an integral part of these consolidated financial statements.

Page 4

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	2009			2008
Revenues:
Rental income	$	234,299		$	226,971
Property other income		21,424			21,658
Interest income		14			139
Other income		368			278
Total revenues		256,105			249,046
Expenses:
Operating and maintenance		108,775			103,806
General and administrative		12,138			12,838
Interest		60,810			58,813
Depreciation and amortization		60,290			55,316
Total expenses		242,013			230,773
Income from continuing operations		14,092			18,273
Discontinued operations:
Income (loss) from discontinued operations		(4,244	)		219
Gain on disposition of property		13,493			29,848
Discontinued operations		9,249			30,067
Net income		23,341			48,340
Net income attributable to noncontrolling interest		(6,419	)		(14,237	)
Net income attributable to common shareholders	$	16,922		$	34,103

Basic earnings per share:
Income from continuing operations	$	0.31		$	0.40
Discontinued operations		0.21			0.67
Net income attributable to common shareholders	$	0.52		$	1.07

Diluted earnings per share:
Income from continuing operations	$	0.31		$	0.40
Discontinued operations		0.21			0.65
Net income attributable to common shareholders	$	0.52		$	1.05

Weighted average number of shares outstanding:
Basic		32,777,001			31,927,868
Diluted		32,811,374			32,342,054

Dividends declared per share	$	1.34		$	1.32

The accompanying notes are an integral part of these consolidated financial statements.

Page 5

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND THE YEAR ENDED DECEMBER 31, 2008

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

										Distributions
							Additional			in Excess of
	Common Stock						Paid-In			Accumulated			Noncontrolling
	Shares			Amount			Capital			Earnings			Interests			Totals
Balance, December 31, 2007		32,600,614		$	326		$	853,358		$	(185,623	)	$	279,061		$	947,122
Cumulative effect of change in accounting principle		-			-			9,688			(2,066	)		3,138			10,760
Balance, January 1, 2008		32,600,614			326			863,046			(187,689	)		282,199			957,882
Net income		-			-			-			66,081			27,124			93,205
Issuance of common stock, net		370,714			3			16,824			-			-			16,827
Repurchase of common stock		(1,165,783	)		(11	)		(53,919	)		-			-			(53,930	)
Repurchase of convertible debt		-			-			88			(88	)		-			-
Conversion of UPREIT Units for common stock		625,759			6			30,222			-			(12,435	)		17,793
Adjustment of noncontrolling interest		-			-			1,154			-			(1,154	)		-
Dividends and distributions paid ($2.65 per share)		-			-			-			(85,265	)		(34,980	)		(120,245	)
Balance, December 31, 2008		32,431,304			324			857,415			(206,961	)		260,754			911,532
Net income		-			-			-			16,922			6,419			23,341
Issuance of common stock, net		177,292			2			4,967			-			-			4,969
Repurchase of common stock		(53,208	)		(1	)		(1,682	)		-			-			(1,683	)
Conversion of UPREIT Units for common stock		484,864			5			9,720			-			(9,725	)		-
Adjustment of noncontrolling interest		-			-			(70	)		-			70			-
Dividends and distributions paid ($1.34 per share)		-			-			-			(44,141	)		(16,578	)		(60,719	)
Balance, June 30, 2009		33,040,252		$	330		$	870,350		$	(234,180	)	$	240,940		$	877,440

The accompanying notes are an integral part of these consolidated financial statements.

Page 6

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED, IN THOUSANDS)

	2009			2008
Cash flows from operating activities:
Net income	$	23,341		$	48,340
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		61,426			54,481
Amortization of debt discount		970			1,309
Gain on disposition of property		(13,493	)		(29,848	)
Issuance of restricted stock, compensation cost of stock options and deferred compensation		3,444			2,954
Changes in assets and liabilities:
Cash in escrows		(254	)		1,395
Other assets		8,226			5,352
Accounts payable and accrued liabilities		(4,825	)		(1,093	)
Total adjustments		55,494			34,550
Net cash provided by operating activities		78,835			82,890
Cash flows from investing activities:
Purchase of land for development		-			(15,951	)
Additions to properties		(38,437	)		(41,942	)
Additions to construction in progress		(35,274	)		(15,806	)
Proceeds from sale of properties, net		66,900			63,044
Withdrawals from (additions to) cash in escrows, net		(226	)		415
Net cash used in investing activities		(7,037	)		(10,240	)
Cash flows from financing activities:
Proceeds from sale of common stock, net		1,525			4,271
Repurchase of common stock		(1,683	)		(52,496	)
Proceeds from mortgage notes payable		12,600			43,145
Payments of mortgage notes payable		(56,598	)		(81,033	)
Proceeds from line of credit		164,500			209,500
Payments on line of credit		(131,500	)		(136,500	)
Payments of deferred loan costs		(7	)		(680	)
Additions to cash in escrows, net		(10	)		(30	)
Dividends and distributions paid		(60,719	)		(60,109	)
Net cash used in financing activities		(71,892	)		(73,932	)
Net decrease in cash and cash equivalents		(94	)		(1,282	)
Cash and cash equivalents:
Beginning of year		6,567			6,109
End of period	$	6,473		$	4,827

Supplemental disclosure of non-cash operating, investing and financing activities:
Increase in real estate associated with the purchase of UPREIT Units	$	-		$	5,600
Exchange of UPREIT Units for common shares		9,725			3,736
Additions to properties included in accounts payable		2,615			5,156
Mortgage note premium write-off		615			4,433

The accompanying notes are an integral part of these consolidated financial statements.

Page 7

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1.	Unaudited Interim Financial Statements

The interim consolidated financial statements of Home Properties, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures that would accompany annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America are omitted. The year-end balance sheet data was derived from audited financial statements, which were revised in the current period to reflect the retroactive application of recently issued accounting standards (see Note 3), but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the consolidated financial statements for the interim periods have been included. The current period's results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2008.

2.	Organization and Basis of Presentation

Organization

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 June 30, 2009, the Company operated 109 apartment communities with 37,539 apartments. Of this total, the Company owned 107 communities, consisting of 36,389 apartments, managed as general partner one partnership that owned 868 apartments, and fee managed one community, consisting of 282 apartments, for a third party.

The Company elected to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code, as amended, for all periods presented. A corporate REIT is a legal entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, the Company generally will not be subject to corporate level tax on taxable income it distributes currently to its stockholders. Management believes that all such conditions for the avoidance of income taxes have been met for the periods presented.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its ownership of 72.9% of the limited partnership units in the Operating Partnership ("UPREIT Units") at June 30, 2009 (71.7% at December 31, 2008). The remaining 27.1% is reflected as noncontrolling interest in these consolidated financial statements at June 30, 2009 (28.3% at December 31, 2008). 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 Home Properties Trust, which is the limited partner. 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.

Page 8

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. Organization and Basis of Presentation (continued)

The accompanying consolidated financial statements include the accounts of Home Properties Resident Services, Inc. ("HPRS"), (the "Management Company"). The Management Company is a wholly owned subsidiary of the Company. In addition, the Company consolidates one affordable housing limited partnership in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 – Consolidated Financial Statements ("FIN 46R"). All significant inter-company balances and transactions have been eliminated in these consolidated financial statements.

3.	Recently Adopted and Recently Issued Accounting Standards

Retrospective Application of Changes in Accounting Principles

On January 1, 2009, the Company adopted FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), ("FSP APB 14-1"); FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 ("SFAS 160"); and FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”).

