Item 1. Business
The Company -----------
Home Properties, Inc. ("Home Properties" or the "Company") is a self-administered and self-managed real estate investment trust ("REIT") that owns, operates, acquires, develops and rehabilitates apartment communities. The Company's properties are regionally focused in select Northeast, Mid-Atlantic, Midwest and Southeast Florida markets of the United States. The Company was formed in November 1993, to continue and expand the operations of Home Leasing Corporation ("Home Leasing"). The Company completed an initial public offering of 5,408,000 shares of common stock (the "IPO") on August 4, 1994.
The Company conducts its business through Home Properties, L.P. (the "Operating Partnership"), a New York limited partnership in which the Company held a 67.7% partnership interest as of December 31, 2004 (66.7% at December 31, 2003) (such interest has been calculated as the percentage of outstanding common shares divided by the total outstanding common shares and Operating Partnership Units outstanding) and two management companies (together, the "Management Companies") - Home Properties Management, Inc. ("HP Management") and Home Properties Resident Services, Inc. ("HPRS"), both of which are Maryland corporations.
Home Properties, through its affiliates described above, as of December 31, 2004, operated 169 communities with 47,378 apartment units. Of these, 41,776 units in 150 communities are owned outright (the "Owned Properties"), 2,793 units in 14 communities are managed and partially owned by the Company as general partner, and 2,809 units in five communities are managed for other owners (collectively, the "Managed Properties"). Please refer to Note 10 on page for discussion on segment information.
The Owned Properties and the Managed Properties (collectively, the "Properties") are concentrated in the following market areas:
Apts. Apts. Managed As Apts. Apt. Market Area Owned General Partner Fee Managed Totals ----------- ----- --------------- ----------- ------ Suburban New York City 7,743 56 - 7,799 Suburban Washington, D.C. 7,506 - 1,387 8,893 Philadelphia, PA 5,913 - - 5,913 Baltimore, MD 5,644 - 1,422 7,066 Detroit, MI 5,046 - - 5,046 Upstate New York 4,567 812 - 5,379 Chicago, IL 2,242 - - 2,242 Boston, MA 1,252 - - 1,252 Southeast, FL 836 - - 836 Portland, ME 595 - - 595 Dover, DE 432 - - 432 Columbus, OH - 868 - 868 Western PA - 1,057 - 1,057 ------ ----- ----- ------ Total # of Units 41,776 2,793 2,809 47,378 ====== ===== ===== ====== Total Number of Communities 150 14 5 169
The Company's mission is to maximize long-term shareholder value by acquiring, repositioning, and managing market-rate apartment communities while enhancing the quality of life for its residents and providing employees with opportunities for growth and accomplishment, and demonstrating personal integrity and dedication at all times. Our vision is to be a prominent owner and manager of market-rate apartment communities, predominantly B class, typically with 150 units or more located in selected suburban markets of metropolitan areas with substantial barriers to new development. The metropolitan areas we have selected include New York City, Washington, D.C., Boston, Baltimore, Philadelphia, Southeast Florida, Chicago and Detroit. We expect to maintain or grow portfolios in markets that profitably support our mission as economic conditions permit.
The Company's business strategies include: (i) aggressively managing and improving its communities to achieve increased net operating income; (ii) acquiring additional apartment communities with attractive returns at prices below replacement costs; (iii) disposing of properties that have reached their potential, are less efficient to operate, or are located in markets where growth has slowed to a pace below the markets targeted for acquisition; and (iv) maintaining a strong and flexible capital structure with cost effective access to the capital markets.
Structure ---------
The Company was formed in November 1993 as a Maryland corporation and is the general partner of the Operating Partnership. On December 31, 2004, it owned a 69.3% legal interest in the Operating Partnership (such interest has been calculated as the percentage of outstanding common and preferred shares owned by the Company divided by the total outstanding common shares, preferred shares, and Operating Partnership Units ("UPREIT Units") outstanding) - one percent as sole general partner and the remainder as a limited partner through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of the limited partner, Home Properties Trust. A portion of the limited partner interests held by Home Properties Trust as of December 31, 2004 consisted of all of the Series D and F Limited Partnership Units (2,650,000 units, or 5.2% of the total). Those preferred interests in the Operating Partnership have rights and preferences that mirror the rights and preferences of the holders of the related series of preferred shares in the Company. The remaining units (32,116,746 or 63.1% of the total) held by Home Properties Trust have basically the same rights as the other limited partner interests (the "Units") in the Operating Partnership. Those other Units are owned by certain individuals and entities who received Units in the Operating Partnership as consideration for their interests in entities owning apartment communities purchased by the Operating Partnership, including certain officers of the Company.
The Operating Partnership is a New York limited partnership formed in December 1993. Holders of Units in the Operating Partnership may redeem a Unit for one share of the Company's common stock or cash equal to the fair market value at the time of the redemption, at the option of the Company. Management expects that it will continue to utilize Units as a form of consideration for a portion of its acquisition properties.
Effective January 1, 2003, the Management Companies became wholly owned subsidiaries of the Company, and as a result the accompanying consolidated financial statements include the accounts of the Management Companies. Prior to January 1, 2003, investments in these entities were accounted for using the equity method. Both of the Management Companies are Maryland corporations and, effective January 1, 2001, both converted to taxable REIT subsidiaries under the Tax Relief Extension Act of 1999. HP Management was formed in January 1994 and HPRS was formed in December 1995. The Management Companies manage, for a fee, certain of the residential and development activities of the Company and provide construction, development and redevelopment services for the Company. As of December 31, 2002, the Operating Partnership held 95% of the economic interest in HP Management and 99% of the economic interest in HPRS through non-voting common stock. Nelson and Norman Leenhouts (the "Leenhoutses") held the remaining five percent and one percent interest, respectively, through the ownership of voting common stock. Effective January 1, 2003, the Operating Partnership acquired all of the shares held by the Leenhoutses.
In September 1997, Home Properties Trust ("QRS") was formed as a Maryland real estate trust and as a qualified REIT subsidiary, with 100% of its shares being owned by the Company. The QRS has been admitted as a limited partner of the Operating Partnership and the Company transferred all but one percent of its interest in the Operating Partnership to the QRS. Effective December 30, 2002, the Company transferred 100% of its ownership in the QRS to a newly formed entity, Home Properties I, LLC. Home Properties I, LLC is a wholly owned subsidiary of the Company.
The Company currently has approximately 1,600 employees and its executive offices are located at 850 Clinton Square, Rochester, New York 14604. Its telephone number is (585) 546-4900.
Operating Strategies --------------------
The Company will continue to focus on enhancing the investment returns of its Properties by: (i) acquiring apartment communities and repositioning those properties for long-term growth at prices that provide a positive spread over the Company's long-term blended cost of capital; (ii) recycling assets by disposing of properties that have reached their potential or are less efficient to operate due to size or remote location; (iii) balancing its decentralized property management philosophy with the efficiencies of centralized support functions and accountability including volume purchasing (iv) enhancing the quality of living for the Company's residents by improving the service and physical amenities available at each community every year; (v) adopting new technology so that the time and cost spent on administration can be minimized while the time spent attracting and serving residents can be maximized; (vi) continuing to utilize its written "Pledge" of customer satisfaction that is the foundation on which the Company has built its brand recognition; and (vii) focusing on reducing expenses while constantly improving the level of service to residents.
Acquisition and Sale Strategies -------------------------------
The Company's strategy is to grow primarily through acquisitions in the suburbs of major metropolitan markets that have significant barriers to new construction, easy access to the Company's headquarters, and enough apartments available for acquisition to achieve a critical mass. Targeted markets also possess other characteristics, including acquisition opportunities below replacement costs, a mature housing stock and stable or moderate job growth. The Company currently expects that its growth will be focused within suburban sub-markets of select metropolitan areas within the Northeast, Mid-Atlantic, Midwest and Southeast Florida regions of the United States, where it has already established a presence. The largest metropolitan areas the Company will focus on include New York City, Washington, D.C., Boston, Baltimore, Philadelphia, Southeast Florida, Chicago and Detroit. The Company may expand into new markets that possess the characteristics described above. Continued geographic specialization is expected to have a greater impact on operating efficiencies versus widespread accumulation of properties. The Company will continue to pursue the acquisition of individual properties as well as multi-property portfolios. It may also consider strategic investments in other apartment companies. The Company has anticipated closing on acquisitions of $200 million in its budget for 2005.
During 2004, the Company acquired ten communities with a total of 2,486 units for an aggregate consideration of approximately $247.5 million (before fair market value adjustment for assumed debt), or an average of approximately $99,600 per apartment unit. The weighted average expected first year capitalization rate for the acquired communities was 6.7%. Capitalization rate ("cap rate") is defined as the rate of interest used to convert the first year expected net operating income ("NOI") less a 3.0% management fee into a single present value. NOI is defined by the Company as rental income and property other income less operating and maintenance expenses. The acquisitions were concentrated in New Jersey, Boston, Washington, D.C. and North Lauderdale.
During 2004, the Company completed the sale of five communities with a total of 1,646 units for an aggregate consideration of approximately $92.5 million, at a weighted average expected first-year cap rate of 8.2%. The properties sold were either in slower growth markets or less efficient to operate due to their remote locations and/or smaller size. The Company recycled the proceeds from those properties that were expected to produce a weighted average unleveraged internal rate of return ("IRR") of 8.0% with the purchase of properties expected to produce an unleveraged IRR of 9.1%. IRR is defined as the discount rate at which the present value of the future cash flows of the investment is equal to the cost of the investment. Several of the properties sold were originally acquired through transactions where the sellers took interests in the Operating Partnership as consideration to provide them with the opportunity to defer tax obligations. We refer to these transactions as "UPREIT transactions." Generally, in UPREIT transactions, the Company has made certain commitments to the sellers regarding the Company's sale of the property. As a result, Section 1031 exchanges were used to defer taxable gains of the UPREIT investor.
The Company will continue to contemplate the sale of certain of its communities. The Company has currently identified three communities for potential sale during 2005. The total estimated fair market value of these communities is in excess of $100 million. The communities are in three different markets and have reached their potential. The Company will not sell these properties, however, unless it achieves targeted prices at levels which would allow it to reinvest the proceeds at higher returns by making acquisitions with repositioning potential. Two of these properties were originally acquired through an UPREIT transaction. Therefore, the sales will have to be matched with suitable acquisitions using a tax deferred exchange. The Company has anticipated closing on sales of $50 million in its budget for 2005.
Financing and Capital Strategies --------------------------------
The Company intends to adhere to the following financing policies: (i) maintaining a ratio of debt-to-total market capitalization (total debt of the Company as a percentage of the market value of outstanding diluted common stock (including the common stock equivalents of the convertible preferred stock, and Units plus total debt) of approximately 55% or less; (ii) utilizing primarily fixed rate debt; (iii) varying debt maturities to avoid significant exposure to interest rate changes upon refinancing; and (iv) maintaining a line of credit so that it can respond quickly to acquisition opportunities.
On December 31, 2004, the Company's debt was approximately $1.6 billion and the debt-to-total market capitalization ratio was 42.5% based on the year-end closing price of the Company's stock of $43.00. The weighted average interest rate on the Company's mortgage debt as of December 31, 2004 was 5.96% and the weighted average maturity was approximately eight years. Debt maturities are staggered, ranging from November 2005, through January 2042. As of December 31, 2004, the Company had an unsecured line of credit facility from M&T Bank of $115 million. This facility is available for acquisition and other corporate purposes and bears an interest rate at 1.05% over the one-month LIBOR rate. As of December 31, 2004, the one-month LIBOR rate was 2.4% and there was $58 million outstanding on the line of credit. Included in the consolidated balance sheet of the Company as of December 31, 2004 is $77.6 million in mortgage notes payable associated with the consolidated affordable limited partnerships. The weighted average interest rate on these mortgages as of December 31, 2004 was 5.22% with debt maturities ranging from 2005 to 2042.
On November 23, 2004, the Company signed a supplemental demand note with M&T Bank. The note has a maximum principal amount of $42 million. Borrowings on the note bear interest at 1.25% over the one-month LIBOR rate. The demand note was entered into to fund the Company's stock repurchase program. The Company had no outstanding balance on the note as of December 31, 2004.
Management expects to continue to fund a portion of its continued growth by taking advantage of its UPREIT structure and using UPREIT Units as currency in acquisition transactions. No UPREIT Units were issued in connection with the two property acquisitions during 2003. During 2004, the Company issued $12.1 million worth of UPREIT Units as consideration in acquiring two properties in the New Jersey region. It is difficult to predict the level of demand from sellers for this type of transaction.
The Company also intends to continue to pursue other equity transactions to raise capital with limited transaction costs. During 2002, the Company closed on two common equity offerings totaling 704,602 shares of the Company's common stock, at a weighted average price of $30.99 per share, resulting in net proceeds to the Company of approximately $21.8 million. Also in 2002, the Company issued 2,400,000 shares of its 9.00% Series F Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"). This offering generated net proceeds of approximately $58 million. The Company raised approximately $17.6 million (net of $5.9 million share repurchase) in 2004 under its Dividend Reinvestment and Direct Stock Purchase Plan (the "Dividend Reinvestment Plan").
The Company's Board of Directors have approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units. Shares or units may be repurchased through the open market or in privately-negotiated transactions. The Company's strategy is to opportunistically repurchase shares at a discount to its underlying net asset value, thereby continuing to build value for long-term shareholders. In 2003, the Company did not repurchase any of its outstanding common stock or UPREIT Units. During 2004, the Company repurchased 1,135,800 shares of its outstanding common stock at a cost of $47.4 million at a weighted average price of $41.72 per share. From January 1, 2005 through February 16, 2005, the Company repurchased 1,300,700 additional shares at a cost of $53.3 million, leaving a remaining share authorization level of 699,300 shares. On February 16, 2005, the Board of Directors approved a 2,000,000-share increase in the stock repurchase program, resulting in an authorization level of 2,699,300 shares.
Competition -----------
The Company competes with other multifamily owners and operators and other real estate companies in seeking properties for acquisition and in attracting potential residents. The Company's properties are primarily in developed areas where there are other properties of the same type which directly compete for residents. The Company, however, believes that its focus on service and resident satisfaction gives it a competitive advantage. The Company also believes that the moderate level of new construction of multifamily properties in its markets in 2004, generally requiring higher rental rates, will not have a material adverse effect on its turnover rates, occupancies or ability to increase rents and minimize operating expenses. During the past few years, the Company has encountered competition as it seeks attractive properties in broader geographic areas. Given the perceived depth of available opportunities, this increased level of competition has not prevented the Company from being able to meet its long-term growth expectations.
Market Environment ------------------
From the IPO through 2001, the markets in which Home Properties operates could be characterized as stable, with moderate levels of job growth. Starting in 2001 and continuing through 2002, many regions of the United States had experienced varying degrees of economic recession resulting in negative job growth for both the country as a whole and the Company's markets. During 2003, that trend started to reverse, with only slight job loss for the country and a very small positive growth in the Company's markets. In 2004, there was more significant job growth at 1.7% for the country and 1.0% growth for the Company's markets.
The information on the Market Demographics and Multifamily Supply and Demand tables on pages 8 and 9 were compiled by the Company from the sources indicated on the tables. The methods used include estimates and, while the Company feels that the estimates are reasonable, there can be no assurance that the estimates are accurate. There can also be no assurance that the historical information included on the table will be consistent with future trends.
New construction in the Company's markets is low, relative to the existing multifamily housing stock and compared to other regions of the country. Most of the existing housing stock in the Company's markets was built before 1980. Zoning restrictions, a scarcity of land and high construction costs make new development difficult to justify in many of the Company's markets. In 2004, Home Properties' markets represented 21.8% of the total estimated existing U.S. multifamily housing stock, but only 10.9% of the country's estimated net new supply of multifamily housing units.
An analysis of future multifamily supply compared to projected multifamily demand can indicate whether a particular market is tightening, softening or in equilibrium. The fourth to last column in the Multifamily Supply and Demand table on Page 9 reflects current estimated net new multifamily supply as a percentage of new multifamily demand for the Company's markets and the United Sates. In 2000, net new multifamily supply as a percent of net new multifamily demand in the Home Properties markets was approximately 49%, compared to a national average of 98%. Starting in 2001 and continuing through 2003, the recession reversed historical trends, with the net increase in the multifamily rental housing stock exceeding the estimated number of new units needed to satisfy increased demand, resulting in an estimated oversupply. In 2004, net new multifamily supply as a percent of net new multifamily demand in the Home Properties markets was approximately 55%, compared to a national average of 65%. Home Properties markets seem to be tightening and compare favorably to the country as a whole on a measurement of supply/demand equilibrium.
The third to the last column in the Multifamily Supply and Demand table on page 9 shows the net new multifamily supply as percent of existing multifamily housing stock. In the Company's markets, net new supply only represents 0.4% of the existing multifamily housing stock. This compares to the national average net new multifamily supply estimates at 0.8% of the multifamily housing stock.