FSP APB 14-1 requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer's nonconvertible debt borrowing rate on the date of issue. The difference between the principal amount of the debt and the amount of proceeds allocated to the liability component is reported as a debt discount and subsequently amortized to earnings over the instrument’s expected life using the effective interest method. The adoption of FSP APB 14-1 affects the accounting for the Company’s 4.125% exchangeable senior notes (“Senior Notes”) which were issued in October 2006 with a par value of $200,000. The initial debt component of the $200,000 par value Senior Notes was $186,050, based on the fair value of similar nonconvertible debt. The aggregate initial debt discount of $13,950 was recorded in additional paid-in capital. The Company is amortizing the discount using the effective interest method over the period the debt is expected to remain outstanding (through the first optional redemption date of November 1, 2011) as additional non-cash interest expense. During the fourth quarter of 2008, the Company repurchased $60,000 par value of the Senior Notes for $45,360. The gain on early extinguishment of debt originally recorded in the fourth quarter of 2008 of $13,884 has been adjusted for the impact of FSP APB 14-1, which requires a revaluation of the extinguished debt and equity components at the date of extinguishment and resulted in a restated gain on early extinguishment of debt of $11,303. The following tables provide additional information about the Senior Notes:

Consolidated Balance Sheet:	June 30, 2009			December 31, 2008
Principal amount of liability component	$	140,000		$	140,000
Unamortized discount		(4,862	)		(5,831	)
Carrying amount of liability component	$	135,138		$	134,169
Carrying amount of equity component	$	13,950		$	13,950

	Three Months Ended June 30,						Six Months Ended June 30,
Consolidated Income Statement:	2009			2008			2009			2008
Coupon interest	$	1,444		$	2,062		$	2,887		$	4,125
Amortization - issuance costs		137			195			273			391
Discount amortization - FSP APB 14-1		490			661			970			1,309
Total interest expense – Senior Notes	$	2,071		$	2,918		$	4,130		$	5,825
Effective interest rate		5.75	%		5.75	%		5.75	%		5.75	%
Conversion price per share, as adjusted	$	72.98		$	73.19		$	72.98		$	73.19

Page 9

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3.	Recently Adopted and Recently Issued Accounting Standards (continued)

SFAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interests be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; and that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

The following tables set forth the effect of the retroactive application of FSP APB 14-1 and SFAS 160 on certain previously reported line items.

Consolidated Balance Sheet:	December 31, 2008
	Originally Reported			As Adjusted			Effect of Change			Impact of FSP APB 14-1			Impact of SFAS 160
Deferred charges	$	11,473		$	11,360		$	(113	)	$	(113	)	$	-
Total assets		3,317,207			3,317,094			(113	)		(113	)		-
Exchangeable senior notes		140,000			134,169			(5,831	)		(5,831	)		-
Total liabilities		2,411,393			2,405,562			(5,831	)		(5,831	)		-
Minority interest		259,136			-			(259,136	)		-			(259,136	)
Additional paid-in capital		847,576			857,415			9,839			9,839			-
Distributions in excess of accumulated earnings		(201,222	)		(206,961	)		(5,739	)		(5,739	)		-
Total stockholders' equity		646,678			650,778			4,100			4,100			-
Noncontrolling interest		-			260,754			260,754			1,618			259,136
Total equity		646,678			911,532			264,854			5,718			259,136
Total liabilities and stockholders' equity		3,317,207			3,317,094			(113	)		(113	)		-

Consolidated Statement of Operations:	Three Months Ended June 30, 2008
	Originally Reported ¹			As Adjusted			Effect of Change			Impact of FSP APB 14-1			Impact of SFAS 160
Interest	$	28,149		$	28,795		$	646		$	646		$	-
Total expense		112,302			112,948			646			646			-
Income from operations		11,783			11,137			(646	)		(646	)		-
Minority interest in operating partnership		(3,487	)		-			3,487			191			3,296
Income from continuing operations		8,296			11,137			2,841			(455	)		3,296
Income from discontinued operations		611			867			256			-			256
Discontinued operations		610			866			256			-			256
Net income		8,906			12,003			3,097			(455	)		3,552
Net income attributable to noncontrolling interest		-			(3,552	)		(3,552	)		-			(3,552	)
Net income attributable to common shareholders		8,906			8,451			(455	)		(455	)		-
Basic earnings per share		0.28			0.27			(0.01	)		(0.01	)		-
Diluted earnings per share		0.28			0.26			(0.02	)		(0.02	)		-

Adjusted for discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), as discussed in Note 10.

Page 10

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3.	Recently Adopted and Recently Issued Accounting Standards (continued)

Consolidated Statement of Operations:	Six Months Ended June 30, 2008
	Originally Reported ¹			As Adjusted			Effect of Change			Impact of FSP APB 14-1			Impact of SFAS 160
Interest	$	57,533		$	58,813		$	1,280		$	1,280		$	-
Total expense		229,493			230,773			1,280			1,280			-
Income from operations		19,553			18,273			(1,280	)		(1,280	)		-
Minority interest in operating partnership		(5,772	)		-			5,772			378			5,394
Income from continuing operations		13,781			18,273			4,492			(902	)		5,394
Income from discontinued operations		154			219			65			-			65
Gain on disposition of property		21,070			29,848			8,778			-			8,778
Discontinued operations		21,224			30,067			8,843			-			8,843
Net income		35,005			48,340			13,335			(902	)		14,237
Net income attributable to noncontrolling interest		-			(14,237	)		(14,237	)		-			(14,237	)
Net income attributable to common shareholders		35,005			34,103			(902	)		(902	)		-
Basic earnings per share		1.10			1.07			(0.03	)		(0.03	)		-
Diluted earnings per share		1.08			1.05			(0.03	)		(0.03	)		-

Adjusted for discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), as discussed in Note 10.

Consolidated Statement of Equity:	December 31, 2008
	Originally Reported			As Adjusted			Effect of Change			Impact of FSP APB 14-1			Impact of SFAS 160
Additional paid-in-capital	$	847,576		$	857,415		$	9,839		$	9,839		$	-
Distributions in excess of accumulated earnings		(201,222	)		(206,961	)		(5,739	)		(5,739	)		-
Noncontrolling interest		-			260,754			260,754			1,618			259,136

The impact of FSP APB 14-1 on the January 1, 2008 balances of additional paid-in capital, distributions in excess of accumulated earnings and noncontrolling interest have been reflected as a cumulative effect of change in accounting principle on our consolidated statements of equity.

Consolidated Statement of Cash Flows:	Six Months Ended June 30, 2008
	Originally Reported		As Adjusted		Effect of Change			Impact of FSP APB 14-1			Impact of SFAS 160
Net income	$	35,005	$	48,340	$	13,335		$	(902	)	$	14,237
Income allocated to minority interest		14,615		-		(14,615	)		(378	)		(14,237	)
Depreciation and amortization		54,510		54,481		(29	)		(29	)		-
Amortization of debt discount		-		1,309		1,309			1,309			-
Net cash provided by operating activities		82,890		82,890		-			-			-

Page 11

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3.	Recently Adopted and Recently Issued Accounting Standards (continued)

FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class

method described in SFAS No. 128, Earnings per Share. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Company determined that its restricted stock granted under its stock plans are considered participating securities since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. Prior to the adoption of FSP EITF 03-6-1, the Company’s restricted stock was included in the calculation of diluted earnings per share using the treasury stock method. FSP EITF 03-6-1 became effective on January 1, 2009 and required all prior period earnings per share data presented to be adjusted retroactively. The adoption of FSP EITF 03-6-1 did not have a material effect on our computation of earnings per share.

Recently Adopted Accounting Principles

On January 1, 2009, the Company adopted SFAS No. 141(R), Business Combinations (“SFAS 141R”), which establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interests in the acquiree and goodwill acquired in a business combination. Additionally, SFAS 141R requires acquisition-related costs to be expensed in the period in which the costs are incurred and the services received instead of including such costs as part of the acquisition price. This statement is effective for business combinations for which the acquisition date is on or after January 1, 2009. The Company’s adoption of SFAS 141R did not have any impact on its financial position and results of operations.

On January 1, 2009, the Company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157") for all non-financial assets and non-financial liabilities except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. 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 to 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 for the Company. The Company’s adoption of SFAS 157 for non-financial assets and non-financial liabilities did not have any impact on its financial position and results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”). FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS 107”) to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies in addition to the annual financial statements. FSP FAS 107-1 also amends APB No. 28 to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 is effective for interim periods ending after June 15, 2009. Prior period presentation is not required for comparative purposes at initial adoption. The Company’s adoption of FSP FAS 107-1 did not have any impact on its financial position and results of operations.

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HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3.	Recently Adopted and Recently Issued Accounting Standards (continued)

In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim periods ending after June 15, 2009. The Company’s adoption of SFAS 165 did not have a material impact on its financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46R ("SFAS 167"). SFAS 167 amends FIN 46R, Consolidation of Variable Interest Entities (“FIN 46R”), to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

a.	The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and;

b.	The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

SFAS 167 also amends FIN 46R to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 will be effective for the Company on January 1, 2010, with earlier application prohibited. The Company is currently assessing the potential impact that the adoption of SFAS 167 will have on its financial position and results of operations.

In July 2009, The FASB issued SFAS No.168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168" or the “Codification”), which reorganizes the GAAP hierarchy. SFAS 168 is intended to improve financial reporting by providing a consistent framework for determining what accounting principles should be used in preparing GAAP financial statements. Other than resolving certain minor inconsistencies in current GAAP, the Codification is not supposed to change GAAP, but is intended to make it easier to find and research GAAP applicable to a particular transaction or specific accounting issue. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately 90 accounting topics. SFAS 168 is effective for interim periods ending after September 15, 2009. The Company’s adoption of SFAS 168 is not expected to have any impact on its financial position and results of operations.

Page 13

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

4.	Earnings Per Common Share

Basic earnings per share (“EPS”) is computed as net income attributable 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 exchangeable senior notes. 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 and discontinued operations is the same for both the basic and diluted calculation.

The reconciliation of the basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008 follows:

	Three Months						Six Months
	2009			2008			2009			2008
Numerator:
Income from continuing operations	$	8,253		$	11,137		$	14,092		$	18,273
Less: Income from continuing operations attributable to noncontrolling interest		(2,254	)		(3,296	)		(3,866	)		(5,394	)
Income from continuing operations attributable to common shareholders	$	5,999		$	7,841		$	10,226		$	12,879

Discontinued operations	$	29		$	866		$	9,249		$	30,067
Less: Discontinued operations attributable to noncontrolling interest		(8	)		(256	)		(2,553	)		(8,843	)
Discontinued operations attributable to common shareholders	$	21		$	610		$	6,696		$	21,224
Denominator:
Basic weighted average number of common shares outstanding		32,868,812			31,641,975			32,777,001			31,927,868
Effect of dilutive stock options		37,199			423,617			28,728			375,915
Effect of phantom and restricted shares		13,395			46,199			5,645			38,271
Diluted weighted average number of common shares outstanding		32,919,406			32,111,791			32,811,374			32,342,054
Earnings per common share:
Basic earnings per share:
Income from continuing operations	$	0.18		$	0.25		$	0.31		$	0.40
Discontinued operations		-			0.02			0.21			0.67
Net income attributable to common shareholders	$	0.18		$	0.27		$	0.52		$	1.07

Diluted earnings per share:
Income from continuing operations	$	0.18		$	0.24		$	0.31		$	0.40
Discontinued operations		-			0.02			0.21			0.65
Net income attributable to common shareholders	$	0.18		$	0.26		$	0.52		$	1.05

Unexercised stock options to purchase 3,142,548 and 1,491,421 shares of the Company's common stock for the three months ended June 30, 2009 and 2008, respectively, and 3,142,548 and 1,500,059 shares of the Company's common stock for the six months ended June 30, 2009 and 2008, respectively, were not included in the computations of diluted EPS because the effects would be antidilutive. Also, in conjunction with the issuance of the Senior Notes, there were 334,188 and 485,542 potential shares issuable under certain circumstances, of which all are considered antidilutive as of June 30, 2009 and 2008, respectively.

Page 14

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

5.	Variable Interest Entities

The Company is the general partner in one variable interest entity ("VIE") syndicated using low income housing tax credits under Section 42 of the Internal Revenue Code. As general partner, the Company manages the day-to-day operations of the partnership for a management fee. In addition, the Company has an operating deficit guarantee and tax credit guarantee to the limited partners of that partnership (as discussed in Note 11). The Company is responsible for funding operating deficits to the extent there are any and can receive operating incentive awards when cash flows reach certain levels. The effect on the Consolidated Balance Sheet of including this VIE as of June 30, 2009 includes total assets of $12,061, total liabilities of $16,881 and partners deficit of $4,820, respectively. Of the $16,881 in total liabilities, $16,137 represents non-recourse mortgage debt.

6. Interest Capitalized

Capitalized interest associated with communities under development or rehabilitation totaled $2,076 and $1,301 for the three months ended June 30, 2009 and 2008, respectively; and $3,870 and $2,362 for the six months ended June 30, 2009 and 2008, respectively.

7.	Line of Credit

As of June 30, 2009, the Company had an unsecured line of credit agreement for $140,000 which expires September 1, 2009. The Company is currently negotiating a new line of credit with the current lead lender. The Company had $104,000 outstanding under the credit facility on June 30, 2009. The Company has had no defaults through June 30, 2009. Borrowings under the line of credit bear interest at 0.75% over the one-month LIBOR. The one-month LIBOR was 0.31% at June 30, 2009.

The credit agreement relating to this line of credit requires the Company to maintain certain financial covenants. The Company was in compliance with these financial covenants for the six months ended June 30, 2009.

The Company’s line of credit agreement provides the ability to issue up to $20,000 in letters of credit. While the issuance of letters of credit does not increase borrowings outstanding under the line of credit, it does reduce the amount available. At June 30, 2009, the Company had outstanding letters of credit of $7,441. As of June 30, 2009, the amount available on the credit facility was $28,559 (net of $7,441 which was restricted to support letters of credit and net of $104,000 in outstanding borrowings).

8.	Fair Value of Financial Instruments

The Company follows the guidance under SFAS 157, when valuing its financial instruments. The valuation of financial instruments under SFAS 107 and FSP FAS 107-1 requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company determines the fair value of the mortgage notes payable and line of credit facility using a discounted future cash flow technique that incorporates a market interest yield curve with adjustments for duration, loan to value, and risk profile (level 2 inputs, as defined by SFAS 157). In determining the market interest yield curve, the Company considered its BBB credit rating. The Company bases the fair value of its Senior Notes using quoted prices (a level 1 input, as defined by SFAS 157).

At June 30, 2009 and December 31, 2008, the fair value of the Company’s total debt, including the Senior Notes and line of credit, amounted to a liability of $2,324,294 and $2,257,917, respectively, compared to its carrying amount of $2,306,836 and $2,317,500.

Page 15

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

9.	Segment Reporting

The Company is engaged in the ownership and management of market rate apartment communities. Each apartment community is considered a separate operating segment. Each segment on a stand alone basis is less than 10% of the revenues, net operating income, and assets of the combined reported operating segments and meets all of the aggregation criteria under Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). The operating segments are aggregated as Core and Non-core properties.

Non-segment revenue to reconcile to total revenue consists of interest income and other income. Non-segment assets to reconcile to total assets include cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, deferred charges and other assets.

Core properties consist of all apartment communities which have been owned more than one full calendar year. Therefore, the Core properties represent communities owned as of January 1, 2008. Non-core properties consist of apartment communities acquired or developed during 2008 and 2009, such that full year comparable operating results are not available.

The Company assesses and measures segment operating results based on a performance measure referred to as net operating income. Net operating income is defined as total revenues less operating and maintenance expenses. The accounting policies of the segments are the same as those described in Notes 1 and 2 of the Company’s Form 10-K for the year ended December 31, 2008.

The revenues and net operating income for each of the operating segments are summarized for the three and six months ended June 30, 2009 and 2008 as follows:

	Three Months						Six Months
	2009			2008			2009			2008
Revenues
Apartments owned
Core properties	$	121,964		$	122,172		$	246,585		$	244,839
Non-core properties		4,554			1,808			9,138			3,790
Reconciling items		96			105			382			417
Total revenues	$	126,614		$	124,085		$	256,105		$	249,046
Net operating income
Apartments owned
Core properties	$	72,625		$	73,674		$	142,575		$	143,078
Non-core properties		2,281			615			4,373			1,745
Reconciling items		96			105			382			417
Net operating income, including reconciling items		75,002			74,394			147,330			145,240

General and administrative expenses		(6,249	)		(6,620	)		(12,138	)		(12,838	)
Interest expense		(30,257	)		(28,795	)		(60,810	)		(58,813	)
Depreciation and amortization		(30,243	)		(27,842	)		(60,290	)		(55,316	)
Income from continuing operations	$	8,253		$	11,137		$	14,092		$	18,273

The assets for each of the reportable segments are summarized as follows as of June 30, 2009 and December 31, 2008:

Assets	2009		2008
Apartments owned
Core properties	$	2,900,404	$	2,923,265
Non-core properties		292,285		312,155
Reconciling items		70,960		81,674
Total assets	$	3,263,649	$	3,317,094

Page 16

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. Disposition of Property and Discontinued Operations

The Company reports its property dispositions as discontinued operations as prescribed by the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Pursuant to the definition of a component of an entity in SFAS 144, assuming no significant continuing involvement by the former owner after the sale, the sale of an apartment community is considered a discontinued operation. In addition, apartment communities classified as held for sale are also considered discontinued operations. The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date.