Market Demographics
December December 2004 Job Job Multifamily % of Growth Growth 2004 Units as a % 2004 Home Properties 2004 Trailing Trailing December Median of Total Multifamily Owned Number of 12 Months 12 Months Unemployment Home Housing Units Housing MSA Market Area Units Households % Change Actual Rate Value Stock (5) Stock (6) --------------- ----- ---------- -------- ------ ---- ----- --------- ---------
Northern VA/DC 18.0% 2,003,091 2.8% 78,800 2.9% 231,968 31.0% 651,360 Baltimore, MD 13.5% 1,008,010 2.2% 27,100 4.2% 171,213 22.1% 239,499 Eastern PA (1) 14.2% 2,210,813 0.3% 8,400 4.8% 142,306 19.5% 461,904 Detroit, MI 12.1% 1,716,904 (1.2%) (24,600) 6.9% 155,126 18.2% 331,527 Downstate NY (2) 10.3% 2,086,500 1.2% 24,900 3.5% 286,899 16.2% 363,571 Northern NJ (3) 8.2% 2,143,310 1.9% 51,800 3.6% 267,573 24.9% 568,541 Chicago, IL 5.4% 3,065,766 0.3% 11,400 5.7% 195,226 34.3% 1,107,295 Rochester, NY 4.0% 424,006 (1.0%) (5,200) 5.4% 122,019 19.7% 89,562 Buffalo, NY 3.9% 465,606 (0.2%) (1,300) 6.0% 115,366 18.0% 91,589 Boston, MA 3.0% 2,373,434 0.1% 2,100 3.5% 270,151 32.3% 800,551 Syracuse, NY 3.0% 287,321 0.9% 3,300 5.6% 106,435 19.1% 61,013 Southeast FL (4) 2.0% 2,023,093 2.0% 44,900 4.6% 153,182 41.9% 956,433 Portland, ME 1.4% 111,872 1.1% 1,700 2.7% 173,458 20.6% 26,201 Delaware 1.0% 231,792 2.0% 6,500 3.9% 163,895 19.8% 48,741 ------------------------------------------------------------------------------------------------------------------------------------ Home Properties Markets 100.0% 20,151,518 1.0% 229,800 4.3% 202,909 26.9% 5,797,787 ------------------------------------------------------------------------------------------------------------------------------------ United States 109,949,228 1.7% 2,174,000 5.1% 141,249 22.0% 26,541,693
(1) Eastern Pennsylvania is defined for this report as Philadelphia, PA MSA and Allentown-Bethlehem-Easton MSA.
(2) Downstate New York is defined for this report as the Hudson Valley Region of Dutchess Co MSA, Newburgh NY-PA MSA, Putnam an Ulster Counties; Long Island, NY (Nassau-Suffolk MSA); Westchester County MSA; and Rockland County MSA.
(3) Northern New Jersey is defined for this report as Middlesex-Somerset-Hunterdon MSA, Bergen-Passaic MSA, Monmouth-Ocean MSA, and Newark MSA.
(4) Southeast Florida is defined for this report as Ft. Lauderdale, FL MSA, Miami, FL MSA and West Palm, FL MSA
(5) Based on Claritas 2004 estimates calculated from the 2000 U.S. Census figures.
(6) 2004 Multifamily Housing Stock is from Claritas estimates based on the 2000 U.S. Census.
Sources: Bureau of Labor Statistics (BLS); Claritas, Inc.; US Census Bureau - Manufacturing and Construction Div.; New York State Department of Labor, Div. Of Research and Statistics.
Data collected is data available as of February 17, 2005 and in some cases may be preliminary.
BLS is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics.
Claritas Inc. is a leading provider of precision marketing solutions and related products/services.
U.S. Census Bureau's parent federal agency is the U.S. Dept. of Commerce, which promotes American business and trade.
Multifamily Supply and Demand
Estimated Estimated Estimated Estimated Estimated Net New Net New 2004 2004 Estimated 2004 Multifamily Multifamily New Multi- 2004 New Supply as a Supply as a Expected Supply of family Net New Multifamily % of New % of Expected Excess Multi- Obsole- Multifamily Household Multifamily Multifamily Excess Revenue MSA Market Area family(7) scence(8) Supply (9) Demand (10) Demand Stock Demand (11) Growth (12) ----------------------------------------------------------------------------------------------------------------------------------
Northern VA/DC 9,296 3,257 6,039 16,270 37.1% 0.9% 10,231 1.6% Baltimore, MD 2,538 1,197 1,341 3,999 33.5% 0.6% 2,658 1.1% Eastern PA (1) 4,991 2,310 2,682 1,095 245.0% 0.6% (1,587) (0.3%) Detroit, MI 3,649 1,658 1,991 (2,994) (66.5%) 0.6% (4,986) (1.5%) Downstate NY (2) 6,200 1,818 4,382 2,692 162.8% 1.2% (1,690) (0.5%) Northern NJ (3) 3,328 2,843 485 8,619 5.6% 0.1% 8,133 1.4% Chicago, IL 8,320 5,536 2,784 2,607 106.8% 0.3% (177) (0.0%) Rochester, NY 271 448 (177) (682) 26.0% (0.2%) (505) (0.6%) Buffalo, NY 561 458 103 (156) (65.6%) 0.1% (259) (0.3%) Boston, MA 5,140 4,003 1,137 452 251.4% 0.1% (685) (0.1%) Syracuse, NY 106 305 (199) 421 (47.2%) (0.3%) 620 1.0% Southeast FL (4) 6,602 4,782 1,819 12,546 14.5% 0.2% 10,727 1.1% Portland, ME 225 131 94 234 40.2% 0.4% 140 0.5% Delaware 369 244 125 858 14.6% 0.3% 733 1.5% ---------------------------------------------------------------------------------------------------------------------------------- Home Properties Markets 51,596 28,990 22,606 41,260 54.8% 0.4% 18,654 0.3% ---------------------------------------------------------------------------------------------------------------------------------- United States 340,696 132,708 207,987 318,612 65.3% 0.8% 110,625 0.4%
(1)-(6) see footnotes prior page
(7) Estimated 2004 New Supply of Multifamily = Multifamily permits (2004 figures U.S. Census Bureau, Mfg. and Constr. Div., 5+ permits only) adjusted by the average % of permits resulting in a construction start (estimated at 95%).
(8) Estimated 2004 Multifamily Obsolescence = 0.5% of Estimated 2004 multifamily housing stock.
(9) Estimated 2004 Net New Multifamily Supply = Estimated 2004 New Supply of Multifamily - Estimated 2004 multifamily obsolescence.
(10) Estimated 2004 New Multifamily Household Demand = Trailing 12 month job growth (Nonfarm, not seasonally adjusted payroll employment figures) (12/31/03-12/31/04) multiplied by the expected % of new household formations resulting from new jobs (66.7%) and the % of multifamily households in each market (based on Claritas estimates).
(11) Expected Excess Demand = Estimated 2004 New Multifamily Household Demand - Estimated 2004 Net New Multifamily Supply.
(12) Expected Excess Revenue Growth = Expected Excess Demand divided by 2004 Multifamily Housing Stock.
Regulation ----------
Many laws and governmental regulations are applicable to the Properties and changes in the laws and regulations, or their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. In addition, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1990, to be accessible to the handicapped. Non-compliance with the ADA or the FHAA could result in the imposition of fines or an award of damages to private litigants. Management believes that the Properties are substantially in compliance with present ADA and FHAA requirements.
Under various laws and regulations relating to the protection of the environment, an owner of real estate may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in its property. These laws often impose liability without regard to whether the owner was responsible for, or even knew of, the presence of such substances. The presence of such substances may adversely affect the owner's ability to rent or sell the property or use the property as collateral. Independent environmental consultants have conducted "Phase I" environmental audits (which involve visual inspection but not soil or groundwater analysis) on substantially all of the Owned Properties. Phase I audit reports did not reveal any environmental liability that would have a material adverse effect on the Company. In addition, the Company is not aware of any environmental liability that management believes would have a material adverse effect on the Company. There is no assurance that Phase I reports would reveal all environmental liabilities or that environmental conditions not known to the Company may exist now or in the future which would result in liability to the Company for remediation or fines, either under existing laws and regulations or future changes to such requirements.
Under the Federal Fair Housing Act and state fair housing laws, discrimination on the basis of certain protected classes is prohibited. Violation of these laws can result in significant damage awards to victims. The Company has a strong policy against any kind of discriminatory behavior and trains its employees to avoid discrimination or the appearance of discrimination. There is no assurance, however, that an employee will not violate the Company's policy against discrimination and thus violate fair housing laws. This could subject the Company to legal actions and the possible imposition of damage awards.
Company Web Site and Access to Filed Reports --------------------------------------------
The Company maintains an Internet Web site at www.homeproperties.com. The Company provides access to its reports filed with the Securities and Exchange Commission ("SEC") through this Web site. These reports are available as soon as reasonably practicable after the reports are filed electronically with the SEC. In addition, paper copies of annual and periodic reports filed with the SEC may be obtained by contacting Corporate Secretary, Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604. The address is also included within the SEC filings or under "Investment Information, Financial Information," on the Company's Web site.
Current copies of the Company's Corporate Governance Guidelines and Charters for the Audit, Compensation, Corporate Governance/Nominating and Real Estate Investment Committees of the Board of Directors are also available on the Company's website under the heading "Investment Information/Investor Overview.". Copies of the Corporate Governance Guidelines and the Committee Charters are also available at no charge to stockholders upon request addressed to the Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.
Item 2.
Item 2. Properties ------------------
As of December 31, 2004, the Owned Properties consisted of 150 multifamily residential communities containing 41,776 apartment units. At the time of the IPO (August 4, 1994), Home Properties owned 11 communities containing 3,065 units and simultaneously with the closing of the IPO acquired an additional four communities containing 926 units. From the time just prior to the IPO to December 31, 2004, the Company experienced a compounded annualized growth rate of 28.5% in the number of apartment units it owned. In 2004, Home Properties acquired 2,486 apartment units in ten communities for a total purchase price of approximately $247.5 million. Also in 2004, the Company sold five communities with a total of 1,646 units for total consideration of $92.5 million. From January 1, 2005 through March 1, 2005, the Company acquired three communities with 550 units in three unrelated transactions for a total purchase price of $40.0 million.
The Owned Properties are generally located in established markets in suburban neighborhoods and are well maintained and well leased. Average economic occupancy at the Owned Properties was 93.1% for 2004. Occupancy is defined as total possible rental income, net of vacancy and bad debt expense as a percentage of total possible rental income. Total possible rental income is determined by valuing occupied units at contract rates and vacant units at market rents. The Owned Properties are typically two- and three-story garden style apartment buildings in landscaped settings and a majority are of brick or other masonry construction. The Company believes that its strategic focus on appealing to middle income and senior residents and the quality of the services it provides to such residents results in lower resident turnover. Average turnover at the Owned Properties was approximately 45% for 2004, which is significantly below the national average of 61.3% for garden-style apartments.
Resident leases are generally for a one year term. Security deposits equal to one month's rent are generally required.
Certain of the Owned Properties secure mortgage loans. See Schedule III contained herein (F-45 to).
The table on the following pages illustrates certain of the important characteristics of the Owned Properties as of December 31, 2004.
Communities Wholly Owned and Managed by Home Properties
(3) (2) 2004 2003 2004 2003 Avg 2004 Average Average Avg Mo Avg Mo # Age Apt % % % Rent Rent 12/31/2004 Of In Year Size Resident Occu- Occu- Rate Rate Total Cost Regional Area Apts Years Acq (Sq Ft) Tumover pancy pancy per Apt per Apt (000) ------------- ---- ----- --- ------- ------- ----- ----- ------- ------- ----- Core Communities (1) DE-Newark HP of Newark 432 36 1999 856 49% 94% 91% $785 $736 $26,547 IL-Chicago Blackhawk 371 43 2000 860 61% 89% 92% 856 842 22,197 IL-Chicago Colonies Apts. 672 30 1998 656 50% 92% 90% 703 707 32,565 IL-Chicago Colony Apts. 783 31 1999 704 48% 93% 93% 829 830 50,837 IL-Chicago Courtyards 224 33 2001 673 52% 96% 94% 757 776 15,282 IL-Chicago Cypress Place 192 34 2000 855 34% 94% 93% 883 886 13,170 MA-Boston Gardencrest Apts. 696 56 2002 847 33% 93% 94% 1,292 1,184 97,092 MD-Baltimore Bonnie Ridge 966 38 1999 1,023 44% 92% 91% 989 980 67,490 MD-Baltimore Canterbury Apts. 618 26 1999 933 45% 93% 94% 804 767 31,075 MD-Baltimore Country Village Apts. 344 33 1998 868 53% 93% 92% 778 749 19,404 MD-Baltimore Falcon Crest 396 35 1999 993 52% 92% 93% 855 817 19,347 MD-Baltimore Fenland Field 234 34 2001 934 37% 93% 92% 1,002 964 17,158 MD-Baltimore Gateway Village 132 15 1999 965 50% 93% 93% 1,112 1,055 9,216 MD-Baltimore Manor, The 435 35 2001 1,017 38% 93% 96% 1,118 1,096 41,055 MD-Baltimore Mill Towne Village Apts. 384 31 2001 812 34% 94% 89% 759 728 25,463 MD-Baltimore Morningside Heights Apts. 1,050 39 1998 870 42% 94% 91% 779 759 53,244 MD-Baltimore Owings Run 504 9 1999 1,142 48% 93% 88% 962 967 40,127 MD-Baltimore Selford Townhomes 102 17 1999 1,115 60% 94% 93% 1,133 1,071 7,367 MD-Baltimore Shakespeare Park 84 21 1999 833 17% 96% 99% 724 608 4,322 MD-Baltimore Timbercroft Townhomes 284 32 1999 990 7% 99% 99% 727 685 10,641 MD-Baltimore Village Square 370 36 1999 1,045 50% 95% 96% 987 928 20,498 MD-Baltimore Woodholme Manor 176 35 2001 825 37% 94% 93% 699 653 8,502 ME-Portland Mill Co. Gardens 95 53 1998 550 52% 95% 96% 711 670 3,044 ME-Portland Redbank Village 500 60 1998 836 39% 92% 92% 768 743 23,313 MI-Detroit Canterbury Square 336 32 1997 789 43% 94% 90% 753 752 18,014 MI-Detroit Carriage Hill Apts. 168 38 1998 783 40% 95% 93% 775 781 8,710 MI-Detroit Carriage Park Apts. 256 37 1998 777 43% 94% 93% 737 736 12,669 MI-Detroit Charter Square 492 33 1997 914 50% 93% 91% 851 848 30,416 MI-Detroit Cherry Hill Club Apts. 165 32 1998 878 56% 88% 90% 644 667 7,770 MI-Detroit Cherry Hill Village Apts. 224 38 1998 742 46% 97% 92% 704 706 10,511 MI-Detroit Deerfield Woods 144 28 2000 800 39% 92% 93% 808 814 7,510 MI-Detroit Fordham Green 146 28 1997 869 58% 90% 92% 891 884 8,884 MI-Detroit Greentrees Apts. 288 33 1997 863 55% 86% 89% 654 659 13,085 MI-Detroit Hampton Court 182 32 2000 972 53% 87% 85% 674 677 9,363 MI-Detroit Kingsley Apts. 328 34 1997 792 42% 93% 91% 669 684 17,557 MI-Detroit Lakes Apts. 434 17 1999 948 57% 88% 88% 863 891 29,840 MI-Detroit Macomb Manor 217 35 2000 867 40% 92% 94% 697 687 10,158 MI-Detroit Oak Park Manor 298 49 1997 887 41% 89% 88% 840 832 14,779 MI-Detroit Scotsdale Apts. 376 29 1997 790 42% 93% 92% 671 693 17,244 MI-Detroit Southpointe Square 224 33 1997 776 48% 91% 88% 644 647 8,099 MI-Detroit Springwells Park 303 63 1999 1,014 49% 89% 87% 978 983 22,880 MI-Detroit Stephenson House 128 37 1997 668 45% 94% 91% 667 670 4,262 MI-Detroit Woodland Gardens 337 38 1997 719 51% 93% 91% 731 733 16,575 NJ-Northern East Hill Gardens 33 46 1998 695 24% 95% 97% 1,331 1,259 2,778 NJ-Northern Lakeview Apts. 106 35 1998 492 42% 96% 97% 1,139 1,063 7,591 NJ-Northern Oak Manor Apts. 77 48 1998 775 40% 97% 96% 1,625 1,564 6,926 NJ-Northern Pleasant View Gardens Apts. 1,142 36 1998 745 36% 94% 92% 997 968 69,647 NJ-Northern Pleasure Bay Apts. 270 33 1998 667 31% 96% 97% 929 849 13,075 NJ-Northern Royal Gardens 550 36 1997 800 34% 93% 96% 1,039 1,007 31,027 NJ-Northern Wayne Village 275 39 1998 725 46% 96% 94% 1,147 1,086 20,003 NJ-Northern Windsor Realty 67 51 1998 675 54% 96% 96% 1,048 1,002 5,237 NY-Alb/ Hudson Valley Carriage Hill 140 31 1996 845 70% 93% 95% 1,210 1,148 7,381 NY-Alb/ Hudson Valley Cornwall Park 75 37 1996 1,320 64% 90% 92% 1,604 1,618 7,425 NY-Alb/ Hudson Valley Lakeshore Villas 152 29 1996 956 51% 93% 95% 1,012 965 8,221 NY-Alb/ Hudson Valley Patricia Apts. 100 30 1998 770 37% 93% 94% 1,305 1,220 7,049 NY-Alb/ Hudson Valley Sherwood Consolidation 224 35 2002 813 21% 97% 97% 995 876 16,291 NY-Alb/ Hudson Valley Sunset Gardens 217 33 1996 662 48% 95% 97% 879 831 8,957 NY-Buffalo Emerson Square 96 34 1997 650 39% 97% 97% 666 645 3,523 NY-Buffalo Idylwood 720 34 1995 700 57% 93% 92% 664 645 27,381 NY-Buffalo Paradise Lane at Raintree 324 32 1997 676 53% 93% 91% 691 680 12,056 NY-Buffalo Raintree Island 504 32 1985 704 48% 93% 90% 719 705 19,375 NY-Long Island Bayview/Colonial 160 37 2000 882 34% 96% 93% 1,111 1,063 13,803 NY-Long Island Cambridge Village Assoc. 