Included in discontinued operations for the three and six months ended June 30, 2009 are the operating results of three apartment communities sold in one transaction during the six months ended June 30, 2009 (the “2009 Disposed Communities”). Included in discontinued operations for the three and six months ended June 30, 2008 are the operating results of fifteen apartment communities sold in six separate transactions during the year ended December 31, 2008 (“2008 Disposed Communities”) and the 2009 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.

The operating results of discontinued operations are summarized for the three and six months ended June 30, 2009 and 2008 as follows:

	Three Months					Six Months
	2009			2008		2009			2008
Revenues:
Rental income	$	19		$	4,184	$	731		$	9,046
Property other income		21			410		42			893
Total revenues		40			4,594		773			9,939
Expenses:
Operating and maintenance		(5	)		2,055		520			4,840
Interest expense, including prepayment penalties		-			689		4,497			2,824
Depreciation and amortization		-			983		-			2,056
Total expenses		(5	)		3,727		5,017			9,720
Income (loss) from discontinued operations	$	45		$	867	$	(4,244	)	$	219

Page 17

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

11.	Commitments and Contingencies

Contingencies

The Company is not a party to any legal proceedings which are expected to have a material adverse effect on the Company's liquidity, financial position or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of employment and resident discrimination are also periodically brought. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company's liquidity, financial position or results of operations.

In 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% by number of apartment communities of the owned portfolio) for a period of 7 to 15 years except through a tax deferred like-kind exchange. The remaining terms on the sale restrictions range from 1 to 7 years.

Guarantees

As of June 30, 2009, the Company, through its general partnership interest in an affordable property limited partnership, has guaranteed low income housing tax credits to limited partners for a remaining period of seven years totaling approximately $3,000. As of June 30, 2009, there were no known conditions that would make such payments necessary relating to these guarantees. In addition, the Company, as general partner in this partnership, is obligated to advance funds to meet partnership operating deficits.

12. Subsequent Events

On August 5, 2009, the Board of Directors approved a dividend of $0.67 per share on the Company’s common stock for the quarter ended June 30, 2009. This is the equivalent of an annual distribution of $2.68 per share. The dividend is payable August 26, 2009 to shareholders of record on August 17, 2009.

Pursuant to SFAS 165, subsequent events have been evaluated through August 7, 2009, the date these financial statements were issued.

Page 18

HOME PROPERTIES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

(UNAUDITED)

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

Forward-Looking Statements

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

Liquidity and Capital Resources

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, debt repayments and stock repurchases. The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities. Management does not anticipate the acquisition of any communities in 2009.

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

As of June 30, 2009, the Company had an unsecured line of credit agreement with M&T Bank, as administrative agent and lead bank, of $140 million which expires September 1, 2009. The Company is currently negotiating a new line of credit with the current lender and is confident that the line will be replaced in full with the possibility of upsizing the facility. The Company has had no defaults through June 30, 2009. The Company had $104 million outstanding under the credit facility on June 30, 2009. The Company’s line of credit agreement provides the ability to issue up to $20 million in letters of credit. While the issuance of letters of credit does not increase the borrowings outstanding under the line of credit, it does reduce the amount available. At June 30, 2009, the Company had outstanding letters of credit of $7.4 million. As of June 30, 2009, the amount available on the credit facility was $28.6 million (net of $7.4 million which was restricted to support letters of credit and net of $104 million in outstanding borrowings). Borrowings under the line of credit bear interest at 0.75% over the one-month LIBOR rate of 0.31% at June 30, 2009. Accordingly, increases in interest rates will increase the Company's interest expense and as a result will affect the Company's results of operations and financial condition.

Page 19

To the extent that the Company does not satisfy its long-term liquidity requirements through net cash flows provided by operating activities and its unsecured credit facility, it intends to satisfy such requirements through property debt financing, proceeds from the sale of properties, the issuance of UPREIT Units, proceeds from its Dividend Reinvestment and Direct Stock Purchase Plan ("DRIP"), or the issuance of additional debt and equity securities. As of June 30, 2009, the Company owned 23 properties with 6,746 apartment units which were unencumbered by debt.

In response to the constrictions in the credit market, the Company is pursuing certain initiatives as follows: 1) The Company is evaluating alternatives to replace the existing unsecured line of credit which matures September 1, 2009. The Company is working with its existing lead bank and discussions suggest that there is significant interest from banks to participate in the Company's facility. The Company anticipates it will be able to replace the entire $140 million line and, in fact, plans on increasing the level to a minimum $150 million. Pricing will be more expensive, and may move from interest at 0.75% over the one-month LIBOR under the existing agreement possibly to a spread closer to 3.00%. In addition, up-front and on-going fees could add another 75 basis points to pricing. 2) During 2008, the Company increased the level of the value of unencumbered properties in relationship to the total property portfolio from 16% to 19%. This higher level adds flexibility in 2009 allowing the Company to place secured financing on unencumbered assets as required. 3) The Company benefits from its multifamily focus as the Government Sponsored Enterprises ("GSEs") Fannie Mae and Freddie Mac are still very active lending to apartment owners. Underwriting has become more stringent, but the Company believes it will be able to refinance its debt maturities during this cycle of reduced liquidity. 4) The Company has only $19 million of secured loans maturing in 2009 (including $6 million already paid during the second quarter of 2009). For 2010 and 2011, the principal amount of loans due rises to $331 million and $300 million, respectively. The Company is pursuing refinancing $225 million of the 2010 and 2011 maturities in the second half of 2009 with the GSEs, at a time when the GSEs are still very active and open to such transactions. It is anticipated that $329 million of new debt could be placed (including financing certain properties currently unencumbered), resulting in $85 million of net proceeds from refinancing. The loans being targeted are those that would have little or no prepayment penalties. The balance of the 2010 maturities are not expected to be refinanced early due to expensive yield-maintenance provisions making prepayment costly.

During the first two quarters of 2009, the Company sold three apartment communities, with a total of 741 units, for $67.8 million. A gain on sale of approximately $13.5 million was recorded in the first quarter related to these sales. The weighted average first year capitalization rate projected on these dispositions was 7.6%.

Management included in its operating plan strategic disposition of assets totaling approximately $110 million in 2009, of which $67.8 million were closed during the first three months of 2009. There can be no assurance that additional dispositions will actually occur.

The Company considers the issuance of UPREIT Units for property acquisitions to be a potential source of capital. During 2008 and the first two quarters of 2009, the Company did not issue any UPREIT Units as consideration for acquired properties.

The Company's DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in additional shares of common stock. In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock. The maximum monthly investment permitted without prior Company approval is currently $10,000. The Company meets share demand under the DRIP through share repurchases by the transfer agent in the open market on the Company's behalf or new share issuances. From December 27, 2006 through September 25, 2007, the Company met demand by issuing new shares. As of September 26, 2007, the Company switched to meeting demand through share repurchases by the transfer agent in the open market on the Company's behalf. Management monitors the relationship between the Company's stock price and its estimated net asset value (“NAV”). During times when the difference between these two values is small, resulting in little dilution of NAV by common stock issuances, the Company can choose to issue new shares. At times when the gap between NAV and stock price is greater, the Company has the flexibility to satisfy the demand for DRIP shares with stock repurchased 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 the six months ended June 30, 2009 or the year ended December 31, 2008.

Page 20

In October 2006, the Company issued $200 million of exchangeable senior notes (“Senior Notes”) with a coupon rate of 4.125%, which generated net proceeds of $195.8 million. The net proceeds were used to repurchase 933,000 shares of common stock for a total of $58 million, pay down $70 million on the line of credit, with the balance used for redemption of preferred shares and property acquisitions. During the fourth quarter of 2008, the Company repurchased $60 million of the Senior Notes for $45.4 million. The exchange terms and conditions are more fully described under "Contractual Obligations and Other Commitments," below.

On April 4, 2007, the Company filed a Form S-3 universal shelf registration statement with the SEC that registers the issuance, from time to time, of common stock, preferred stock or debt securities. The Company may offer and sell securities issued pursuant to the universal shelf registration statement after a prospectus supplement, describing the type of security and amount being offered, is filed with the SEC.

In 1997, the Company's Board of Directors (the “Board”) approved a stock repurchase program under which the Company may repurchase shares of its common stock or UPREIT Units ("Company Program"). The shares/units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board's action did not establish a target stock price or a specific timetable for repurchase. At December 31, 2007, there was approval remaining to purchase 1,362,748 shares. During 2008, the Company repurchased 1,071,588 shares of its outstanding common stock at a cost of $50 million at a weighted average price of $46.66 per share. On May 1, 2008, the Board approved a 2,000,000-share increase in the stock repurchase program, resulting in a remaining authorization level of 2,291,160 shares as of December 31, 2008. There were no repurchases under the Company Program during the first six months of 2009. The Company will continue to monitor stock prices, the NAV, and acquisition/development alternatives to determine the current best use of capital between the two major uses of capital – stock buybacks and acquisitions/development. At the present time, the Company has no intention of buying any stock back during the balance of 2009 or early in 2010.

As of June 30, 2009, the weighted average rate of interest on the Company’s total indebtedness of $2.3 billion was 5.4% with staggered maturities averaging approximately six years. Approximately 93% of total indebtedness was 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.

In 2000, the Company obtained an investment grade rating from Fitch, Inc. The rating in effect at June 30, 2009 (no change from initial rating) is a corporate credit rating of "BBB" (Triple B). Ratings are reviewed from time to time by the issuing agency and may change at any time.

The Company’s cash provided by operating activities was $79 million for the six months ended June 30, 2009 compared to $83 million for the same period in 2008. The change is primarily due to timing differences in cash disbursements between periods.

Cash used in investing activities was $7 million for the six months ended June 30, 2009 compared to $10 million for the same period in 2008. The change is primarily due to a change in the use of proceeds between periods, as the proceeds from sale of properties were similar in both periods at $67 million and $63 million, respectively. During the six months ended June 30, 2009, $74 million cash was used on additions to property and new construction as compared to the six months ended June 30, 2008 where $58 million was spent on additions to property and new construction, plus $16 million on the purchase of land for development.

Cash used in financing activities was $72 million for the six months ended June 30, 2009 compared to $74 million for the same period in 2008. The $2 million decrease in cash used between periods is primarily due to $40 million less cash provided by the line of credit and $6 million higher net mortgage payments in 2009 as compared to 2008, partially offset by $51 million less cash used for stock buybacks in the 2009 period as compared to the 2008 period.

Variable Interest Entities

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The effect on the consolidated balance sheet of including this VIE as of June 30, 2009 includes total assets of $12.1 million, total liabilities of $16.9 million and partners deficit of $4.8 million. Of the $16.9 million in total liabilities, $16.1 million represents non-recourse mortgage debt. The VIE is included in the Consolidated Statement of Operations for the three and six months ended June 30, 2009 and 2008.

The Company, through its general partnership interest in the VIE, has guaranteed the low income housing tax credits to the limited partners for a remaining period of seven years totaling approximately $3 million. Such guarantee requires the Company to operate the property in compliance with Internal Revenue Code Section 42 for a total of 15 years. The Company believes the property’s operations conform to the applicable requirements as set forth above. In addition, as the general partner in this partnership, the Company is obligated to advance funds to meet partnership operating deficits.

Acquisitions and Dispositions

On January 30, 2009, the Company sold three apartment communities, with a total of 741 units, for $67.8 million. A gain on sale of approximately $13.5 million was recorded in the first quarter related to this sale. The weighted average first year capitalization rate projected on this disposition was 7.6%.

Contractual Obligations and Other Commitments

The primary obligations of the Company relate to its borrowings under the line of credit, Senior Notes and mortgage notes payable. The Company’s line of credit matures in September 2009 and had $104 million outstanding at June 30, 2009. The $2.1 billion in mortgage notes payable have varying maturities ranging from 5 months to 25 years. The weighted average interest rate of the Company's secured debt was 5.67% at June 30, 2009. The weighted average rate of interest on the Company’s total indebtedness of $2.3 billion at June 30, 2009 was 5.37%.

In October 2006, the Company issued $200 million of Senior Notes with a coupon rate of 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. The exchange price is adjusted for payments of dividends in excess of the reference dividend set in the indenture of $0.64 per share. The adjusted exchange price at June 30, 2009 was $72.98 per share. 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. During October and November 2008, the Company repurchased and retired $60 million face value of its Senior Notes for $45.4 million, in several privately-negotiated transactions which amounted to a 24.4% discount from face value. An adjusted gain on debt extinguishment of $11.3 million was recorded in the fourth quarter of 2008, as compared to the originally reported gain of $13.9 million. The adjustment is as a result of recently adopted accounting standards as more fully described in Note 3 to the Consolidated Financial Statements.

The Company leases its corporate office space from an affiliate and the office space for its regional offices from non-affiliated third parties. The corporate office space requires an annual base rent plus a pro-rata portion of property improvements, real estate taxes, and common area maintenance. The regional office leases require an annual base rent plus a pro-rata portion of real estate taxes. In July 2009, the Company extended the lease on its corporate office space through October 2019, plus two five-year renewal options.

As discussed in the section entitled “Variable Interest Entities”, the Company, through its general partnership interest in an affordable property limited partnership, has guaranteed low income housing tax credits to limited partners totaling approximately $3 million. With respect to the guarantee of the low income housing tax credits, the Company believes the property’s operations conform to the applicable requirements and does not anticipate any payment on the guarantees. In addition, the Company, as general partner in this partnership, is obligated to advance funds to meet partnership operating deficits.

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

Effective January 1, 2009, the Company updated its estimate of the amount of recurring, non-revenue enhancing capital expenditures incurred on an annual basis for a standard garden style apartment. The Company now estimates that the amount of these capital expenditures is $800 per apartment unit compared to $780 per apartment unit in the prior year. This new amount better reflects current actual costs since the last update.

The Company’s policy is to capitalize costs related to the acquisition, development, rehabilitation, construction and improvement of properties. Capital improvements are costs that increase the value and extend the useful life of an asset. Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred. Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn. Recurring capital improvements typically include: appliances, carpeting and flooring, HVAC equipment, kitchen/bath cabinets, new roofs, site improvements and various exterior building improvements. Non-recurring, revenue generating capital improvements include, among other items: community centers, new windows, and kitchen/bath apartment upgrades. Revenue generating capital improvements will directly result in increased rental earnings or expense savings. The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.

The Company estimates that on an annual basis $800 and $780 per unit is spent on recurring capital expenditures in 2009 and 2008, respectively. During the three months ended June 30, 2009 and 2008, approximately $200 and $195 per unit, respectively, was estimated to be spent on recurring capital expenditures. For the six months ended June 30, 2009 and 2008, approximately $400 and $390 per unit, respectively, was estimated to be spent on recurring capital expenditures. The table below summarizes the actual total capital improvements incurred by major categories for the three and six months ended June 30, 2009 and 2008 and an estimate of the breakdown of total capital improvements by major categories between recurring and non-recurring, revenue generating capital improvements for the three and six months ended June 30, 2009 as follows:

	For the three months ended June 30,
	2009												2008
					Non-				Total				Total
	Recurring		Per		Recurring		Per		Capital		Per		Capital		Per
	Cap Ex		Unit(a)		Cap Ex		Unit(a)		Improvements		Unit(a)		Improvements		Unit(a)
New buildings	$	-	$	-	$	75	$	2	$	75	$	2	$	563	$	16
Major building improvements		1,139		31		2,466		68		3,605		99		4,299		122
Roof replacements		298		8		756		21		1,054		29		1,600		45
Site improvements		406		11		895		25		1,301		36		1,882		53
Apartment upgrades		1,574		44		3,708		103		5,282		147		7,810		221
Appliances		995		28		-		-		995		28		1,373		39
Carpeting/flooring		1,999		55		506		14		2,505		69		2,729		77
HVAC/mechanicals		642		18		1,392		38		2,034		56		2,840		80
Miscellaneous		181		5		399		11		580		16		917		26
Totals	$	7,234	$	200	$	10,197	$	282	$	17,431	$	482	$	24,013	$	679

(a)	Calculated using the weighted average number of units owned, including 35,360 core units, and 2008 acquisition units of 813 for the three months ended June 30, 2009; and 35,360 core units for the three months ended June 30, 2008.