82 37 2002 747 34% 97% 99% 1,349 1,237 7,149 NY-Long Island Coventry Village 94 29 1998 718 44% 94% 97% 1,299 1,237 5,651 NY-Long Island Devonshire Hills 297 36 2001 803 43% 94% 93% 1,661 1,688 51,906 NY-Long Island Eastwinds 96 38 2000 888 42% 94% 93% 1,089 1,044 8,302 NY-Long Island Hawthorne Court 434 36 2002 729 41% 95% 92% 1,270 1,203 44,996 NY-Long Island Heritage Square 80 55 2002 703 33% 97% 98% 1,326 1,226 7,985 NY-Long Island Holiday Square 143 25 2002 566 10% 98% 98% 961 903 10,406 NY-Long Island Lake Grove 368 34 1997 879 52% 93% 95% 1,345 1,297 30,766 NY-Long Island Maple Tree 84 53 2000 937 43% 92% 94% 1,117 1,091 6,699 NY-Long Island Mid-Island Estates 232 39 1997 690 41% 96% 97% 1,165 1,096 15,080 NY-Long Island Rider Apts. 24 43 2000 817 38% 96% 98% 1,160 1,088 1,946 NY-Long Island South Bay Manor 61 44 2000 849 30% 96% 96% 1,466 1,357 6,661 NY-Long Island Southern Meadows 452 33 2001 810 46% 94% 95% 1,316 1,290 44,708 NY-Long Island Stratford Greens Assoc. 359 30 2002 725 43% 94% 95% 1,349 1,307 50,171 NY-Long Island Terry Apts. 65 28 2000 722 35% 92% 93% 1,091 1,048 4,754 NY-Long Island Westwood Village Apts. 242 35 2002 829 41% 96% 97% 1,970 1,801 36,929 NY-Long Island Woodmont Village Apts. 96 36 2002 704 40% 95% 95% 1,202 1,143 10,105 NY-Long Island Yorkshire Village Apts. 40 35 2002 779 20% 99% 98% 1,386 1,309 3,692 NY-Rochester 1600 East Avenue 164 45 1997 800 37% 93% 77% 1,035 1,159 14,619 NY-Rochester 1600 Elmwood 210 44 1983 891 41% 93% 92% 921 910 13,662 NY-Rochester Brook Hill 192 32 1994 999 54% 92% 89% 863 888 12,967 NY-Rochester Newcastle Apts. 197 29 1982 873 45% 95% 95% 769 770 11,332 NY-Rochester Perinton Manor 224 34 1982 928 47% 95% 92% 810 812 13,075 NY-Rochester Riverton Knolls 240 30 1983 911 59% 90% 88% 835 837 14,633 NY-Rochester Spanish Gardens 220 30 1994 1,030 45% 90% 90% 708 696 13,777 NY-Rochester The Meadows 113 33 1984 890 42% 96% 95% 751 730 5,850 NY-Rochester Woodgate Place 120 31 1997 1,100 55% 93% 95% 828 809 6,470 NY-Syracuse Fairview Heights 214 40 1965 798 60% 91% 94% 959 915 12,429 NY-Syracuse Harborside Manor 281 31 1995 823 45% 96% 96% 674 658 10,637 NY-Syracuse Pearl Street 60 33 1995 855 50% 96% 95% 588 574 1,923 NY-Syracuse Village Green 448 18 1994 908 44% 92% 93% 697 682 20,206 NY-Syracuse Westminster Place 240 32 1996 913 65% 94% 95% 671 656 9,480 PA-Philadelphia Arbor Crossing 134 35 1999 667 39% 93% 91% 790 770 6,596 PA-Philadelphia Beechwood Gardens 160 37 1998 775 39% 94% 97% 801 754 6,260 PA-Philadelphia Cedar Glen Apts. 110 37 1998 726 42% 92% 91% 669 615 4,613 PA-Philadelphia Chesterfield Apts. 247 31 1997 812 45% 95% 96% 857 826 13,912 PA-Philadelphia Curren Terrace 318 33 1997 782 50% 92% 92% 894 876 18,587 PA-Philadelphia Executive House 100 39 1997 696 46% 94% 94% 905 876 6,583 PA-Philadelphia Glen Brook 173 41 1999 689 36% 92% 94% 763 713 8,178 PA-Philadelphia Glen Manor 174 28 1997 667 39% 93% 92% 751 726 7,550 PA-Philadelphia Hill Brook Place 274 36 1999 709 35% 97% 97% 821 797 14,758 PA-Philadelphia Home Properties of Bryn Mawr 316 53 2000 900 57% 92% 92% 1,038 1,015 29,942 PA-Philadelphia Home Properties of Castle Club 158 37 2000 974 32% 94% 97% 870 819 12,103 PA-Philadelphia Home Properties of Devon 629 41 2000 1,299 56% 86% 90% 1,083 1,059 60,476 PA-Philadelphia Home Properties of Golf Club 399 35 2000 821 56% 91% 91% 1,003 967 35,626 PA-Philadelphia Home Properties of Trexler Park 249 30 2000 1,000 61% 89% 89% 1,054 990 21,346 PA-Philadelphia New Orleans Park 308 33 1997 693 43% 94% 94% 778 761 17,111 PA-Philadelphia Racquet Club East Apts. 467 33 1998 850 41% 96% 96% 962 916 30,166 PA-Philadelphia Racquet Club South 103 35 1999 821 51% 94% 96% 840 804 5,854 PA-Philadelphia Ridley Brook 244 42 1999 731 36% 95% 97% 814 779 12,354 PA-Philadelphia Sherry Lake Apts. 298 39 1998 811 46% 95% 95% 1,100 1,060 25,390 PA-Philadelphia The Landings 384 31 1996 987 55% 94% 94% 979 941 26,387 PA-Philadelphia Valley View Apts. 177 31 1997 769 57% 90% 90% 777 774 9,882 PA-Philadelphia Village Square 128 31 1997 795 54% 94% 93% 895 854 7,431 PA-Philadelphia William Henry 363 33 2000 900 58% 93% 88% 1,062 1,042 35,096 VA-Suburban DC Braddock Lee Apts. 254 49 1998 758 31% 97% 96% 1,124 1,079 17,625 VA-Suburban DC Brittany Place 591 36 2002 920 44% 93% 95% 1,034 976 50,233 VA-Suburban DC Cider Mill 864 26 2002 834 43% 94% 95% 1,020 997 85,724 VA-Suburban DC East Meadow 150 33 2000 1,035 51% 97% 95% 1,171 1,145 13,806 VA-Suburban DC Elmwood Terrace 504 31 2000 1,038 53% 91% 94% 821 789 24,757 VA-Suburban DC Manor, The 198 30 1999 844 55% 93% 92% 914 902 10,229 VA-Suburban DC Orleans Village 851 36 2000 1,040 39% 92% 90% 1,150 1,136 79,738 VA-Suburban DC Park Shirlington Apts. 294 49 1998 758 40% 93% 93% 1,132 1,122 21,101 VA-Suburban DC Pavilion Apts. 432 36 1999 951 37% 91% 92% 1,395 1,374 53,828 VA-Suburban DC Seminary Hill 296 44 1999 884 57% 91% 91% 1,156 1,115 19,402 VA-Suburban DC Seminary Towers 540 40 1999 875 41% 93% 92% 1,145 1,114 35,579 VA-Suburban DC Tamarron Apts. 132 17 1999 1,097 35% 95% 96% 1,169 1,086 10,644 VA-Suburban DC The Sycamores 185 26 2002 876 51% 96% 91% 1,130 1,097 21,326 VA-Suburban DC Virginia Village 344 37 2001 1,028 43% 95% 94% 1,186 1,144 32,253 VA-Suburban DC Wellington Lakes 160 33 2001 675 74% 87% 86% 772 758 9,046 VA-Suburban DC Wellington Woods 114 32 2001 688 80% 85% 91% 820 780 6,426 VA-Suburban DC West Springfield Terrace 244 26 2002 1,019 65% 94% 89% 1,217 1,226 35,235
Core Communities Total/ Weighted Avg 38,560 35 856 45% 93% 93% $948 $921 $2,667,146
(1) "Core Communities" represents the 38,560 apartment units owned consistently throughout 2003 and 2004.
(2) Resident Turnover" reflects, on an annual basis, the number of moveouts; divided by the total number of apartment units.
(3) "Average % Occupancy" is the average economic occupancy for the 12 months ended December 31, 2003 and 2004. For communities acquired during 2003 and 2004, this is the average occupancy from the date of acquisition.
Communities Wholly Owned and Managed by Home Properties (3) (2) 2004 2003 2004 2003 Avg 2004 Average Average Avg Mo Avg Mo # Age Apt % % % Rent Rent 12/31/2004 Of In Year Size Resident Occu- Occu- Rate Rate Total Cost Regional Area Apts Years Acq (Sq Ft) Tumover pancy pancy per Apt per Apt (000) ------------- ---- ----- --- ------- ------- ----- ----- ------- ------- ----- 2003 Acquisition Communities MA-Boston Stone Ends Apts. 280 25 2003 797 57% 95% 94% $1,178 $1,080 $34,842 VA-Suburban DC Falkland Chase Apts. 450 67 2003 772 40% 93% 91% 1,123 1,078 59,910
2003 Total/ Weighted Average 730 46 782 46% 93% 92% $1,144 $1,079 $94,752
2004 Acquisition Communities FL-Southeast The Hamptons 668 15 2004 1,093 54% 90% NA $840 NA $56,755 FL-Southeast The Vinings at Hampton Village 168 15 2004 1,093 43% 93% NA 911 NA 14,054 MA-Boston The Village at Marshfield 276 32 2004 753 37% 93% NA 1,068 NA 31,691 NJ-Northern Chatham Hill Apts. 308 37 2004 944 26% 85% NA 1,427 NA 49,551 NJ-Northern Fairmount Apts. 54 61 2004 900 18% 97% NA 758 NA 2,300 NJ-Northern Kensington Apts. 38 61 2004 1,117 23% 98% NA 884 NA 1,884 NJ-Northern Northwood Apts. 134 39 2004 937 36% 94% NA 1,110 NA 15,264 NJ-Northern Regency Club 372 30 2004 941 41% 98% NA 1,043 NA 37,872 VA-Suburban DC The Apts. at Wellington Trace 240 2 2004 1,095 77% 94% NA 1,160 NA 29,417 VA-Suburban DC Woodleaf Apts. 228 19 2004 709 36% 94% NA 967 NA 20,805
2004 Total/ Weighted Average 2,486 31 967 44% 92% N/A $1,017 N/A $259,593
Owned Portfolio Total/ Weighted Avg 41,776 34 861 45% 93% 93% $956 $924 $3,021,491
(1) "Core Communities" represents the 38,560 apartment units owned consistently throughout 2003 and 2004.
(2) Resident Turnover" reflects, on an annual basis, the number of moveouts; divided by the total number of apartment units.
(3) "Average % Occupancy" is the average economic occupancy for the 12 months ended December 31, 2003 and 2004. For communities acquired during 2003 and 2004, this is the average occupancy from the date of acquisition.
Property Development --------------------
For approximately five years, from 1996 to 2000, the Company actively diversified its portfolio of market-rate communities with government assisted multifamily housing developed or re-developed by the Company. Effective December 31, 2000, the Company sold its affordable housing development operations to Conifer, LLC. Conifer, LLC is led by Richard J. Crossed, a former Executive Vice President and former director of the Company. The Company retained general partner ownership interests in and property management operations for 8,325 apartment units in 136 existing affordable communities.
In December 2002, the Company determined that it would market for sale virtually all of the assets associated with its interests in various affordable property limited partnerships. At that time, the Company announced its intention to sell the assets which include the equity interest in the affordable housing partnerships, loans, advances and management contracts.
During 2003, the Company was successful in selling its interest in entities that own in the aggregate 84 properties containing 2,590 units. During 2004, the Company closed on the sale of its general partner interests in an additional 26 entities that own in the aggregate 1,952 units. The Company has under contract to sell, pending lender approval, an additional 12 entities that own in the aggregate 868 units. The Company still holds interests in three entities owning two affordable properties.
Of the remaining two properties with a total of 1,925 units, the Company will retain its ownership interest and will continue to manage one of them, with 868 units located in Columbus, Ohio, while it pursues various disposition options. The other property (interests in two partnerships), with 1,057 units located in Pittsburgh, Pennsylvania, is being disposed of through a default on the non-recourse financing. The Company has met with the federal agency which insured the repayment of that financing. That agency has agreed that the Company may continue to manage the property until the agency can auction or sell the loan in a note sale. The note sale is expected to occur in March, 2005. Following the note sale the Company expects that it will transfer its interest in this property to the new note holder in lieu of a foreclosure, and that it will cease managing the property. In January, 2005, the Company repurchased the limited partners' 99.99% interests in accordance with the partnership agreements. The Company has recorded the $5.7 million liability to repurchase these limited partnership interests and the resulting loss on disposition of property of $5.0 million. The Company does not anticipate the need to fund operating deficits and will only participate in the cash flow of the property by receiving a fee for managing the property for so long as there is cash flow available.
The Company has retained the ability to develop new market rate communities but does not plan to focus on this activity. Rather, it plans to engage in development activity only on a selective basis. Currently, the Company is developing a 120-unit apartment community in South Portland, Maine adjacent to a market-rate property the Company acquired in 1998. The first phase of the project, which consists of 48 units, is expected to be completed in the summer of 2005.
Property Management -------------------
As of December 31, 2004, the Managed Properties consist of: (i) 2,793 apartment units where Home Properties is the general partner of the entity that owns the property; and (ii) 2,809 apartment units managed for others. The 2,793 apartment units where the Company is the general partner are projected to be sold during 2005 as referred to above under the Property Development section.
On January 1, 2004, the Company sold certain assets of its commercial property management division to Home Leasing LLC, which is owned by the Leenhoutses. This division managed approximately 2.2 million square feet of gross leasable area, as well as certain planned communities. The majority of the managed commercial properties are and have been owned in whole or in part by the Leenhoutses since before the Company's IPO in 1994. The sale was completed in order to permit the Company to focus solely on the direct ownership and management of market rate apartment communities. The contribution from the commercial property management division to Home Properties' 2003 earnings was significantly less than one-half of one percent. The initial amount paid was $67,500. In addition, the Company is entitled to receive a percentage of the management fee received by Home Leasing LLC in connection with the management of one of the commercial properties for a period not to exceed 36 months. If Home Leasing LLC continues to manage that property for three years, the Company is expected to receive an additional deferred purchase price of $166,000, for a total consideration of $233,500. If the management of this property is retained for the entire three years, the gain on sale will be approximately $135,000.
The Company may pursue the management of additional properties not owned by the Company, but will only do so when such additional properties can be effectively and efficiently managed in conjunction with other properties owned or managed by Home Properties, or where the Company views the properties as potential acquisitions in desirable markets.
The following table details managed multifamily communities broken down by market area.
Communities Managed Home Properties by Market Area As of December 31, 2004 --------------------------------------------------------------------------
Communities Managed as General Partner --------------------------------------
Community Name City # of Apts. -------------- ---- ---------- UPSTATE NEW YORK ---------------- Rochester, NY Area ------------------ Chevy Place Rochester 77 College Greene Senior Apartments N. Chili 110 East Court Apartments Rochester 85 Fort Hill Canandaigua 57 Jefferson Park Fairport 69 YWCA Rochester 86
Syracuse, NY Area ----------------- Ledges Evans Mills 100 Meadowview I Central Square 60 Pontiac Terrace Apartments Oswego 70 Schoolhouse Gardens Groton 28 Wedgewood Apartments Kirkville 70
ALBANY/HUDSON VALLEY NY AREA ---------------------------- Albert Carriere Apartments Rouses Point 56
NORTHERN/CENTRAL OHIO --------------------- Briggs/Wedgewood Apartments Columbus 868
PENNSYLVANIA ------------ Green Meadow Apartments Pittsburgh 1,057
Total Apt. Units in Communities Managed as General Partner 2,793
Communities Fee Managed ----------------------- Community Name City # of Apts. -------------- ---- ---------- MARYLAND -------- Annapolis Roads Apartments Annapolis 282 Chesapeake Bay Apartments Annapolis 108 Dunfield Townhomes Baltimore 312 Fox Hall Baltimore 720
NORTHERN VIRGINIA ----------------- Mount Vernon Square Alexandria 1,387
Total Apt. Units in Communities Fee Managed 2,809
Supplemental Property Information ---------------------------------
At December 31, 2004, none of the Properties have an individual net book value equal to or greater than ten percent of the total assets of the Company or would have accounted for ten percent or more of the Company's aggregate gross revenues for 2004.
Item 3.
Item 3. Legal Proceedings -------------------------
The Company is a party to certain legal proceedings. In March 2005, the Company agreed to pay $3.5 million in settlement of an action commenced in 2000 against the Company, the Operating Partnership and Home Leasing. The essence of the complaint was that the entity in which the plaintiffs were investors was wrongfully excluded from the Company's initial organization. The Company is not a party to any other legal proceedings, which, taken together, are expected to have a material adverse effect on the Company's liquidity, financial position or results of operations. The Company is also 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. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company's liquidity, financial position or results of operations.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders ---------------------------------------------------------
None.