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	For the six months ended June 30,
	2009												2008
					Non-				Total				Total
	Recurring		Per		Recurring		Per		Capital		Per		Capital		Per
	Cap Ex		Unit(b)		Cap Ex		Unit(b)		Improvements		Unit(b)		Improvements		Unit(b)
New buildings	$	-	$	-	$	595	$	16	$	595	$	16	$	1,219	$	34
Major building improvements		2,278		63		4,042		112		6,320		175		6,831		193
Roof replacements		596		16		841		24		1,437		40		2,049		58
Site improvements		796		22		894		25		1,690		47		2,663		75
Apartment upgrades		2,988		83		8,797		243		11,785		326		12,587		356
Appliances		2,167		60		34		1		2,201		61		2,415		68
Carpeting/flooring		3,997		110		1,108		31		5,105		141		5,017		142
HVAC/mechanicals		1,284		36		2,682		73		3,966		109		5,253		149
Miscellaneous		362		10		908		25		1,270		35		1,513		43
Totals	$	14,468	$	400	$	19,901	$	550	$	34,369	$	950	$	39,547	$	1,118

(b)	Calculated using the weighted average number of units owned, including 35,360 core units, and 2008 acquisition units of 813 for the six months ended June 30, 2009; and 35,360 core units for the six months ended June 30, 2008.

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

	For the three months ended June 30,
	2009												2008
					Non-				Total				Total
	Recurring		Per		Recurring		Per		Capital		Per		Capital		Per
	Cap Ex		Unit(c)		Cap Ex		Unit(c)		Improvements		Unit(c)		Improvements		Unit(c)
Core Communities	$	7,071	$	200	$	9,535	$	270	$	16,606	$	470	$	24,013	$	679
2008 Acquisition Communities		163		200		662		814		825		1,014		-		-
Sub-total		7,234		200		10,197		282		17,431		482		24,013		679
2009 Disposed Communities		-		-		-		-		-		-		443		598
2008 Disposed Communities		-		-		-		-		-		-		315		501
Corporate office expenditures(1)		-		-		-		-		452		-		1,118		-
Totals	$	7,234	$	200	$	10,197	$	282	$	17,883	$	482	$	25,889	$	674

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

(c)	Calculated using the weighted average number of units owned, including 35,360 core units, and 2008 acquisition units of 813 for the three months ended June 30, 2009; and 35,360 core units, 2009 disposed units of 741 and 2008 disposed units of 629 for the three months ended June 30, 2008.

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	For the six months ended June 30,
	2009												2008
					Non-				Total				Total
	Recurring		Per		Recurring		Per		Capital		Per		Capital		Per
	Cap Ex		Unit(d)		Cap Ex		Unit(d)		Improvements		Unit(d)		Improvements		Unit(d)
Core Communities	$	14,143	$	400	$	18,959	$	536	$	33,102	$	936	$	39,547	$	1,118
2008 Acquisition Communities		325		400		942		1,158		1,267		1,558		-		-
Sub-total		14,468		400		19,901		550		34,369		950		39,547		1,118
2009 Disposed Communities		49		400		126		1,025		175		1,425		988		1,333
2008 Disposed Communities		-		-		-		-		-		-		680		914
Corporate office expenditures(1)		-		-		-		-		762		-		2,189		-
Totals	$	14,517	$	400	$	20,027	$	552	$	35,306	$	952	$	43,404	$	1,119

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

(d)

Calculated using the weighted average number of units owned, including 35,360 core units, 2008 acquisition units of 813 and 2009 disposed units of 123 for the six months ended June 30, 2009; and 35,360 core units, 2009 disposed units of 741 and 2008 disposed units of 744 for the six months ended June 30, 2008.

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

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

Summary of Core Properties

The Company had 104 apartment communities with 35,360 units which were owned during the three and six months ended June 30, 2009 and 2008 (the "Core Properties"). The Company has acquired/developed an additional three apartment communities with 1,029 units during 2009 and 2008 (the "Acquisition Communities"). During 2009, the Company disposed of three apartment communities with a total of 741 units, which had partial results for 2009 and full year results for 2008 (the “2009 Disposed Communities”). During 2008, the Company disposed of fifteen apartment communities with a total of 1,227 units, which had partial results for 2008 (the “2008 Disposed Communities”). The results of these disposed properties have been classified as discontinued operations and are not included in the table below.

The inclusion of the Acquisition Communities generally accounted for the significant changes in operating results for the three and six months ended June 30, 2009. In addition, the reported income from operations include the results of one investment where the Company is the managing general partner that has been determined to be a VIE and consolidated with the Company.

A summary of the net operating income for Core Properties is as follows:

	Three Months												Six Months
	2009			2008			$ Change			% Change			2009			2008			$ Change			% Change
Rent	$	113,177		$	112,339		$	838			0.7	%	$	225,561		$	223,621		$	1,940			0.9	%
Utility recovery revenue		3,593			4,593			(1,000	)		(21.8	%)		10,927			11,193			(266	)		(2.4	%)
Rent including recoveries		116,770			116,932			(162	)		(0.1	%)		236,488			234,814			1,674			0.7	%
Property other income		5,194			5,240			(46	)		(0.9	%)		10,097			10,025			72			0.7	%
Total revenue		121,964			122,172			(208	)		(0.2	%)		246,585			244,839			1,746			0.7	%
Operating and maintenance		(49,339	)		(48,498	)		(841	)		(1.7	%)		(104,010	)		(101,761	)		(2,249	)		(2.2	%)
Net operating income	$	72,625		$	73,674		$	(1,049	)		(1.4	%)	$	142,575		$	143,078		$	(503	)		(0.4	%)

A summary of the net operating income for the Company as a whole is as follows:

	Three Months												Six Months
	2009			2008			$ Change			% Change			2009			2008			$ Change			% Change
Rent	$	117,538		$	114,034		$	3,504			3.1	%	$	234,299		$	226,971		$	7,328			3.2	%
Utility recovery revenue		3,668			4,604			(936	)		(20.3	%)		11,096			11,210			(114	)		(1.0	%)
Rent including recoveries		121,206			118,638			2,568			2.2	%		245,395			238,181			7,214			3.0	%
Property other income		5,312			5,342			(30	)		(0.6	%)		10,328			10,448			(120	)		(1.1	%)
Total revenue		126,518			123,980			2,538			2.0	%		255,723			248,629			7,094			2.9	%
Operating and maintenance		(51,612	)		(49,691	)		(1,921	)		(3.9	%)		(108,775	)		(103,806	)		(4,969	)		(4.8	%)
Net operating income	$	74,906		$	74,289		$	617			0.8	%	$	146,948		$	144,823		$	2,125			1.5	%

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Comparison of three months ended June 30, 2009 to the same period in 2008

Of the $3,504 increase in rental income, $2,666 is attributable to the Acquired Communities, and $838 is from the Core Properties, as the result of an increase of 0.6% in weighted average rental rates and a 0.1% increase in economic occupancy from 93.9% to 94.0%. Economic 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 rents and vacant units at market rents. Of the $936 decrease in utility recovery revenue, an increase of $64 is attributable to the Acquired Communities, offset by a $1,000 decrease to the Core Properties. The lower utility recovery revenue in 2009 is due primarily to warmer than normal temperatures compared to cooler temperatures in the spring of 2008, leading to decreased energy consumption and lower heat billed through to residents.

The remaining property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents decreased by $30. Of this decrease, $16 is attributable to an increase to the Acquired Communities, offset by a $46 decrease in Core Properties resulting primarily from decreases in early termination fees.

Interest income decreased $13 due to a lower level of invested excess cash on hand and lower interest rates as compared to the prior year.

Other income, which primarily reflects management and other real estate service fees recognized by the Company, increased by $4. This is due to an increase in post closing consultation fees recognized between periods. The second quarter of 2009 realized higher fees as a result of the first quarter 2009 property dispositions.

Of the $1,921 increase in operating and maintenance expenses, $1,080 is attributable to the Acquired Communities and $841 is attributable to the Core Properties. The increase in Core Properties is primarily due to increases in repairs & maintenance, and personnel, partially offset by decreases in property insurance expense, natural gas heating costs and property management general & administrative costs.

Repairs & maintenance increased $967, or 13.2%, primarily due to the 2008 period including $861 in recoveries from insurance claims. Without the impacts of the insurance recoveries, the recurring repairs & maintenance expenses increased only $106, or 1.4%, which reflects cost savings realized through the rebidding of selected service contracts, enabling reduced rates in this more competitive economic environment.

Personnel expense increased $847, or 7.6% primarily due to workers compensation self-insurance reserve adjustments in the 2009 period of $409, compared to no reserve changes in the 2008 period, making the increase before reserve adjustments $438, or 3.9%. The workers compensation reserve increases relate to the prior year claims reaching maturity.

Real estate taxes were up $395, or 3.6%, including the benefit of $406 in tax reassessment refunds in 2009 compared to none in 2008, partially offset by $224 of tax increases experienced at the eight properties acquired in 2006 which were reassessed based upon the acquisition price. After removing the effects of refunds and reassessments, real estate taxes were up $577, or 5.2%, which represents the typical tax increases being experienced across our portfolio.

Property insurance decreased by $956, or 33.9%, due to the current period including a reserve reduction of $409, compared to no reserve adjustment in 2008. In the 2009 period the Company also realized the benefit of $75 in subrogation counterclaims settled for two prior property losses. The remaining decrease before the reserve and counterclaim settlement adjustments was $472, or 16.7%, which primarily reflects a timing variance of the aggregate retention amount for the twelve month policy period ending October 31, 2009. Losses during the first few months of the policy period starting November 1, 2008 resulted in higher expenses as a large part of the self insurance portion of the policy ended up being front loaded. The second and third quarters will naturally result in expense savings as loss occurences will be subject to a much smaller deductible.

Natural gas heating costs were down $364, or 10.9% from a year ago due to a combination of lower commodity rates and decreased consumption. For the second quarter 2009 our natural gas weighted average cost was $8.30 per

Page 27

decatherm, compared to $8.74 per decatherm for the 2008 period, a 5.0% decrease. In addition, the overall consumption was lower in 2009 as the second quarter 2009 experienced warmer than normal temperatures, compared to the cooler temperatures in the spring of 2008.

Property management general and administrative costs decreased $197, or 5.3%, primarily due to staff reductions and other efficiency measures.

General and administrative expenses decreased in 2009 by $371, or 5.6%. General and administrative expenses as a percentage of total revenues were 5.0% for 2009 as compared to 5.2% for 2008. Incentive bonus and stock-based compensation expenses were down $529 in 2009 as compared to 2008, which reflect the decrease in the Company’s operating performance as compared to prior year. In addition, the Company recorded $126 in nonrecurring severance costs in the 2009 period.

Interest expense increased by $1,462, or 5.1% in 2009 primarily as a result of interest expense on the new debt of the Acquisition Communities, partially offset by higher capitalized interest in connection with increased development levels in the first quarter of 2009 as compared to 2008, and lower interest on the Senior Notes as a result of the $60,000 face value extinguishment that occurred in the fourth quarter 2008.

Depreciation and amortization expense increased $2,401, or 8.6% due to the depreciation on the Acquisition Communities and the capital additions to the Core Properties.

Included in discontinued operations for the three months ended June 30, 2009 are the residual operating results of the 2009 Disposed Communities. Included in discontinued operations for the three months ended June 30, 2008 are the operating results of the 2009 and 2008 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.

Comparison of six months ended June 30, 2009 to the same period in 2008

Of the $7,328 increase in rental income, $5,388 is attributable to the Acquired Communities, and $1,940 is from the Core Properties, as the result of an increase of 1.2% in weighted average rental rates, partially offset by a 0.3% decrease in economic occupancy from 93.9% to 93.6%. Of the $114 decrease in utility recovery revenue, an increase of $152 is attributable to the Acquired Communities, offset by a $266 decrease to the Core Properties. The lower utility recovery revenue in 2009 is due primarily to warmer than normal temperatures compared to cooler temperatures in the spring of 2008, leading to decreased energy consumption and lower heat billed through to residents.

The remaining property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents decreased by $120. Of this decrease, $192 is attributable to the Acquired Communities, which realized $363 of nonrecurring commercial revenues in the 2008 period; offset by a $72 increase in Core Properties resulting primarily from increases in early termination fees.

Interest income decreased $125 due to a lower level of invested excess cash on hand and lower interest rates as compared to the prior year.

Other income, which primarily reflects management and other real estate service fees recognized by the Company, increased by $90. This is due to an increase in post closing consultation fees recognized between periods in connection with property dispositions.

Of the $4,969 increase in operating and maintenance expenses, $2,243 is attributable to the Acquired Communities and $477 is attributable to the consolidation of the VIE reflecting a nonrecurring property tax refund of $389 that occurred in 2008. The balance, a $2,249 increase is attributable to the Core Properties and is primarily due to increases in repairs & maintenance, personnel and real estate taxes, partially offset by decreases in property insurance expense and property management general & administrative costs.

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Repairs & maintenance increased $1,008, or 7.7%, primarily due to the 2008 period including $658 in recoveries from insurance claims which did not occur in the current period. Without the impacts of the insurance recoveries, the recurring repairs & maintenance expenses increased only $350, or 2.7%.

Personnel expense increased $1,321, or 5.9% primarily due to workers compensation self-insurance reserve adjustments in the 2009 period of $639, compared to no reserve changes in the 2008 period, making the increase before reserve adjustments $682, or 3.0%.

Real estate taxes were up $1,037, or 4.7%, including the benefit of $551 in tax reassessment refunds in 2009 compared to none in 2008, partially offset by $473 of tax increases experienced at the eight properties acquired in 2006 which were reassessed based upon the acquisition price. After removing the effects of refunds and reassessments, real estate taxes were up $1,115, or 5.0%, which represents the typical tax increases being experienced across our portfolio.

Property insurance decreased by $1,378, or 24.4%, due to the current period including a reserve reduction of $639, compared to no reserve adjustment in 2008. In the 2009 period the Company also realized the benefit of $483 in subrogation counterclaims settled for several prior property losses. The remaining decrease before the reserve and counterclaim settlement adjustments was $256, or 4.5%, which primarily reflects a decrease in the property insurance cost due to a lower deductible in the 2009 period.

Property management general and administrative costs decreased $563, or 7.3%, primarily due to staff reductions and other efficiency measures.

General and administrative expenses decreased in 2009 by $700, or 5.5%. General and administrative expenses as a percentage of total revenues were 4.8% for 2009 as compared to 5.0% for 2008. Incentive bonus and stock-based compensation expenses were down $881 in 2009 as compared to 2008, which reflect the decrease in the Company’s operating performance as compared to prior year. In addition, the Company recorded $458 in nonrecurring severance costs in the 2009 period.

Interest expense increased by $1,997, or 3.4% in 2009 primarily as a result of interest expense on the new debt of the Acquisition Communities, partially offset by higher capitalized interest in connection with increased development levels in 2009 as compared to 2008, and lower interest on the Senior Notes as a result of the $60,000 face value extinguishment that occurred in the fourth quarter 2008.

Depreciation and amortization expense increased $4,974, or 9.0%, due to the depreciation on the Acquisition Communities and the capital additions to the Core Properties.

Included in discontinued operations for the six months ended June 30, 2009 are the operating results of the 2009 Disposed Communities. Included in discontinued operations for the six months ended June 30, 2008 are the operating results of the 2009 and 2008 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.

Funds From Operations

Pursuant to the revised definition of Funds From Operations (“FFO”) adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"), FFO is defined as net income (computed in accordance with accounting principles generally accepted in the United States of America ("GAAP")) excluding gains or losses from sales of property, noncontrolling interest, extraordinary items and cumulative effect of change in accounting principle plus depreciation from real property including adjustments for unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares. Because of the limitations of the FFO definition as published by NAREIT as set forth above, the Company has made certain interpretations in applying the definition. The Company believes all adjustments not specifically provided for are consistent with the definition.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after a specific and defined supplemental adjustment to exclude losses from early extinguishments of debt associated with the sales of real estate. The adjustment to exclude losses from early extinguishments of debt results when the sale of real estate

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encumbered by debt requires us to pay the extinguishment costs prior to the debt's stated maturity and to write-off unamortized loan costs at the date of the extinguishment. Such costs are excluded from the gains on sales of real estate reported in accordance with GAAP. However, we view the losses from early extinguishments of debt associated with the sales of real estate as an incremental cost of the sale transactions because we extinguished the debt in connection with the consummation of the sale transactions and we had no intent to extinguish the debt absent such transactions. We believe that this supplemental adjustment more appropriately reflects the results of our operations exclusive of the impact of our sale transactions.

Although our FFO as adjusted clearly differs from NAREIT's definition of FFO, and may not be comparable to that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance because we believe that, by excluding the effects of the losses from early extinguishments of debt associated with the sales of real estate, management and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO.