Item 4A. Executive Officers ---------------------------
The following table sets forth, as of February 28, 2005, the eight executive officers of the Company, together with their respective ages, positions and offices.
Name Age Position ---- --- --------
Edward J. Pettinella 53 President and Chief Executive Officer of Home Properties, HP Management and HPRS
David P. Gardner 49 Executive Vice President and Chief Financial Officer of Home Properties, HP Management and HPRS
Ann M. McCormick 48 Executive Vice President, General Counsel and Secretary of Home Properties, HP Management and HPRS
Scott A. Doyle 43 Senior Vice President, Property Management of Home Properties, HP Management and HPRS
Johanna A. Falk 40 Senior Vice President and Chief Administrative Officer of Home Properties, HP Management and HPRS
Robert J. Luken 40 Senior Vice President, Chief Accounting Officer and Treasurer of Home Properties, HP Management and HPRS
Janine M. Schue 42 Senior Vice President, Human Resources of Home Properties, HP Management and HPRS
John E. Smith 54 Senior Vice President, Acquisitions and Dispositions of Home Properties, HP Management and HPRS
Information regarding Edward Pettinella is set forth below under "Directors" in Item 10.
David P. Gardner has served as Executive Vice President of the Company since 2004. He had been a Vice President and Chief Financial Officer of the Company since its inception. He holds the same titles in HP Management and HPRS. Mr. Gardner joined Home Leasing Corporation in 1984 as Vice President and Controller. In 1989, he was named Treasurer of Home Leasing and Chief Financial Officer in December 1993. From 1977 until joining Home Leasing, Mr. Gardner was an accountant at Cortland L. Brovitz & Co. Mr. Gardner is a graduate of the Rochester Institute of Technology and is a Certified Public Accountant.
Ann M. McCormick has served as Executive Vice President since 2004. She had been a Vice President, General Counsel and Secretary of the Company since its inception. She holds the same titles in HP Management and HPRS. Mrs. McCormick joined Home Leasing in 1987 and was named Vice President, Secretary and General Counsel in 1991. Prior to joining Home Leasing, she was an associate with the law firm of Nixon Peabody LLP. Mrs. McCormick is a graduate of Colgate University and holds a Juris Doctor from Cornell University. She is on the Board of Directors of Monroe Title Insurance Corporation, Greater Rochester Housing Partnership and the Alzeimer's Association of the Finger Lakes.
Scott A. Doyle has served as a Senior Vice President since 2000, and, from 1997 until 2000, was a Vice President of the Company. He holds the same title in HP Management and HPRS. He joined Home Properties in 1996 as a Regional Property Manager. Mr. Doyle has been in property management for 20+ years and is a Certified Property Manager (CPM) as designated by the Institute of Real Estate Management. Prior to joining Home Properties, he worked with CMH Properties, Inc., Rivercrest Realty Associates and Arcadia Management Company. Mr. Doyle serves on the Advisory Board of the Residential Property Management Program at Virginia Tech. He is a graduate of State University at Plattsburgh, New York.
Johanna A. Falk has served as Senior Vice President since 2000 and as Chief Administrative Officer since 2003. She had been a Vice President of the Company since 1997. She holds the same titles in HP Management and HPRS. She joined the Company in 1995 as an investor relations specialist, was responsible for the Information Systems Department through 2002, and was promoted to Chief Administrative Officer in February 2003. Prior to joining the Company, Mrs. Falk was employed as a marketing manager at Bausch & Lomb Incorporated and Champion Products, Inc. and as a financial analyst at Kidder Peabody. She is a graduate of Cornell University and holds an MBA from the Wharton School of The University of Pennsylvania.
Robert J. Luken has served as Senior Vice President since 2004, and as Chief Accounting Officer since January, 2005. He has been the Company's Treasurer since 2000 and became Vice President in 1997. He holds the same titles in HPRS and HP Management. He joined the Company in 1996, serving as its Controller. Prior to joining the Company, he was the Controller of Bell Corp. of Rochester and an Audit Supervisor for PricewaterhouseCoopers LLP. Mr. Luken is a graduate of St. John Fisher College and is a Certified Public Accountant.
Janine M. Schue has served as Senior Vice President of the Company since 2004, after joining the Company in October of 2001. She holds the same title in HPRS and HP Management. Prior to joining the Company, she was employed by NetSetGo as Vice President of Human Resources and prior to that by Wegmans Food Markets, Inc. as Director of Human Resources. Ms. Schue is a graduate of and holds a Masters of Education from the State University of New York at Albany.
John E. Smith has served as Senior Vice President of the Company since 2001 and, from 1998 until 2001, was a Vice President of the Company. He holds the same title in HP Management and HPRS. Prior to joining the Company in 1997, Mr. Smith was general manager for Direct Response Marketing, Inc. and Executive Vice President for The Equity Network, Inc. Mr. Smith was Director of Investment Properties at Hunt Commercial Real Estate for 20 years. He has been a Certified Commercial Investment Member (CCIM) since 1982, a New York State Certified Instructor and has taught accredited commercial real estate courses at various institutions in four states.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters -------------------------------------------------------------------------------- and Issuer Purchases of Equity Securities -----------------------------------------
The Common Stock has been traded on the New York Stock Exchange ("NYSE") under the symbol "HME" since July 28, 1994. The following table sets forth for the previous two years the quarterly high and low sales prices per share reported on the NYSE, as well as all distributions paid.
High Low Distribution ---- --- ------------ ---- First Quarter $34.85 $31.19 $.61 Second Quarter $37.55 $33.66 $.61 Third Quarter $39.20 $35.05 $.61 Fourth Quarter $40.92 $37.75 $.62
---- First Quarter $41.74 $38.45 $.62 Second Quarter $41.30 $36.25 $.62 Third Quarter $41.10 $36.83 $.62 Fourth Quarter $43.96 $39.46 $.63
As of February 28, 2005, the Company had approximately 4,700 shareholders of record, 31,415,781 common shares (plus 15,583,411 UPREIT Units convertible into 15,583,411 common shares and Preferred Stock convertible into 833,333 common shares) were outstanding, and the closing price was $40.43. It is the Company's policy to pay dividends. The Company has historically paid dividends on a quarterly basis in the months of February, May, August and November. The Credit Agreement relating to the Company's $115 million line of credit provides that the Company may not pay any distribution if a distribution, when added to other distributions paid during the three immediately preceding fiscal quarters, exceeds the greater of: (i) 90% of funds from operations, and 110% of cash available for distribution; and (ii) the amounts required to maintain the Company's status as a REIT.
Issuer Purchases of Equity Securities -------------------------------------
In 1997, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units. The shares/units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board's action does not establish a specific target stock price or a specific timetable for share repurchase. In addition, participants in the Company's Stock Benefit Plan can use common stock of the Company that they already own to pay all or a portion of the exercise payable to the Company upon the exercise of an option. In such event, the common stock used to pay the exercise price is returned to authorized but unissued status, and for purposes of this table is deemed to have been repurchased by the Company. At December 31, 2003 the Company had authorization to repurchase 3,135,800 shares of common stock and UPREIT Units under the stock repurchase program. No shares were repurchased during the first two quarters of 2004. At December 31, the Company had remaining authorization to repurchase 2,000,000 shares of common stock and UPREIT Units. From January 1, 2005 through February 16, 2005, the Company repurchased 1,300,700 additional shares at a cost of $53,320,000, leaving a remaining share authorization level of 699,300 shares. On February 16, 2005, the Board of Directors approved a 2,000,000 share increase in the stock repurchase program, resulting in a authorization level of 2,699,300 shares.
The following table summarizes the total number of shares (units) repurchased by the Company during the remainder of year ended December 31, 2004:
Maximum Total Average Total shares/units shares/units shares/units price per purchased under available under the Period purchased (1) share/unit Company program Company program ------ ------------- ---------- --------------- ---------------
Balance January 1, 2004: - - - 3,135,800
August 1, 2004 to August 31, 2004 57,500 $38.07 57,500 3,078,300
September 1, 2004 to September 30, 2004 5,698 $39.41 - 3,078,300
October 1, 2004 to October 31, 2004 15,239 $ 40.77 - 3,078,300
November 1, 2004 to November 30, 2004 853,649 $ 41.65 701,900 2,376,400
December 1, 2004 to December 31, 2004 378,518 $ 42.38 376,400 2,000,000 --------- ------- --------- ---------
Balance December 31, 2004: 1,310,604 $ 41.68 1,135,800 2,000,000 ========= ======= ========= =========
(1) During 2004, and as permitted by the Company's stock option plans, 30,783 shares of common stock already owned by option holders were used by those holders to pay the exercise price associated with their option exercise. These shares were returned to the status of authorized but unissued shares. In addition the Company repurchased 144,021 shares of common stock through share repurchase by the transfer agent in the open market in connection with the Company's Dividend Reinvestment Plan (DRIP).
Item 6.
Item 6. Selected Financial and Operating Information ----------------------------------------------------
The following table sets forth selected financial and operating data on a historical basis for the Company and should be read in conjunction with the financial statements appearing elsewhere in this Form 10-K (amounts in thousands, except per share data).
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Revenues: Rental Income $436,724 $400,178 $355,520 $313,675 $265,386 Other Income 21,606 19,852 16,762 17,034 20,255 -------- -------- -------- -------- -------- TOTAL REVENUES 458,330 420,030 372,282 330,709 285,641 -------- -------- -------- -------- --------
Expenses: Operating and maintenance 202,479 181,773 154,583 137,578 119,780 General and administrative 23,978 22,607 12,649 10,542 6,485 Interest 90,404 82,758 73,508 63,597 54,109 Depreciation and amortization 89,929 76,206 62,823 58,484 46,716 Prepayment penalties 102 1,610 3,275 116 -
Impairment of assets held as General Partner 1,116 2,518 3,533 - - -------- -------- -------- -------- -------- TOTAL EXPENSES 408,008 367,472 310,371 270,317 227,090 -------- -------- -------- -------- --------
Income from operations 50,322 52,558 61,911 60,392 58,551 Equity in earnings (losses) of unconsolidated affiliates ( 538) ( 1,892) ( 17,493) 123 ( 1,747) -------- -------- -------- -------- -------- Income before minority interest, discontinued operations and extraordinary item 49,784 50,666 44,418 60,515 56,804 Minority interest 13,637 13,965 9,451 17,890 21,316 -------- -------- -------- -------- -------- Income from continuing operations 36,147 36,701 34,967 42,625 35,488 Discontinued operations, net of minority interest 11,263 5,106 10,174 6,625 6,763 -------- -------- -------- -------- -------- Income before gain (loss) on disposition of property and business and cumulative effect of change in accounting principle 47,410 41,807 45,141 49,250 42,251 Gain (loss) on disposition of property and business, net of minority interest ( 67) ( 9) ( 202) 15,256 ( 795) -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 47,343 41,798 44,939 64,506 41,456 Cumulative effect of change in accounting principle, net of minority interest ( 321) - - - - -------- -------- -------- -------- --------
Net Income 47,022 41,798 44,939 64,506 41,456 Preferred dividends ( 7,593) ( 11,340) (14,744) (17,681) ( 12,178)
Premium on Series B preferred stock repurchase - - ( 5,025) - - -------- -------- -------- -------- -------- Net income available to common shareholders $ 39,429 $ 30,458 $ 25,170 $ 46,825 $ 29,278 ======== ======== ======== ======== ========
Basic earnings per share data: Income from continuing operations $ .87 $ .87 $ .58 $ 1.82 $ 1.09 Discontinued operations .34 .17 .39 .30 .33 Cumulative effect of change in accounting principle ( .01) - - - - ------ ------ ------- ------- ------- Net income available to common shareholders $ 1.20 $ 1.04 $ .97 $ 2.12 $ 1.42 ====== ====== ====== ======= =======
Diluted earnings per share data: Income from continuing operations $ .85 $ .86 $ .57 $ 1.81 $ 1.08 Discontinued operations .34 .17 .39 .30 .33 Cumulative effect of change in accounting principle ( .01) - - - - ------ ------ ------- ------- ------- Net income available to common shareholders $ 1.18 $ 1.03 $ .96 $ 2.11 $ 1.41 ====== ====== ====== ======= =======
Cash dividends declared per common share $ 2.49 $ 2.45 $ 2.41 $ 2.31 $ 2.16 ====== ====== ====== ======= =======
Balance Sheet Data: Real estate, before accumulated depreciation $3,123,901 $2,752,992 $2,597,278 $2,135,078 $1,895,269 Total assets 2,816,796 2,513,317 2,456,266 2,063,789 1,871,888 Total debt 1,702,722 1,380,696 1,335,807 992,858 832,783 Series B convertible cumulative preferred stock - - - 48,733 48,733 Redeemable preferred stock (1) 85,000 85,000 167,680 114,000 149,000 Stockholders' equity 720,422 741,263 726,242 620,596 569,528
Other Data: Net cash provided by operating activities $159,195 $144,107 $140,612 $148,505 $127,218 Net cash used in investing activities ($165,466) ($112,025) ($295,181) ($139,106) ($178,466) Net cash provided by (used in) financing activities $ 8,243 ($ 35,761) $152,632 ($ 9,129) $56,955 Funds from Operations (2) $126,953 $132,803 $121,745 $136,604 $120,854 Adjusted Funds From Operations(3) $104,787 $111,020 $100,654 $120,994 $107,300
Weighted average number of shares outstanding: Basic 32,911,945 29,208,242 26,054,535 22,101,027 20,639,241 Diluted 33,314,038 29,575,660 26,335,316 22,227,521 20,755,721
Total communities owned at end of period 150 147 152 143 147 Total apartment units owned at end of period 41,776 40,946 41,776 39,007 39,041
(1) Redeemable preferred stock is redeemable solely at the option of the Company.
(2) Pursuant to the revised definition of Funds From Operations ("FFO") adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"), FFO is defined as net income (computed in accordance with accounting principles generally accepted in the United States of America ("GAAP")) excluding gains or losses from sales of property, minority interest and extraordinary items plus depreciation from real property including adjustments for unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares. In 2003, the Company added back debt extinguishment costs which are incurred as a result of repaying property specific debt triggered upon sale as a gain or loss on sale of the property. Because of the limitations of the FFO definition as published by NAREIT as set forth above, the Company has made certain interpretations in applying the definition. The Company believes all adjustments not specifically provided for are consistent with the definition.
FFO falls within the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K and as a result the Company is required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. Management believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, FFO should be considered in conjunction with net income as presented in the consolidated financial statements included elsewhere herein. Management believes that by excluding gains or losses related to dispositions of property and excluding real estate depreciation (which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company's real estate between periods or as compared to different companies. The Company also uses this measure to compare its performance to that of its peer group. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indication of the Company's performance or to cash flow as a measure of liquidity.
The following table sets forth the calculation of FFO and Adjusted Funds From Operations for the previous five years, beginning with "net income available to common shareholders" from the Company's audited financial statements prepared in accordance with GAAP:
2004 2003 2002 2001 2000 ---- ---- ---- ---- ----
Net income available to common shareholders $ 39,429 $ 30,458 $ 25,170 $ 46,825 $ 29,278 Convertible Preferred dividends(a) 2,194 5,939 10,589 17,681 12,178 Depreciation from real property(b) 91,564 79,577 67,919 64,589 52,297 Impairment on General Partner Investment 945 1,785 1,470 - - (Gain) loss from sale of property 50 260 202 ( 15,256) 795 Minority interest 13,637 13,965 9,451 17,890 21,316 Minority interest - discontinued operations ( 80) 1,385 2,775 4,759 4,990 Impairment of real property - 423 1,565 - - (Gain) loss from sale of discontinued operations (21,107) ( 2,599) ( 5,696) - - Prepayment penalties - - 3,275 116 - Loss from early extinguishment of debt in connection with sale of real estate - 1,610 - - - Cumulative effect of change in accounting principle 321 - - - - -------- -------- -------- -------- -------- FFO as defined above 126,953 132,803 116,720 136,604 120,854 Premium paid on Series B repurchased(c) - - 5,025 - - -------- -------- -------- -------- -------- FFO as adjusted by the Company 126,953 132,803 121,745 136,604 120,854 Reserve(3) (22,166) (21,783) (21,091) (15,610) (13,554) -------- -------- -------- -------- -------- Adjusted Funds From Operations $104,787 $111,020 $100,654 $120,994 $107,300 ======== ======== ======== ======== ======== Weighted average common shares/units outstanding: Basic 48,675.0 45,276.7 42,062.1 37,980.0 35,998.3 ======== ======== ======== ======== ======== Diluted(a) 49,077.1 47,873.8 46,466.4 45,063.6 41,128.4 ======== ======== ======== ======== ========
(a) The calculation of FFO assumes the conversion of dilutive common stock equivalents and convertible preferred stock. Therefore, the convertible preferred dividends are added to FFO, and the common stock equivalent is included in both the basic and diluted weighted average common shares/units outstanding. The weighted average common shares/units outstanding assumes conversion of all UPREIT Units to common shares.
(b) Includes amounts passed through from unconsolidated investments.
(c) FFO for 2002 includes adding back the premium on the Series B preferred stock repurchase of $5,025.
All REITs may not be using the same definition for FFO. Accordingly, the above presentation may not be comparable to other similarly titled measures of FFO of other REITs.
(3) Adjusted Funds From Operations is defined as Funds from Operations less an annual reserve for anticipated recurring, non-revenue generating capitalized costs ("Reserve") of $525 for 2004, 2003 and 2002 ($400 used for 2001 and $375 used for 2000) per apartment unit (weighted average units owned during the year). The adjustment from FFO to AFFO only takes into account this reserve level as previously described. The NAREIT definition of FFO or AFFO does not take into account any additional costs of capital improvements and capitalized interest that also are incurred. The total level of capital improvements and capitalized interest (including the amount defined as reserve) for the five years are as follows: 2004 - $102,700; 2003 - $106,346; 2002 - $115,692; 2001 - $130,648; and 2000 - $92,603. Please see Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations -------------
Overview --------
The following discussion should be read in conjunction with the consolidated financial statements, the notes thereto, and the selected financial data appearing elsewhere in this report. 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. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) future capital expenditures, financing sources and availability and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Factors that may cause actual results to differ include general economic and local real estate conditions, the weather and other conditions that might affect operating expenses, the timely completion of repositioning activities within anticipated budgets, the actual pace of future acquisitions and sales, and continued access to capital to fund growth. For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "seeks", "estimates", and similar expressions are intended to identify forward-looking statements. Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and could materially affect the Company's actual results, performance or achievements.
The Company is engaged primarily in the ownership, management, acquisition, rehabilitation and development of residential apartment communities in selected Northeast, Mid-Atlantic, Midwest and Southeast Florida markets. As of December 31, 2004, the Company operated 169 apartment communities with 47,378 apartments. Of this total, the Company owned 150 communities, consisting of 41,776 apartments, managed as general partner 14 partnerships that owned 2,793 apartments, and fee managed 2,809 apartments for affiliates and third parties.
Executive Summary -----------------
The Company continued to operate during 2004 in a difficult economic environment. The recession, which started in 2001, continued through 2003 resulting in job losses in many parts of the country. For historical reference, Home Properties' markets experienced negative job growth of -0.4% in 2001 and -0.9% in 2002. For 2003, the Company's markets, as well as the country as a whole, experienced flat job growth. A reduction of job growth leads to fewer household formations, which creates a reduction in demand for rental housing. In addition, the low interest rate environment made it more challenging to compete for potential residents who considered making the switch to home ownership. Home ownership continues to be the number one reason our residents give for moving out of our communities. In 2001, home purchases represented 17.8% of our move-outs, growing to 18.8% in 2002, 19.6% in 2003, and leveling off at 19.5% for 2004. An increase to home mortgage rates could push this level down, which would positively affect our turnover rates and improve occupancy. As referenced in our Market Demographics table on page 8 of this report, job growth for our markets improved in 2004 with 1.0% growth over 2003. As there is usually a lag between job growth and household formation, this slight recovery did not create a measurable increased demand for our apartments during 2004.
During 2003, with leading indicators suggesting that the economy had bottomed out and was positioned for a recovery, the Company decided to position itself to improve occupancy. This resulted in less aggressive rental rate increases and a greater use of rent concessions to achieve this objective, and we ended 2003 at 93.3% occupancy for the 120 communities with 34,290 units owned throughout 2002 and 2003 where comparable results are available for the years presented ("2003 Core Properties"). Concessions for 2003 were 119 basis points of rental revenue, which dropped to 87 basis points for all of 2004, and 76 basis points for the fourth quarter of 2004.
Occupancies at the Core Properties for 2004 increased slightly by 40 basis points, from 92.7% to 93.1%. Occupancies in the fourth quarter of 2004 averaged 92.3%, compared to 93.3% a year ago. The Company uses a measurement referred to as Available to Rent, or ATR. This is a leading indicator to assess future occupancy rates by reference to units which will be available for rent, based upon leases signed or termination notices received relating to future move in/move out dates. As of the middle of February, 2005, our ATR was 8.4%, compared to the same time period a year ago when ATR was 6.9%. The fact that ATR is running 1.5% behind 2004 is not surprising, given the fact that 2004 ended 1.0% behind the previous year in occupancy. Balancing this is increased rental growth achieved each and every quarter of 2004.
Total Core Property rental revenue growth for 2004 was expected to be 3.8%, made up of 2.5% in rental rate growth, 0.6% in occupancy improvement, and 0.7% in reduction to concessions. Actual results were 2.6% in rental rate growth, 0.4% in occupancy improvement, and 0.3% reduction to concessions, totaling 3.3% total rental revenue growth. One positive trend in 2004 was the growth seen quarter over quarter for weighted average rents, which captures rent increases as well as changes to concessions. The first quarter of 2004 was 2.4%, second quarter 2.5% third quarter 2.9% and fourth quarter 3.1%.
The guidance for 2005 Core Properties (apartment units owned throughout 2004 and 2005) rental growth is 3.3%. Rental rates are projected to increase 2.5%, including above-average rental increases at certain communities resulting from the continued efforts to upgrade the properties. Occupancies are expected to pick up 0.3% for the year, starting out negative for the first quarter, breaking even for the second quarter, and achieving positive growth for the third and fourth quarters. Finally, the pricing power resulting from improved occupancies support the belief that we will slow down concession activity , adding 0.5% to net rental income.
Expenses for 2005 Core Properties are projected to increase 3.9%. See below under "Results of Operations" for more details on expense comparisons.
These revenue and expense projections result in 2005 Core Properties net operating income ("NOI") growth of 2.5% at the mid-point of 2005 guidance. Markets where the Company expects above average NOI growth include: Boston (+5.8%); Philadelphia (+4.7%); Washington, D.C. (+3.8%); and Upstate New York (Rochester, Buffalo and Syracuse at +3.7%). Markets with below average expectations include: New York City Metro (+1.9%); Baltimore (+1.2%); Detroit (+0.7%); and Chicago (-4.2%). Certain historical demographic information for these markets may be found in the tables on pages 8 and 9 of this report.
Of the two items making up NOI - rental revenue and operating expenses, the revenue component is likely to be more volatile. An improving economy could create higher demand for rental housing above that projected. An economic recovery that creates little new job growth, coupled with a continuation of low interest rates, could put pressure on the Company's ability to reach the mid-point of guidance. The Company has given FFO guidance for 2005 with a range of $2.83 to $2.97 per share.
The Company has anticipated closing on acquisitions of $200 million in its budget for 2005. The Company is committed to a disciplined approach to acquisitions, but at the same time recognizes that unprecedented low interest rate levels allow the Company flexibility to adjust hurdle rates and bids to reflect market conditions. The Company has traditionally kept leverage at about 40% of total equity market capitalization. Using a constant stock price of $41.00 per share for the equity component of total market capitalization, our debt to total market cap was 40.0% at the end of 2002, 39.9% at the end of 2003, and 43.7% at the end of 2004. To facilitate acquisition activity in the current market, the Company will increase leverage to enhance the ability to secure prime acquisition opportunities. While the acquisition market will likely continue to be very competitive, the Company is confident that the 2005 acquisition goal of $200 million is achievable based on the current acquisition pipeline and the Company's decision to increase leverage.
During the fourth quarter of 2004 and first quarter of 2005, the Company increased its level of stock buy-back activity substantially, repurchasing approximately 2.4 million shares at a weighted price of $41.35 per share. The Company's strategy is to opportunistically repurchase shares at a discount to its underlying net asset value, thereby continuing to build value for shareholders. The Company estimates its net asset value per share at December 31, 2004 to be $44.68, based on capitalizing at 7% the annualized and seasonally adjusted fourth quarter property net income, plus a 4% growth factor, minus a management fee. With the difficult and competitive acquisition environment described above, the Company believes buying back stock is a logical use of funds. The Company will continue to monitor stock prices, the published net asset value and acquisition alternatives to determine the current best use of capital between stock buyback and acquisitions.
During 2005, the Company anticipates increasing leverage to a level of approximately 47% of debt-to-total market capitalization in order to meet the above-described acquisition goals. Finally, although not contemplated based on the announced level of acquisitions of $200 million, if the acquisition pace were to increase, the Company would consider a combination of increased sales of under-performing or isolated apartment communities and issuance of cumulative redeemable preferred stock to raise additional capital.
Results of Operations ---------------------
Comparison of year ended December 31, 2004 to year ended December 31, 2003.
The Company owned 138 communities with 38,560 apartment units throughout 2003 and 2004 where comparable operating results are available for the years presented (the "2004 Core Properties"). For the year ended December 31, 2004, the 2004 Core Properties showed an increase in rental revenues of 3.3% and a net operating income increase of 2.2% over the 2003 year-end period. Property level operating expenses increased 6.0%. Average economic occupancy for the 2004 Core Properties increased from 92.7% to 93.1%, with average monthly rental rates increasing 2.8% to $948 per apartment unit.
A summary of the 2004 Core Property net operating income is as follows:
2004 2003 $ Change % Change ---- ---- -------- -------- Rent $408,404,000 $395,203,000 $13,201,000 3.3% Property Other Income 17,440,000 14,713,000 2,727,000 18.5% ------------ ------------ ----------- --- Total Revenue 425,844,000 409,916,000 15,928,000 3.9% Operating and Maintenance (190,917,000) (180,118,000) (10,799,000) (6.0%) ------------ ------------ ----------- --- Net Operating Income $234,927,000 $229,798,000 $ 5,129,000 2.2% ============ ============ =========== ===
NOI may fall within the definition of "non-GAAP financial measure" set forth in Item 10(e) of Regulation S-K and, as a result, Home Properties may be required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. Home Properties believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company's apartment properties. In addition, the apartment communities are valued and sold in the market by using a multiple of NOI. The Company also uses this measure to compare its performance to that of its peer group.
During 2004, the Company acquired a total of 2,486 apartment units in ten newly-acquired communities (the "2004 Acquisition Communities"). In addition, the Company experienced full-year results for the 730 apartment units in two apartment communities (the "2003 Acquisition Communities") acquired during 2003. The inclusion of these acquired communities generally accounted for the significant changes in operating results for the year ended December 31, 2004.
A summary of the net operating income from operations for the Company as a whole is as follows:
2004 2003 $ Change % Change ---- ---- -------- -------- Rent $436,724,000 $400,178,000 $36,546,000 9.1% Property Other Income 18,299,000 14,910,000 3,389,000 22.7% ------------ ------------ ----------- ---
Total Revenue 455,023,000 415,088,000 39,935,000 9.6% Operating and Maintenance (202,479,000) (181,773,000) (20,706,000) (11.4)% ------------ ------------ ----------- ---
Net Operating Income $252,544,000 $233,315,000 $19,229,000 8.2% ============ ============ =========== ===
During 2004, the Company also disposed of five properties with a total of 1,646 units, which had partial results for 2004 (the "2004 Disposed Communities"). The results of these disposed properties have been reflected in discontinued operations.
For the year ended December 31, 2004, income from operations (income before equity in earnings (losses) of unconsolidated affiliates, minority interest, discontinued operations and gain (loss) on disposition of property and business) decreased by $2,236,000 when compared to the year ended December 31, 2003. The decrease was primarily attributable to the following factors: an increase in rental income of $36,546,000, an increase in property other income of $3,389,000 and a decrease in impairment of assets held as general partner of $1,402,000. These changes were more than offset by an increase in operating and maintenance expense of $20,706,000, an increase in general and administrative expense of $1,371,000, an increase in interest expense of $6,138,000, an increase in depreciation and amortization of $13,723,000 and a decrease in all other income of $1,635,000. Each of the items are described in more detail below.
Of the $36,546,000 increase in rental income, $4,410,000 is attributable to the 2003 Acquisition Communities and $18,935,000 is attributable to the 2004 Acquisition Communities. The balance of $13,201,000 relates to a 3.3% increase from the 2004 Core Properties due primarily to an increase of 2.8% in weighted average rental rates, accompanied by an increase in average economic occupancy from 92.7% to 93.1%.
As referenced in "Executive Summary" above, the Company focused more on improving occupancy during 2003 and therefore was less aggressive with rent increases at its Core Properties. The Company reverted back in 2004 to focusing on rent increases, as seen by the quarter over quarter trend of more aggressive rents. An additional component of the 3.3% increase in weighted average rent results from the significant upgrading and repositioning efforts discussed under "Capital Improvements" below. The Company seeks a minimum 9% internal rate of return for these revenue-enhancing upgrades, down from the 12% goal referenced one year ago.
In the current economic environment, it is very difficult to project rental rate and occupancy results. The Company has provided guidance for 2005, which, at the mid-point of the range, anticipates same store revenue growth of 3.1%, including above-average rental increases from the continued efforts to upgrade the properties. Occupancy levels are expected to slowly improve from the level at the end of the fourth quarter of 2004, producing an expected average for 2005 Core Properties of 93.4%, 30 basis points higher than all of 2004.
Property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, net profits from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased in 2004 by $3,389,000. Of this increase, $210,000 is attributable to the 2003 Acquisition Communities, $452,000 is attributable to the 2004 Acquisition Communities, and $2,727,000 represents a 18.5% increase attributable to the 2004 Core Properties. A significant portion of the increase (40%) for the 2004 Core Properties is from telephone revenue and cable revenue, in particular, revenue recognized in the amount of $500,000 associated with the termination of a contract with a telephone service provider. In addition, 12% of the increase is from increased laundry revenue as we continue to increase the percentage of owned laundry equipment at the properties.
Other income, which primarily reflects management and other real estate service fees recognized by the Company, decreased in 2004 by $1,599,000. This is due primarily to a decrease in the level of management activity as a result of the sale of the affordable limited partnerships.
Of the $20,706,000 increase in operating and maintenance expenses, $1,687,000 is attributable to the 2003 Acquisition Communities and $8,220,000 is attributable to the 2004 Acquisition Communities. The balance for the 2004 Core Properties, a $10,799,000 increase in operating expenses or 6.0%, is primarily a result of increases in utilities, repairs and maintenance, personnel, property insurance and real estate taxes, offset in part by reductions in advertising and snow removal costs.
The breakdown of operating and maintenance costs for the 2004 Core Properties by line item is listed below:
2004 2003 $ Variance % Variance ---- ---- ---------- ---------- Electricity $ 7,969 $ 7,465 $( 504) -6.8% Gas 19,243 18,089 ( 1,154) -6.4% Water and Sewer 10,819 9,804 ( 1,015) -10.4% Repairs and Maintenance 30,269 27,033 ( 3,236) -12.0% Personnel Expense 41,795 39,472 ( 2,323) -5.9% Site Level Incentive Compensation 1,700 1,150 ( 550) -47.8% Advertising 6,320 6,826 506 7.4% Legal and Professional 1,457 1,444 ( 13) -0.9% Office and Telephone 5,309 5,600 291 5.2% Property Insurance 7,149 6,199 ( 950) -15.3% Real Estate Taxes 43,444 41,060 ( 2,384) -5.8% Snow 1,204 1,970 766 38.9% Trash 2,630 2,758 128 4.6% Property Management G&A 11,609 11,248 ( 361) -3.2% -------- -------- -------- --- Total $190,917 $180,118 $(10,799) -6.0% ======== ======== ======== ===
The increase in electric of 6.8% continues a trend of above 5% increases for the past two years, reflective of market increases versus any substantial shift in usage.
The natural gas heating cost variance of 6.4% was all a fourth quarter event, as this line item was breakeven through the third quarter of 2004. The fourth quarter of 2003 was relatively mild, plus there have been significant increases in the cost of natural gas per decatherm. As of December 31, 2004, the Company had fixed-price contracts covering 99% of its natural gas exposure for the 2004/2005 heating season. The Company has fixed-price contracts covering 59% of its natural gas exposure for calendar year 2005. Risk is further diversified by staggering contract term expirations. For the 2004/2005 heating season, where the Company has coverage for 99% of its exposure, the Company's negotiated average price per decatherm is approximately $6.08. For calendar year 2005, where the Company has coverage for 59% of its exposure, the Company's negotiated average price per decatherm is approximately $6.40. A year ago, the average commodity cost for the season's contracts was $4.52. While costs are up, they are below the weighted settle price of $6.68 we would have paid for the same period if we had not had natural gas costs on a fixed contract. The Company has provided guidance for 2005 which anticipates a 20% increase (or $3,900,000) in natural gas heating costs. This is based on the thirty-year average for the number of degrees days for 2005. For guidance, the portion of the calendar year not covered by fixed price contracts is assumed to be priced at a level that reflects twelve month strip pricing as of February, 2005. During 2005, the Company plans on increasing the percentage of fixed price contracts before entering the 2005/2006 winter heating season.
The over 10% increase in water and sewer costs are a function of municipalities across all regions looking at ways to increase revenues. The Company is focusing on a program to allocate water and sewer costs to residents at a majority of the Owned Properties.
The increase in repairs and maintenance of 12% occurred in contract repairs, painting and cleaning. Included in contract repairs is $805,000 of sales tax expense, as described below, which accounted for 25% of the total increase in repairs and maintenance. Cleaning costs are up $637,000, or 20% of the total increase in repairs and maintenance. A significant portion of this represents a shift between personnel costs and repairs and maintenance as more of this function was performed by outside contractors versus in-house personnel. The Company has provided guidance for 2005 which anticipates a 2.3% decrease in repairs and maintenance. The anticipated decrease in repairs and maintenance is two-fold. First, the $805,000 from sales tax will not be repeated, providing a positive comparison. If not for this, other expenses in this category would be break-even. The other reason is an increased focus on reducing controllable operating costs. Properties whose costs are out of line compared to typical per unit average costs will be challenged to perform within more stringent operating budgets. The shift in the property manager bonus plan for 2005 from revenue based to net operating income based should also focus attention on repair and maintenance expense control.