Neither FFO nor FFO as adjusted should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. Neither FFO nor FFO as adjusted represents cash generated from operating activities determined in accordance with GAAP, and neither is a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO and FFO as adjusted should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

FFO falls within the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K and as a result the Company is required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. Management believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, FFO should be considered in conjunction with net income as presented in the consolidated financial statements included elsewhere herein. Management believes that by excluding gains or losses related to dispositions of property and excluding real estate depreciation (which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company's real estate between periods or as compared to different companies. The Company also uses this measure to compare its performance to that of its peer group. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indication of the Company's performance or to cash flow as a measure of liquidity.

The calculation of FFO and reconciliation to GAAP net income available to common shareholders for the three and six months ended June 30, 2009 and 2008 are presented below (in thousands):

	Three Months				Six Months
	2009		2008		2009			2008
Net income attributable to common shareholders	$	6,020	$	8,451	$	16,922		$	34,103
Real property depreciation and amortization		29,629		28,207		59,050			56,158
Noncontrolling interest		2,262		3,552		6,419			14,237
Loss (gain) on disposition of property		16		1		(13,493	)		(29,848	)
FFO – Basic and Diluted, as defined by NAREIT		37,927		40,211		68,898			74,650
Loss from early extinguishment of debt in connection with sale of real estate		-		-		4,927			1,384
FFO – Basic and Diluted, as adjusted by the Company	$	37,927	$	40,211	$	73,825		$	76,034
Weighted average common shares/units outstanding (1):
Basic		45,227.0		44,960.3		45,211.3			45,306.7
Diluted		45,277.6		45,430.2		45,245.7			45,720.8

(1)	Basic includes common stock outstanding plus UPREIT Units which can be converted into shares of common stock. Diluted includes additional common stock equivalents.

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.

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Covenants

The credit agreement relating to the Company’s line of credit provides for the Company to maintain certain financial covenants. The Company was in compliance with these financial covenants for all periods presented. The line of credit has not been used for long-term financing but adds a certain amount of flexibility, especially in meeting the Company's acquisition goals. Many times it is easier to temporarily finance an acquisition or stock repurchases by short-term use of the line of credit, with long-term secured financing or other sources of capital replenishing the line of credit availability.

Economic Conditions

Substantially all of the leases at the Company’s apartment communities are for a term of one year or less, which enables the Company to seek increased rents upon renewal of existing leases or commencement of new leases. These short-term leases minimize the potential adverse effect of inflation on rental income, although residents may leave without penalty at the end of their lease terms and may do so if rents are increased significantly.

Historically, real estate has been subject to a wide range of cyclical economic conditions, which affect various real estate sectors and geographic regions with differing intensities and at different times. Starting in 2001 and continuing into 2004 many regions of the United States had experienced varying degrees of economic recession and certain recessionary trends, such as a temporary reduction in occupancy and reduced pricing power limiting the ability to aggressively raise rents. Starting in the second half of 2004 and continuing into 2007, the Company saw a reversal of these recessionary trends. However, throughout 2008 and continuing into 2009, the sub-prime issue put significant pressure on the mortgage lending industry. This led to problems in the financial system which developed into the worst recession since the Great Depression. The credit markets tightened, consumer confidence plunged and unemployment soared. The Company has continued to receive favorable financing at market rates of interest. Its occupancy at 95.0% in 2008 and 2009 was the highest it has been since 2000 and financial performance continued strong. However, a recessionary economy and increasing job losses typically slow household formations which could affect occupancy and decrease the Company's ability to raise rents. In light of this, the Company will continue to review our business strategy throughout the year. However, we believe that given our B property type and the geographic regions in which we are located, the Company's financial performance will be affected less negatively than its peers.

Declaration of Dividend

Contingency

The Company is not a party to any legal proceedings which are expected to have a material adverse effect on the Company's liquidity, financial position or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability and property 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.

Recently Adopted and Recently Issued Accounting Standards

Disclosure of recently adopted and recently issued accounting standards is incorporated herein by reference to the discussion under Part I, Item 1, Notes to Consolidated Financial Statements, Note 3.

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HOME PROPERTIES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure is interest rate risk. At June 30, 2009 and December 31, 2008, approximately 93% and 95%, respectively, of the Company's debt bore interest at fixed rates. At June 30, 2009 and December 31, 2008, approximately 87% and 89%, respectively, of the Company's debt was secured and bore interest at fixed rates. The secured fixed rate debt had weighted average maturities of approximately 5 years for both periods and a weighted average interest rate of 5.78% and 5.77% at June 30, 2009 and December 31, 2008, respectively. The remainder of the Company's secured debt bore interest at variable rates with a weighted average maturity of approximately 13 years for both periods and a weighted average interest rate of 1.73% and 2.02%, at June 30, 2009 and December 31, 2008, respectively. The Company does not intend to utilize a significant amount of permanent variable rate debt to acquire properties in the future. On occasion, the Company may use its line of credit in connection with a property acquisition or stock repurchase with the intention to refinance at a later date. The Company believes that increases in interest expense as a result of inflation would not significantly impact the Company's distributable cash flow.

At June 30, 2009 and December 31, 2008, the fair value of the Company's fixed and variable rate secured debt amounted to a liability of $2.09 billion and $2.08 billion, respectively, compared to its carrying amount of $2.07 billion and $2.11 billion, respectively. The Company estimates that a 100 basis point increase in market interest rates at June 30, 2009 would have changed the fair value of the Company's fixed and variable rate secured debt to a liability of $2.01 billion. At June 30, 2009 and December 31, 2008, the fair value of the Company’s total debt, including the Senior Notes and line of credit, amounted to a liability of $2.32 billion and $2.26 billion, respectively, compared to its carrying amount of $2.31 billion and $2.32 billion, respectively.

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 June 30, 2009, the Company had no other material exposure to market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the officers who certify the Company’s financial reports and to the other members of senior management and the Board of Directors.

The principal executive officer and principal financial officer evaluated, as of June 30, 2009, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15-d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and have determined that such disclosure controls and procedures are effective.

There have been no changes in the internal controls over financial reporting identified in connection with that evaluation, or that occurred during the second quarter of the year ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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HOME PROPERTIES, INC.

PART II - OTHER INFORMATION

ITEM 1A.

RISK FACTORS

Refer to the Risk Factors disclosure in the Company’s Form 10-K for the year ended December 31, 2008. There have been no material changes in these risk factors during the six months ended June 30, 2009 and through the date of this report.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES

In 1997, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units (“Company Program”). 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 and applicable withholding tax. In such event, the common stock used to pay the exercise price and tax withholding 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, 2008, the Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the Company Program. During the first quarter of 2009, the Company did not repurchase any shares under the Company Program. The following table summarizes the total number of shares/units repurchased by the Company during the three months ended June 30, 2009:

							Maximum
	Total		Average		Total shares/units		shares/units
	shares/units		price per		purchased as part of		available under
Period	purchased(1)		share/unit		Company Program		Company Program

Balance April 1, 2009:								2,291,160
April 2009		959	$	34.80		-		2,291,160
May 2009		13,806		32.89		-		2,291,160
June 2009		1,638		33.71		-		2,291,160
Total Second Quarter 2009		16,403	$	33.09		-		2,291,160

(1)	During the three months ended June 30, 2009, the Company repurchased 16,403 shares of common stock through share repurchase by the transfer agent in the open market in connection with the Company's Dividend Reinvestment and Direct Stock Purchase Plan, which are included in this table.

ITEM 6.

EXHIBITS


Exhibit 10.1	Amended and Restated Lease Agreement Between Clinton Square Asset Holding Associates, L.P. and Home Properties, L.P., dated July 6, 2009
Exhibit 10.2	Amendment No. 101 to Second Amended and Restated Agreement of Limited Partnership
Exhibit 31.1	Section 302 Certification of Chief Executive Officer*
Exhibit 31.2	Section 302 Certification of Chief Financial Officer*
Exhibit 32.1	Section 906 Certification of Chief Executive Officer**
Exhibit 32.2	Section 906 Certification of Chief Financial Officer**

*Filed herewith

**Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOME PROPERTIES, INC.
	(Registrant)

	Date:	August 7, 2009



	By:	/s/ Edward J. Pettinella
		Edward J. Pettinella
		President and Chief Executive Officer


	Date:	August 7, 2009



	By:	/s/ David P. Gardner
		David P. Gardner
		Executive Vice President and
		Chief Financial Officer

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