During April, 2004, the Company finalized negotiations with New York State settling a sales and use tax audit covering the period June 1, 1999 through May 31, 2002. The total cost to the Company as a result of the audit amounted to $861,000 (including $173,000 of interest expense) for sales tax not charged to the Company by its vendors. This was included in the first quarter results and allocated $312,000 to expense for property repairs, $136,000 (before minority interest) to loss on disposition of property, and $413,000 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter the Company examined its sales and use tax compliance in the other states in which the Company operates. Based upon its internal analysis, the Company estimated its liability as of June 30, 2004 in those states where it found non-compliance and had recorded a liability of $1,712,000. This was allocated $493,000 to expense for property repairs, $233,000 to interest expense, $35,000 (before minority interest) to loss on disposition of property, and $951,000 capitalized to real estate assets. The liability recorded related to the period beginning on the later of: (i) the date the Company first purchased property in the applicable state; or (ii) January 1, 1997 and ending on June 30, 2004. The Company recognizes that the liability recorded is an estimate and that the actual tax liability that will be paid in the future may be less than or greater than this estimate. The Company has determined that the likely range is between $1,325,000 and $2,300,000.
The Company determined that the amount of liability which it failed to record with respect to sales and use tax did not have a material impact on its results of operations or reported earnings for the prior periods in which the items subject to tax were purchased and that the expense recorded in the first and second quarters of 2004 were one-time adjustments. The Company does not believe that the additional sales and use tax it will record and pay will have a material impact on its results of operations in future periods. As a result of the sales tax audit, the Company initiated procedures to ensure that sales and use tax on expenditures were properly collected by its vendors or accrued and paid by the Company.
Personnel expense was up 5.9% in 2004 versus 2003. Payroll tax expense was up 7.2%, mostly fueled by significant increases in workers compensation and health insurance costs. The balance represents a 4.8% increase in wages. For 2005 guidance, personnel costs are anticipated to increase 3.6%, with more controlled increases in workers compensation and health insurance expected.
Site level incentive compensation was up $550,000, or 47.8%. This represents an increased focus on creating a higher level of property management compensation coming from incentive based performance measures. Site level bonuses increased $400,000, while leasing commissions increased $150,000.
Advertising costs were down 7.4% as a result of a comparison to higher than normal levels in 2003. Advertising costs were up substantially in 2003 consistent with increased efforts to attract traffic and increase occupancy. The advertising level in 2004 reflected a more normalized run rate.
Property insurance costs were up 15.3% over 2003. The insurance expense for 2003 reflects the impact of a legal settlement which reduced the expense by $500,000. Without the benefit of this settlement, insurance costs would have been up 6.7%. The Company renewed the property and general liability insurance policy for the year beginning November, 2004 at significantly reduced rates. The guidance for 2005 reflects a 14.8% decrease in insurance costs.
Real estate taxes were up 5.8% in 2004, reflecting increased assessments and rates as tax authorities struggle to raise revenues in many regions of the country. The Company expects real estate taxes to increase a similar amount in 2005.
Snow removal costs were down 38.9%. The first quarter of 2003 produced significant snowfalls compared to historical norms. Most of the $766,000 decrease in snow removal costs occurred during the first quarter, due to this comparison and below normal snowfall in 2004. Snow removal costs are anticipated to return to normal levels in 2005 with a 38% increase from 2004 levels projected.
The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2004 Core Properties was 44.8% and 43.9% for 2004 and 2003, respectively. This 0.9% increase resulted from the 3.9% increase in total revenue achieved through ongoing efforts to upgrade and reposition properties for maximum potential being offset by the 6.0% increase in operating and maintenance expense. In general, the Company's operating expense ratio is higher than that experienced in other parts of the country due to relatively high real estate taxes in its markets and the Company's practice, typical in its markets, of including heating expenses in base rent.
General and administrative expenses ("G&A") increased in 2004 by $1,371,000 or 6% from $22,607,000 in 2003 to $23,978,000 in 2004. Of this increase, $3,800,000 is attributable to an accrued liability recorded in the fourth quarter of 2004 relating to the March 2005 settlement of a lawsuit and the payment of certain related legal fees, as described below. The year-over-year increase would have been greater but for a $5,000,000 expense incurred in 2003 for the restricted stock granted to the Leenhoutses as part of their retirement as Co-CEO's. After taking into account the settlement expense and the restricted stock grant, all other items of G&A increased $2,571,000 year over year. Of this net variance, $1,591,000 is directly attributed to increased external costs incurred specifically to comply with Section 404 of Sarbanes-Oxley. Including all other accounting, auditing and tax compliance cost increases explains an additional $368,000 of the variance increase. All other items of G&A accounted for the $612,000 balance of the increase. The total direct external costs incurred during 2004 for Section 404 compliance totaled approximately $1,800,000. G&A is expected to decrease 18% for 2005, based on an expectation of a lower level of Section 404 costs to be required and the fact that the Company does not anticipate additional settlement costs in 2005.
The $3.8 million accrued for settlement costs ($3.5 million) and the legal fees ($300,000) relates to a legal action, commenced in 2000, against the Company, the Operating Partnership and Home Leasing Corporation. Home Leasing is owned by Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board of Directors and Senior Advisors to the Company. The Company was originally formed to expand and continue Home Leasing's business. The essence of the complaint was that the entity in which the plaintiffs were investors was wrongfully excluded from the Company's initial organization. In their original complaint, plaintiffs sought damages in the amount of $3 million. In the subsequent discovery process, plaintiffs increased damages sought to $10 million. Payment in settlement and of legal fees was made on behalf of Home Leasing as well as the Company and the Operating Partnership in recognition of the fact that the matters alleged in the action against Home Leasing related directly and solely to the promotion and creation of the Company.
Interest expense increased in 2004 by $6,138,000 as a result of the increased borrowings in connection with acquisition of the 2004 Acquisition Communities, and a full year of interest expense for the 2003 Acquisition Communities. In addition, amortization from deferred charges relating to the financing of properties totaled $1,766,000 and $1,483,000, and was included in interest expense for 2004 and 2003, respectively.
Included in interest expense are prepayment penalties which decreased in 2004 by $1,305,000 as compared to 2003. During 2004, the Company incurred a total of $305,000 in prepayment penalties in connection with the refinancing of certain mortgages and the sale of one of the 2004 disposed properties. In 2003, $1,610,000 was recorded in loss from early extinguishment of debt in connection with the sale of two of the 2003 Disposed Communities.
Depreciation and amortization expense increased $13,723,000 due to the additional depreciation expense on the 2004 Acquisition Communities and a full year of depreciation expense for the 2003 Acquisition Communities, as well the incremental depreciation on the capital expenditures for additions and improvements to the Core Properties in 2004 and 2003 of $91,151,000 and $101,398,000, respectively, net of the Disposition Communities.
In the fourth quarter of 2002, the Company announced its intention to sell virtually all of the assets associated with its general partner interests in the affordable properties in order to focus solely on the direct ownership and management of market rate apartment communities. The assets included principally loans, advances and management contracts. During 2004, the Company recorded impairment charges of $1,116,000 (all in the first quarter). Of this total, $171,000 represents advances made during the first quarter of 2004 to certain of the affordable property limited partnerships which the Company believes will not be repaid upon the sale of the loans. The remaining $945,000 pertains to an additional net impairment charge taken on the 38 properties included in Phase III of the Company's planned disposition of its affordable portfolio to reduce the assets based upon the revisions to the sale contract in the first quarter. In connection with FIN 46R, the Company was required to consolidate the majority of the affordable limited partnerships results of operations beginning April 1, 2004.
The equity in earnings (losses) of unconsolidated affiliates of ($538,000) is primarily the result of the general partner recording a greater share of the underlying investment's losses due to the loans and advances to certain of the affordable property limited partnerships where the limited partner has no capital account. This is pursuant to the accounting requirements of EITF 99-10, "Percentage Used to Determine the Amount of Equity Method Losses." In connection with FIN 46R, the Company was required to consolidate the majority of the affordable limited partnerships results of operations beginning April 1, 2004 and is included in discontinued operations.
Minority interest decreased $328,000 as a direct result of the decrease in income from operations over the prior year.
Included in discontinued operations for the year-ended December 31, 2004, are the Disposition Communities and the results of operations of the Phase III affordable limited partnerships that in connection with FIN 46R were required to be consolidated beginning April 1, 2004. As all significant contingencies surrounding the sale of Phase III have been resolved, the Company has considered these assets held for sale and reported them in discontinued operations. (See further detail supplied under "Off-Balance Sheet Investments" section).
Included in the $11,417,000 net gain on disposition of property reported for the year 2004 is the sale of five apartment communities where the Company has recorded a combined gain on sale, net of minority interest, of approximately $18,082,000. In addition, the Company recorded a $6,665,000 loss, net of minority interest of $3,103,000, during the year related to the disposal of the affordable partnerships. Included in the gross $9.8 million loss reported is a $5.0 million loss from a property being disposed through a default with the lender, as more fully explained in the "Off-Balance Sheet Investments" section. An additional impairment in value of $3.6 million was recorded relating to the closing of 26 affordable properties and the eight properties under contract for sale with the same buyer. The Company has recorded a $309,000 impairment in connection with a contract to sell general partnership interests in eight properties with a total of 612 units. Finally, a reduction of $800,000 to fair market value has been recorded for the property the Company will continue to hold for sale.
In connection with the adoption of FIN 46R, the Company recorded a $321,000 cumulative effect charge of a change in accounting principle in the first quarter of 2004. This charge was the result of negative capital accounts of minority interest partners that were absorbed by the Company.
Net income increased $5,224,000 primarily due to the increase in discontinued operations of $6,157,000 in 2004 compared to 2003.
Comparison of year ended December 31, 2003 to year ended December 31, 2002.
The Company owned 120 communities with 34,290 apartment units throughout 2002 and 2003 where comparable operating results are available for the years presented (the "2003 Core Properties"). For the year ended December 31, 2003, the 2003 Core Properties showed an increase in rental revenues of 3.1% and a net operating income decrease of 1.0% over the 2002 year-end period. Property level operating expenses increased 8.8%. Average economic occupancy for the 2003 Core Properties increased from 92.1% to 92.4%, with average monthly rental rates increasing 2.8% to $894 per apartment unit.
A summary of the 2003 Core Property net operating income is as follows:
2003 2002 $ Change % Change ---- ---- -------- -------- Rent $339,930,000 $329,764,000 $10,166,000 3.1% Property Other Income 13,599,000 12,975,000 624,000 4.8% ------------ ------------ ----------- ----
Total Revenue 353,529,000 342,739,000 10,790,000 3.1% Operating and Maintenance (157,967,000) (145,195,000) (12,772,000) (8.8%) ------------ ------------ ----------- ----
Net Operating Income $195,562,000 $197,544,000 $(1,982,000) (1.0%) ============ ============ =========== ====
During 2003, the Company acquired a total of 730 apartment units in two newly-acquired communities (the "2003 Acquisition Communities"). In addition, the Company experienced a full year results for the 4,280 apartment units in twenty apartment communities (the "2002 Acquisition Communities") acquired during 2002. The inclusion of these acquired communities generally accounted for the significant changes in operating results for the year ended December 31, 2003.
A summary of the net operating income from operations for the Company as a whole is as follows:
2003 2002 $ Change % Change ---- ---- -------- -------- Rent $400,178,000 $355,520,000 $44,658,000 12.6% Property Other Income 14,910,000 13,470,000 1,440,000 10.7% ------------ ------------ ----------- ----
Total Revenue 415,088,000 368,990,000 46,098,000 12.5% Operating and Maintenance (181,773,000) (154,583,000) (27,190,000) (17.6)% ------------ ------------ ----------- ----
Net Operating Income $233,315,000 $214,407,000 $18,908,000 8.8% ============ ============ =========== ===
During 2003, the Company disposed of seven properties with a total of 1,568 units, which had partial results for 2003 (the "2003 Disposed Communities"). During 2004, the Company also disposed of five properties with a total of 1,646 units. The results of these disposed properties have been reflected in discontinued operations.
For the year ended December 31, 2003, income from operations (income before equity in earnings (losses) of unconsolidated affiliates, minority interest, discontinued operations and gain (loss) on disposition of property and business) decreased by $9,353,000 when compared to the year ended December 31, 2002. The decrease was primarily attributable to the following factors: an increase in operating and maintenance expense of $27,190,000, an increase in general and administrative expense of $9,958,000, an increase in interest expense of $7,585,000, and an increase in depreciation and amortization of $13,383,000. These changes were partially offset by a decrease of $1,015,000 in all other expense items, an increase in rental income of $44,658,000, and an increase in all other income of $3,090,000. Each of the expense items is described in more detail below.
Of the $44,658,000 increase in rental income, $29,520,000 is attributable to the 2002 Acquisition Communities and $4,972,000 is attributable to the 2003 Acquisition Communities. The balance of $10,166,000 relates to a 3.1% increase from the 2003 Core Properties due primarily to an increase of 2.8% in weighted average rental rates, accompanied by an increase in average economic occupancy from 92.1% to 92.4%.
Property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, net profits from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased in 2003 by $1,440,000. Of this increase, $619,000 is attributable to the 2002 Acquisition Communities, $197,000 is attributable to the 2003 Acquisition Communities, and $624,000 represents a 4.8% increase attributable to the 2003 Core Properties. The increase represents a higher level of corporate leases in 2003 which produced a higher level of ancillary income.
Interest and dividend income decreased in 2003 by $799,000, due to decreased levels of financing to affiliates as a result of the Company's disposition of its interests in various affordable housing communities and a lower interest rate environment.
Other income, which primarily reflects management and other real estate service fees recognized by the Company, increased in 2003 by $2,449,000. This is the direct result of the consolidation of the Management Companies effective January 1, 2003. In 2002 and prior, the share of the combined loss from the Management Companies was included in the line item Equity in earnings (losses) of unconsolidated affiliates. The activity in 2003 is spread amongst various line items including other income, interest income, general and administrative, interest expense, and depreciation expense to name the major categories (see Note 4 to the Consolidated Financial Statements for a complete historical breakdown).
Of the $27,190,000 increase in operating and maintenance expenses, $12,846,000 is attributable to the 2002 Acquisition Communities, $1,572,000 is attributable to the 2003 Acquisition Communities. The balance for the 2003 Core Properties, a $12,772,000 increase in operating expenses or 8.8%, is primarily a result of increases in natural gas heating costs, repairs and maintenance, personnel, advertising, property insurance, snow removal costs, and property management allocated general and administrative costs.
The breakdown of operating and maintenance costs by line item is listed below:
2003 2002 $ Variance % Variance ---- ---- ---------- ---------- Electricity $ 6,343 $ 6,001 $( 342) -5.7% Gas 15,499 14,712 ( 787) -5.3% Water and Sewer 8,436 8,416 ( 20) -0.2% Repairs and Maintenance 24,879 22,734 ( 2,145) -9.4% Personnel Expense 36,128 32,453 ( 3,675) -11.3% Site Level Incentive Compensation 1,031 650 ( 381) -58.6% Advertising 6,265 5,576 ( 689) -12.4% Legal and Professional 1,202 1,203 1 0.1% Office and Telephone 4,950 4,517 ( 433) -9.6% Property Insurance 5,431 2,997 ( 2,434) -81.2% Real Estate Taxes 33,673 33,553 ( 120) -0.4% Snow 1,569 782 ( 787) -100.6% Trash 2,504 2,506 2 0.1% Property Management G&A 10,057 9,095 ( 962) -10.6% -------- -------- -------- --- Total $157,967 $145,195 $(12,772) -8.8% ======== ======== ======== ===
The natural gas variance of 5.3% was mostly a second quarter event from a combination of a colder spring than usual, as well as renewal of certain contracts at higher rates than we enjoyed the year before. As of December 31, 2003, the Company had fixed-price contracts covering 99% of its natural gas exposure for the 2003/2004 heating season. Risk was further diversified by staggering contract term expirations. For the 2003/2004 heating season, the Company's negotiated average price per decatherm was approximately $4.52. A year ago, the average commodity cost for the season's contracts was $3.80. While the Company's costs are up, they are well below the January 2004 strip price of $5.79 for the same time frame.
The increase in repairs and maintenance of 9.4% occurred in contract repairs, painting and cleaning. The timing of contract repairs are somewhat unpredictable. A new marketing strategy for many of our regions included a two-tone, custom paint selection, which drove up costs, but may have helped to capture a higher percentage of potential resident traffic. This custom painting strategy has been discontinued for 2004.
Personnel expense was up 11.3% in 2003 versus 2002. The harsh snowfall during the first quarter of 2003 contributed to the need for overtime in excess of budget, which accounted for 1.5% of the 11.3% increase. Payroll tax expense was up 22%, mostly fueled by significant increases in workers compensation and health insurance costs, accounting for 5.0% of the 11.3% increase. The balance represents a 4.8% increase in wages.
Advertising costs were up 12.4%, consistent with the efforts to attract traffic and increase occupancy.
Property insurance costs were up 81.2% over 2002. The insurance expense for 2002 reflects the impact of a legal settlement related to the portion of the policy year from January 1, 2002 to October 31, 2002, which reduced the expense by $2.7 million. In addition, the policy period from November 1, 2002 to October 31, 2003 was reduced by a settlement of $600,000.
Snow removal costs were up 100.6%. The first quarter of 2003 produced significant snowfalls compared to historical norms. Most of the $787,000 increase in snow removal costs occurred during the first quarter.
Many new property management initiatives were started in 2002, but were not fully functional until the fourth quarter of 2002, resulting in increased property management G&A. Among those initiatives are a 24/7 call center, expanded marketing initiatives, and improvements in hardware, software and staffing of the information systems department. This contributed to the 10.6% increase experienced in property management G&A in 2003.
The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2003 Core Properties was 44.7% and 42.2% for 2003 and 2002, respectively. This 2.5% increase resulted from the 3.1% increase in total revenue achieved through ongoing efforts to upgrade and reposition properties for maximum potential being offset by the 8.8% increase in operating and maintenance expense. In general, the Company's operating expense ratio is higher than that experienced in other parts of the country due to relatively high real estate taxes in its markets and the Company's practice, typical in its markets, of including heating expenses in base rent.
General and administrative expenses ("G&A") increased in 2003 by $9,958,000 or 79% from $12,649,000 in 2002 to $22,607,000 in 2003. Of this increase, $5,000,000 represents a one time charge for the restricted stock granted to the Leenhoutses as part of their retirement as Co-CEO's. Another $4,183,000 of the increase is the direct result of the consolidation of the Management Companies effective January 1, 2003, since the expenses of the Management Companies are recorded directly as consolidated expenses, whereas previously they had been a component of the Company's share of the income within the line item "Equity in earnings (losses) of unconsolidated affiliates." (See "Other Income" above for more detail.) The remaining $775,000 is primarily comprised of the costs related to the expensing of stock options for the first time beginning in 2003 of $804,000, other general increases of $853,000, offset by a decline of $882,000 from the cost of a legal settlement included in 2002 not repeated in 2003.
Interest expense increased in 2003 by $7,585,000 as a result of the increased borrowings in connection with acquisition of the 2003 Acquisition Communities and a full year of interest expense for the 2002 Acquisition Communities. In addition, amortization from deferred charges relating to the financing of properties totaled $1,483,000 and $1,014,000, and was included in interest expense for 2003 and 2002, respectively.
Included in interest expense are prepayment penalties which decreased in 2003 by $1,665,000 as compared to 2002. In 2003, $1,610,000 was recorded in loss from early extinguishment of debt in connection with the sale of two of the 2003 Disposed Communities. During the fourth quarter of 2002, the Company refinanced $101,341,000 in existing mortgage debt resulting in new borrowings in excess of $236,000,000. The weighted average interest rate of the pre-paid debt was 8.2%, and it was replaced by loans with a weighted average interest rate of 5.1%. The Company incurred prepayment penalties from the early extinguishment of this debt of $3,275,000.
Depreciation and amortization expense increased $13,383,000 due to the additional depreciation expense on the 2003 Acquisition Communities and a full year of depreciation expense for the 2002 Acquisition Communities, as well the incremental depreciation on the capital expenditures for additions and improvements to the Core Properties.
In the fourth quarter of 2002, the Company decided to sell virtually all of the assets associated with its general partner interests in the affordable properties to focus solely on the direct ownership and management of market rate apartment communities. At that time, the Company announced its intention to sell the assets, which include principally loans, advances and management contracts, in three phases. The status of the sales is as follows:
Phase I, consisting of the Company's interest in 35 properties containing 1,119 units, of which all were New York State Rural Development properties, was sold on September 5, 2003. The sale price of $1.5 million resulted in a gain on sale of approximately $72,000 that was recorded in the third quarter.
Phase II, consisting of the Company's interest in 49 Pennsylvania Rural Development and other low income housing tax credit properties containing 1,471 units, was sold on December 18, 2003. The sale price of $1.1 million resulted in a loss on sale of approximately $32,000 that was recorded in the fourth quarter of 2003.
Phase III, consisting of the Company`s interest in 38 Upstate New York, Maryland, Ohio and Indiana properties, was under contract to a qualified buyer. The contract price is $6.8 million and the Company is working towards an expected closing in the first half of 2004. The buyer is still engaged in due diligence, so it is possible that there may be some further negotiations relating to price and/or the properties to be included in the sale.
At December 31, 2003, the Company planned during 2004 to pursue the sale of its general partner interests in one additional property (two partnerships) with 1,057 units. At year end, it did not currently have a contract for this sale but anticipated a possible closing in the third quarter of 2004. The Company has guarantees to the partnerships to reimburse limited partners for any lost tax credits (totaling $5.7 million) and to fund operating deficits. The property was currently experiencing high vacancy. The regulatory agreement between the entity which owns the property and the State Housing Authority requires a percentage of residents to meet certain income qualifications. The Company had had difficulty renting the units subject to those requirements to persons it believed were economically qualified to rent the units. The Company did not anticipate that occupancy levels or other aspects of the operational outlook would improve in the foreseeable future under the regulation restrictions. The Company funded operating deficits of $1.3 million in 2003 and expected to continue to fund a similar level until the property is sold. The prior operating advances are not an indicator of future cash requirements, and, in accordance with GAAP, the Company will record impairment charges as operating advances are actually incurred. The net value of the general partnership interests and other loans or assets associated with this property had been reduced to $43,000 at December 31, 2002. The book value at December 31, 2003 of the Company's interest in these partnerships, was a negative $725,000. The value had been reduced below zero as a function of losses passed through to the Company as general partner all of which, or more, had been funded in cash by the Company. Since the Company did not have any agreements in process with respect to a disposition of the property, the Company could not accurately estimate a price at which the property may be disposed of, and it was likely that the Company would have to pay a third party to purchase its interest in and assume its liabilities with respect to future operating advances to this property.
For the year, the Company has recorded a total of $3.5 million in impairment charges, of which $1.7 million pertains to an additional net impairment charge taken in the third quarter upon contract signing to reduce the book value of assets in Phase III to fair market value. The balance, or $1.8 million, represents cash advances reflected in either Equity in earnings (losses) of unconsolidated affiliates ($1.0 million) or Impairment of assets held as general partner ($822,000).
Minority interest increased $4,514,000 due to the effect of the increase in income allocated to the OP Unitholders, which is primarily attributable to the losses associated with the assets associated with the limited partnerships where the Company is a general partner that were present in 2002, which did not repeat during 2003.
Included in discontinued operations for the year ended December 31, 2002 are the operating results, net of minority interest, of twelve, seven and five apartment communities disposed of in 2002, 2003 and 2004, respectively.
Net income decreased $3,141,000 primarily due to the one time charge of $5,000,000 (before minority interest) included in 2003 G&A for the restricted stock granted to the Leenhoutses as more fully described above in the paragraph describing G&A variances.
Liquidity and Capital Resources -------------------------------
The Company's principal liquidity demands are expected to be distributions to the preferred and common stockholders and Operating Partnership Unitholders, capital improvements and repairs and maintenance for the properties, acquisition of additional properties, stock repurchases and debt repayments. The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities. Management anticipates the acquisition of properties of approximately $200 million in 2005, although there can be no assurance that such acquisitions will actually occur.
The Company intends to meet its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank line of credit, described below. The Company considers its ability to generate cash to be adequate to meet all operating requirements and make distributions to its stockholders in accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.
To the extent that the Company does not satisfy its long-term liquidity requirements through net cash flows provided by operating activities and the line of credit, it intends to satisfy such requirements through property debt financing, proceeds from the sale of properties, the issuance of UPREIT Units, proceeds from sales of its common stock through the Dividend Reinvestment Plan ("DRIP"), or issuing additional common shares, shares of the Company's preferred stock, or other securities. As of December 31, 2004, the Company owned 23 properties, with 4,153 apartment units, which were unencumbered by debt.
A source of liquidity in 2005 is expected to be from the sale of properties. During 2004, the Company sold five communities for a total sales price of $92.5 million. The Company sold seven communities during 2003 for a total sales price of $59.3 million. The Company was able to sell these properties at an average capitalization rate of 8.4% and reinvest in the acquisition of properties with more growth potential at an expected first year cap rate of 6.8%. While the capitalization rate from dispositions was 160 basis points higher than for acquisitions, the Company expects to realize a higher unleveraged IRR from its acquisitions due to higher rates of revenue growth expected from the acquired properties. Management has included in its operating plan that the Company will strategically dispose of assets totaling approximately $50 million in 2005, although there can be no assurance that such dispositions will actually occur.
In May 1998, the Company's Form S-3 Registration Statement was declared effective relating to the issuance of up to $400 million of common stock, preferred stock or other securities. As of December 31, 2004, the Company continued to have available securities under the registration statement in the aggregate amount of $144,392,000.
In September 1999, the Company completed the sale of $50 million of Series B Preferred Stock in a private transaction with GE Capital. The Series B Preferred stock carries an annual dividend rate equal to the greater of 8.36% or the actual dividend paid on the Company's common shares into which the preferred shares could be converted. The stock had a liquidation preference of $25.00 per share, a conversion price of $29.77 per share, and a five-year, non-call provision. On February 14, 2002, 1,000,000 shares of the Series B Preferred stock were converted to 839,771 common shares. The conversion had no effect on the reported results of operations. On May 24, 2002 the Company repurchased the remaining 1,000,000 shares outstanding at an amount equivalent to 839,772 common shares (as if the preferred shares had been converted). The Company repurchased the shares for $29,392,000, equal to the $35.00 common stock trading price when the transaction was consummated. A premium of $5,025,000 was incurred on the repurchase and has been reflected as a charge to net income available to common shareholders' in the consolidated statement of operations for the year ended December 31, 2002.
In May and June 2000, the Company completed the sale of $60 million of Series C Preferred Stock in a private transaction with affiliates of Prudential Real Estate Investors ("Prudential"), Teachers Insurance and Annuity Association of America ("Teachers"), affiliates of AEW Capital Management and Pacific Life Insurance Company. The Series C Preferred Stock carried an annual dividend rate equal to the greater of 8.75% or the actual dividend paid on the Company's common shares into which the preferred shares could be converted. The stock had a conversion price of $30.25 per share and a five-year, non-call provision. As part of the Series C Preferred Stock transaction, the Company also issued 240,000 warrants to purchase common shares at a price of $30.25 per share, expiring in five years. On January 9, 2003, holders of 100,000 shares of Series C Preferred Shares elected to convert those shares for 330,579 shares of common stock. On May 8, 2003, 200,000 shares of Series C Preferred Shares were converted into 661,157 shares of common stock. On August 26, 2003, 200,000 shares of Series C Preferred Shares were converted into 661,157 of common stock. On November 5, 2003, holders of the remaining 100,000 shares of Series C Preferred Shares elected to convert those shares for 330,579 shares of common stock. On September 9, 2003, 17,780 warrants were exercised, resulting in the issuance of 17,780 shares of common stock. During the fourth quarter of 2003, the remaining 222,220 common stock warrants were exercised, resulting in the issuance of 222,220 shares of common stock. Neither the conversions nor the warrant exercise had an effect on the reported results of operations.
In June 2000, the Company completed the sale of $25 million of Series D Preferred Stock in a private transaction with The Equitable Life Assurance Society of the United States. The Series D Preferred Stock carries an annual dividend rate equal to the greater of 8.775% or the actual dividend paid on the Company's common shares into which the preferred shares can be converted. The stock has a conversion price of $30 per share and a five-year, non-call provision.
In December 2000, the Company completed the sale of $30 million of Series E Preferred Stock in a private transaction, again with affiliates of Prudential and Teachers. The Series E Preferred Stock carried an annual dividend rate equal to the greater of 8.55% or the actual dividend paid on the Company's common shares into which the preferred shares could be converted. The stock had a conversion price of $31.60 per share and a five-year, non-call provision. In addition, as part of the Series E Preferred Stock transaction, the Company issued warrants to purchase 285,000 common shares at a price of $31.60 per share, expiring in five years. On August 20, 2002, 63,200 of the Series E Convertible Preferred Shares were converted into 200,000 shares of common stock. On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted into 116,456 shares of common stock. On August 26, 2003 the remaining 200,000 shares of Series E Preferred Shares were converted into 632,911 of common stock. On September 9, 2003, 17,100 warrants were exercised, resulting in the issuance of 17,100 shares of common stock. During the fourth quarter of 2003, the remaining 267,900 common stock warrants were exercised, resulting in the issuance of 267,900 shares of common stock. Neither the conversions nor the warrant exercise had an effect on the reported results of operations.
On February 28, 2002, the Company closed on two common equity offerings totaling 704,602 shares of the Company's common stock, at a weighted average price of $30.99 per share, resulting in net proceeds to the Company of approximately $21.8 million.
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a $25.00 liquidation preference per share. This offering generated net proceeds of approximately $58 million. The net proceeds were used to fund the Series B preferred stock repurchase, property acquisitions, and property upgrades. The Series F Preferred Shares are redeemable by the Company at anytime on or after March 25, 2007 at a redemption price of $25.00 per share, plus any accumulated, accrued and unpaid dividends. Each Series F Preferred share will receive an annual dividend equal to 9.00% of the liquidation preference per share (equivalent to a fixed annual amount of $2.25 per share).
In 2000, the Company obtained an investment grade rating from Fitch, Inc. The Company was assigned an initial corporate credit rating of "BBB" (Triple-B), with a rating of "BBB-" (Triple-B Minus) for Series C through E Convertible Preferred Stock and Series F Preferred Stock. This rating remains in effect as of December 31, 2004.
The issuance of UPREIT Units for property acquisitions continues to be a minor source of capital for the Company. During 2004, the Company issued $12,100,000 worth of UPREIT Units as consideration in acquiring two of the four properties acquired in the New Jersey region. The remainder of the $67,400,000 total purchase price was funded through the assumption of debt and cash. No units were issued in connection with the two acquisitions during 2003. During 2002, the Company acquired an 864-unit property for a total purchase price of $81,500,000. The Company issued UPREIT units valued at approximately $11,500,000, with the balance funded by the assumption of debt and cash.
In 1997, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units. The shares/units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board's action did not establish a target price or a specific timetable for repurchase. At December 31, 2000, there was approval remaining to purchase 1,326,500 shares. In 2001, the Board of Directors approved a 1,000,000-share increase in the stock repurchase program. During 2001, the Company repurchased 754,000 shares and 436,700 UPREIT Units at a cost of $20,600,000 and $11,900,000, respectively. On August 6, 2002 the Board of Directors approved a 2,000,000-share increase in the stock repurchase program. During 2003 and 2002, there were no shares or UPREIT Units repurchased by the Company. During 2004, the Company repurchased 1,135,800 shares at a cost of $47,426,000. From January 1, 2005 through February 16, 2005, the Company repurchased 1,300,700 additional shares at a cost of $53,320,000, leaving a remaining share authorization level of 699,300 shares. On February 16, 2005, the Board of Directors approved a 2,000,000 share increase in the stock repurchase program, resulting in a authorization level of 2,699,300 shares. The guidance given for 2005 does not anticipate any additional share repurchase for the remainder of the year. During 2005, the Company will monitor stock prices, the published net asset value, and acquisition alternatives to determine the current best use of capital between the two major uses of capital - stock buyback and acquisitions.
The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in common stock. In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock. The maximum monthly investment without prior Company approval is currently $1,000. The DRIP was amended, effective April 10, 2001, in order to reduce management's perceived dilution from issuing new shares at or below the underlying net asset value. The discount on reinvested dividends and optional cash purchases was reduced from 3% to 2%. The maximum monthly investment (without receiving approval from the Company) was reduced from $5,000 to $1,000. As expected, these changes significantly reduced participation in the Plan. Effective December 10, 2004, the discount was further reduced from 2% to 0%. In addition, in the fourth quarter of 2004, the Company has begun meeting share demand in the program through share repurchase by the transfer agent in the open market on the Company's behalf instead of new share issuance. This removes essentially 100% of the dilution caused by issuing new shares at a price less than the net asset value in an economic and efficient manner. During 2003, $30,300,000 of common stock was issued under this plan, with an additional $17,560,000 (net of $5,978,000 share repurchase) of common stock issued in 2004.
Management monitors the relationship between the Company's stock price and its estimated net asset value. During times when the difference between these two values is small, resulting in little "dilution" of net asset value by common stock issuances, the Company has the flexibility to satisfy the demand for DRIP shares with stock repurchased in the open market or to issue waivers to DRIP participants to provide for investments in excess of the $1,000 maximum monthly investment. No such waivers were granted during 2003 or 2004.
During 2002, the Company extended its revolving line of credit with M&T Bank for a period of three years, increasing the line from $100,000,000 to $115,000,000. As of December 31, 2004 the Company had $58,000,000 outstanding on the line of credit. Borrowings under the line of credit bear interest at 1.05% over the one-month LIBOR rate. Accordingly, increases in interest rates will increase the Company's interest expense and as a result will affect the Company's results of operations and financial condition. The Company renegotiated certain terms of the line of credit effective April 1, 2004, including a ten basis point drop in the interest rate and easing of certain covenant restrictions. The line of credit expires on September 1, 2005. The Company is evaluating alternatives to replace or extend the line of credit after September 1, 2005.
The Credit Agreement relating to this line of credit provides for the Company to maintain certain financial ratios and measurements. One of these covenants is that the Company may not pay any distribution if a distribution, when added to other distributions paid during the three immediately preceding fiscal quarters, exceeds the greater of: (i) 90% of funds from operations and 110% of cash available for distribution; and (ii) the amount required to maintain the Company's status as a REIT. During 2004, the Company was in compliance with the covenants. The Company did not meet the required ratio due to the granting of restricted stock to the retiring Co-CEO's in the fourth quarter of 2003 and the impairment charges recorded in the fourth quarter of 2002. The funds from operations payout ratio was 91% and 94%, respectively, when measured for the calendar years. Waivers have been granted by the participating banks for the excess payout incurred in 2003 and 2002 as indicated above. The line of credit has not been used for long-term financing but adds a certain amount of flexibility, especially in meeting the Company's acquisition goals. Many times it is easier to temporarily finance an acquisition in a short-term nature through the line of credit, with long term secured financing or other sources of capital replenishing the line of credit availability.
On November 23, 2004, the Company signed a supplemental demand note with M&T Bank. The note has a maximum principal amount of $42 million. Borrowings on the note bear interest at 1.25% over the one-month LIBOR rate. The demand note was entered into to fund the Company's stock repurchase program. The Company had no outstanding balance on the note as of December 31, 2004.
As of December 31, 2004, the weighted average rate of interest on the Company's mortgage debt was 5.96% and the weighted average maturity of such indebtedness was approximately eight years. Mortgage debt of $1.6 billion was outstanding with 89% at fixed rates of interest with staggered maturities. This limits the exposure to changes in interest rates, minimizing the effect of interest rate fluctuations on the Company's results of operations and cash flows.
The Company's net cash provided by operating activities increased from $144,107,000 for the year ended December 31, 2003, to $159,195,000 for the year ended December 31, 2004. The increase was principally due to changes in accounts payable and accrued liabilities. The increase in liabilities over the prior year were primarily related to recording the $5,700,000 to repurchase limited partner interests, $3,800,000 for a legal settlement, bonus accrual of $1,500,000, increased insurance reserves of $2,000,000 over the prior year, and the recording of a liability of $1,800,000 in 2004 in relation to state sales tax. The remainder of the difference is attributable to an increase in trade payables offset by a decrease in other assets.
Net cash used in investing activities increased from $112,025,000 in 2003 to $165,466,000 in 2004. The increase was principally due to the higher level of properties purchased in 2004 which increased to $247,500,000 in 2004 from $92,970,000 in 2003. Other changes included an increase of $35,362,000 in proceeds from sale of property and business, offset by a decrease in property additions of $4,131,000, and net advance activity to affiliates of $4,251,000.
The Company's net cash provided by (used in) financing activities increased from using $35,761,000 in 2003 to providing $8,243,000 in 2004. In 2004, proceeds from the sale of common stock totaled $43,095,000. Debt proceeds, used to fund property acquisitions and additions, increased from $54,907,000 in 2003 to $94,038,000 in 2004. Net borrowings on the Company's line of credit increased from a net repayment of $35,000,000 in 2003 to a net borrowing position of $58,000,000 in 2004.
On February 7, 2005, the Board of Directors approved a dividend of $.63 per share for the period from October 1, 2004 to December 31, 2004. This is the equivalent of an annual distribution of $2.52 per share. The dividend is payable February 28, 2005 to shareholders of record on February 17, 2005.
Critical Accounting Policies ----------------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including industry practice and its own past history in forming its estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements may not materialize. However, application of the accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates which may impact comparability of the Company's results of operations to those of companies in similar businesses.
Revenue Recognition -------------------
The Operating Partnership leases its residential properties under leases with terms generally one year or less. Rental income is recognized on a straight-line basis over the related lease term. As a result, deferred rents receivable are created when rental income is recognized during the concession period of certain negotiated leases and amortized over the remaining term of the lease. In accordance with SFAS No. 141, the Company recognizes rental revenue of acquired in-place "above and below" market leases at their fair value over the weighted average remaining lease term. Property other income, which consists primarily of income from operation of laundry facilities, administrative fees, garage and carport rentals and miscellaneous charges to residents, is recognized when earned - when the services are provided, or when the resident incurs the charge.
Property management fees are recognized when earned based on a contractual percentage of net monthly cash collected on rental income.
Change in Accounting Estimate ----------------------------
During the first quarter of 2002, the Company completed a comprehensive review of its real estate related useful lives for certain of its asset classes. As a result of this review, the Company changed its estimate of the remaining useful lives for its buildings and apartment improvements. Effective January 1, 2002, the estimated useful life of all buildings has been extended to 40 years and the estimated useful life of apartment improvements has been changed from 10 years to 20 years. Certain buildings had previously been depreciated over useful lives ranging from 30 to 40 years. As a result of the change, income before extraordinary item for the year-ended December 31, 2002 increased approximately $6.2 million or $.24 on a diluted per share basis. The Company believes the change reflects more appropriate remaining useful lives of the assets based upon the nature of the expenditures and is consistent with prevailing industry practice. This change has been accounted for prospectively in accordance with the provisions of Accounting Principle Board Opinion No. 20, Accounting Changes.
Real Estate -----------
Real estate is recorded at cost. Costs related to the acquisition, development, construction and improvement of properties are capitalized. Recurring capital replacements typically include carpeting and tile, appliances, HVAC equipment, new roofs, site improvements and various exterior building improvements. Non-recurring upgrades include, among other items, community centers, new appliances, new windows, kitchens and bathrooms. Interest costs are capitalized until construction is substantially complete. When retired or otherwise disposed of, the related asset cost and accumulated depreciation are cleared from the respective accounts and the net difference, less any amount realized from disposition, is reflected in income. Ordinary repairs and maintenance that do not extend the life of the asset are expensed as incurred.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." This standard requires (i) recognition of an impairment loss of the carrying amount of a long-lived asset if it is not recoverable from its undiscounted cash flows and (ii) measurement of an impairment loss as the difference between the carrying amount and fair value of the asset unless an asset is held for sale, in which case it would be stated at the lower of carrying amount or fair value less costs to dispose. In addition, SFAS No. 144 also describes a probability-weighted cash flow estimation approach to deal with situations which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated. The determination of undiscounted cash flows requires significant estimates made by management (such as estimating future net operating income and estimating fair value upon sale of each property owned) and considers the expected course of action at the balance sheet date. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could impact the determination of whether an impairment exists.
Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset's carrying value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The Company records impairment losses and reduces the carrying amounts of assets held for sale when the carrying amounts exceed the estimated selling proceeds less the costs to sell.
The Company accounts for its acquisitions of investments in real estate in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, which requires the fair value of the real estate acquired to be allocated to the acquired tangible assets, consisting of land, building, personal property and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of resident relationships, based in each case on their fair values. The Company considers acquisitions of operating real estate assets to be businesses as that term is contemplated in Emerging Issues Task Force Issue No. 98.3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.
The Company allocates purchase price to the fair value of the tangible assets of an acquired property (which includes the land, building, and personal property) determined by valuing the property as if it were vacant. The as-if-vacant value is allocated to land, buildings, and personal property based on management's determination of the relative fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.
Other intangible assets acquired include amounts for in-place lease values that are based upon the Company's evaluation of the specific characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on the property acquired.
The total amount of other intangible assets acquired is further allocated to in-place leases, which includes other resident relationship intangible values based on management's evaluation of the specific characteristics of the residential leases and the Company's resident retention history.
The value of in-place leases and resident relationships are amortized as a leasing cost expense over the initial term of the respective leases and any expected renewal period.
Discontinued Operations -----------------------
In addition to the provisions of SFAS No. 144 described above, the standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also retains the basic provisions for presenting discontinued operations in the income statement but broadened the scope to include a component of an entity rather than a segment of a business. Pursuant to the definition of a component of an entity in the SFAS, assuming no significant continuing involvement, the sale of an apartment community is now considered a discontinued operation. In addition, apartment communities classified as held for sale are also considered a discontinued operation. The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date.
Included in discontinued operations for the three years ended December 31, 2004 are twenty four apartment community dispositions (five, seven and twelve in 2004, 2003 and 2002, respectively). The operations of such apartment communities have been reflected as discontinued operations in the consolidated financial statements for each of the three years ended December 31, 2004 included herein. In addition, discontinued operations for the year ended December 31, 2004 includes the operating results, net of minority interest, of 22 variable interest entities ("VIE's") sold during 2004 and 12 VIE's held for sale as of December 31, 2004.
Capital Improvements --------------------
The Company has a policy to capitalize costs related to the acquisition, development, rehabilitation, construction, and improvement of properties. Capital improvements are costs that increase the value and extend the useful life of an asset. Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred. Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn. Recurring capital improvements typically include: appliances, carpeting and flooring, HVAC equipment, kitchen/ bath cabinets, new roofs, site improvements and various exterior building improvements. Non- recurring upgrades include, among other items: community centers, new windows, and kitchen/ bath apartment upgrades. The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.
The Company is required to make subjective assessments as to the useful lives of its properties and improvements for purposes of determining the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on the Company's net income. See "Change in Accounting Estimate" above.
Estimate of Fair Value of Assets Associated with General Partnership Interests
The Company uses the sale contract to determine the fair market value of assets associated with its general partner investment, including notes, advances, management contracts and the equity investment in the limited partnership. The fair value used could vary from the actual sales price of the assets which could result in further charges or gains recognized upon disposition. See Note 3 to the Notes to Consolidated Financial Statements for further discussion.
Federal Income Taxes --------------------
The Company has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. As a result, the Company generally is not subject to Federal or State income taxation at the corporate level to the extent it distributes annually at least 90% of its REIT taxable income to its shareholders and satisfies certain other requirements. For the years ended December 31, 2004, 2003 and 2002, the Company distributed in excess of 100% of its taxable income; accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Stockholders of the Company are taxed on dividends and must report distributions from the Company as either ordinary income, capital gains, or as return of capital.
Included in total assets on the Consolidated Balance Sheets are deferred tax assets of $8,737 and $8,394 as of December 31, 2004 and 2003, respectively. The deferred tax assets were a result of the net losses associated with the affordable property portfolio sales over the past two years. Management does not believe it is more likely than not that these deferred assets will be used, and accordingly has recorded a reserve against the deferred tax asset of $8,680 and $8,185 for the years ended December 31, 2004 and 2003, respectively. The deferred tax assets are associated with the Management Companies who perform certain of the residential and development activities of the Company. The Management Companies historically provided commercial management services and provided loan advances to affordable housing entities owned through general partnership interests. As these activities are no longer provided, Management does not currently believe there is a source for future material taxable earnings for the Management Companies that would give rise to value for the deferred tax assets.
Off-Balance Sheet Investments -----------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R - Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 - Consolidated Financial Statements. The interpretation addresses consolidation by businesses of special purpose entities (variable interest entities, "VIE"). The Company has made a determination that all 41 of the remaining limited partnerships are Variable Interest Entities. The Company has further determined that it is the primary beneficiary in 34 of the limited partnerships and therefore consolidated these entities effective March 31, 2004.
Effective December 31, 2004, the Company has closed on the sale of its general partner interests in 26 of its VIE's. The Company has under contract an additional twelve partnerships, pending lender approval.
Of the remaining two properties (three partnerships), with a total of 1,925 units, the Company will retain its ownership interest and will continue to manage one of them while it pursues various disposition options. The other property (two partnerships) is being disposed of through a default on the non-recourse financing. The Company has met with the federal agency which insured the repayment of that financing. That agency has agreed that the Company may continue to manage the property until the agency can auction or sell the loan in a note sale. The note sale is expected to occur in March, 2005. Following the note sale the Company expects that it will transfer its interest in this property to the new note holder in lieu of a foreclosure, and that it will cease managing the property. In January 2005, the Company repurchased the limited partner's 99.99% interests in accordance with the partnership agreements. The Company has recorded the $5.7 million liability to repurchase these limited partnership interests and the resulting loss on disposition of property of $5.0 million. The Company does not anticipate the need to fund operating deficits and will only participate in the cash flow of the property by receiving a fee for managing the property for so long as there is cash flow available.
Due to the sale and contract referenced above, the results of operations of the 34 limited partnerships for the year ended December 31, 2004 have been consolidated herein and reported as discontinued operations. The balance sheet consolidates the accounts of the remaining twelve of the original 34 properties classified as held for sale as of December 31, 2004. The tables on the following pages show the effects of the VIE's being consolidated.
Home Properties determined that it is not the primary beneficiary in seven partnerships syndicated under U.S. Department of Housing and Urban Development subsidy programs, of which four have been sold as of December 31, 2004. The three remaining investments will continue to be accounted for under the equity method. For those three investments, the Company will continue to record its allocable share of the respective partnership's income or loss based on the terms of the agreement. To the extent it is determined that the LPs cannot absorb their share of the losses, if any, the GP will record the LPs share of such losses. The Company will absorb such losses to the extent the Company has outstanding loans or advances and the limited partner has no remaining capital account.
The Company, through its general partnership interest in certain affordable property limited partnerships, has guaranteed the low income housing tax credits to the limited partners for a period of either five or ten years in 10 partnerships totaling approximately $21 million. Such guarantee requires the Company to operate the properties in compliance with Internal Revenue Code Section 42 for 15 years. The weighted average number of compliance years remaining is approximately 9 years. In addition, acting as the general partner in certain partnerships, the Company is obligated to advance funds to meet partnership operating deficits.
The Company believes the properties' operations conform to the applicable requirements as set forth above. In addition, the Company has required the buyer of its general partner interests in the limited partnerships to secure releases of the Company's guarantees from the limited partners.
As indicated above, the Company is working towards a complete disposition of its general partner interests in affordable properties. The following table below summarizes the effect of the consolidation requirements of FIN 46R on the balance sheet as of December 31, 2004.
Consolidation Summary of the Balance Sheet as of December, 2004 (in thousands)
December 31, Effect of December 31, 2004 FIN 46R 2004 (before FIN 46R) Consolidation (as reported) ---------------- ------------- ------------- ASSETS Real estate: Land $ 402,620 $ - $ 402,620 Buildings, improvements and equipment 2,642,570 - 2,642,570 Real estate held for sale or disposal, net - 78,711 78,711 ---------- --------- ---------- 3,045,190 78,711 3,123,901 Less: accumulated depreciation ( 405,919) - ( 405,919) ---------- --------- ---------- Real estate, net 2,639,271 78,711 2,717,982
Cash and cash equivalents 7,269 656 7,925 Cash in escrows 39,528 4,355 43,883 Accounts receivable 6,198 466 6,664 Prepaid expenses 18,057 167 18,224 Investment in and advances to affiliates 431 ( 431) - Deferred charges 9,918 3,860 13,778 Other assets 8,323 17 8,340 ---------- --------- ---------- Total assets $2,728,995 $ 87,801 $2,816,796 ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable $1,567,085 $ 77,637 $1,644,722 Line of credit 58,000 - 58,000 Accounts payable 24,057 543 24,600 Accrued interest payable 7,539 1,337 8,876 Accrued expenses and other liabilities 26,194 556 26,750 Security deposits 22,118 533 22,651 ---------- --------- ---------- Total liabilities 1,704,993 80,606 1,785,599 ---------- --------- ----------
Minority interest 303,259 7,516 310,775 ---------- --------- ----------
Stockholders' equity 720,743 ( 321) 720,422 ---------- --------- ---------- Total liabilities and stockholders' equity $2,728,995 $ 87,801 $2,816,796 ========== ========= ==========
Acquisitions and Dispositions
In 2004, the Company acquired a total of ten communities with a total of 2,486 units for total consideration of approximately $247,500,000, or an average of approximately $99,600 per unit. For the same time period, the Company sold five properties with a total of 1,646 units for total consideration of $92,500,000, or an average of $56,200 per unit. The weighted average expected first year cap rate of the 2004 Acquisition Communities was 6.7% and of the 2004 Disposed Communities was 8.2%. The weighted average unleveraged internal rate of return (IRR) during the Company's ownership for the properties sold was 13.1%.
In 2003, the Company acquired a total of two communities with a total of 730 units for total consideration of approximately $92,900,000, or an average of approximately $127,200 per unit. For the same time period, the Company sold seven properties with a total of 1,568 units for total consideration of $59,300,000, or an average of $37,800 per unit. The weighted average expected first year cap rate of the 2003 Acquisition Communities was 7.3% and of the 2003 Disposed Communities was 8.7%. The weighted average unleveraged IRR during the Company's ownership for the properties sold was 9.5%.
In January 2005, the Company acquired a 204-unit community in Westminster, Maryland. The total purchase price of $19,700,000, including closing costs, equates to approximately $96,400 per apartment unit. Consideration for this property was funded through the use of the Company's line of credit. Management expects a 7.1% weighted average first year capitalization rate on this acquisition.
Contractual Obligations and other Commitments ---------------------------------------------
The primary obligations of the Company relate to its borrowings under the line of credit and mortgage notes payable. The Company's line of credit matures in September 2005, and has $58,000,000 outstanding at December 31, 2004. The $1.6 billion in mortgage notes payable have varying maturities ranging from 1 to 38 years. The principal payments on the mortgage notes payable for the years subsequent to December 31, 2004, are set forth in the table below as "long-term debt."
The Company has a non-cancelable operating ground lease for one of its properties. The lease expires May 1, 2020, with options to extend the term of the lease for two successive terms of twenty-five years each. The lease provides for contingent rental payments based on certain variable factors. At December 31, 2004, future minimum rental payments required under the lease are $70,000 per year until the lease expires.
The Company leases its corporate office space from an affiliate and the office space for its regional offices from third parties. The corporate office space requires an annual base rent plus a pro-rata portion of property improvements, real estate taxes, and common area maintenance. The regional office leases require an annual base rent plus a pro-rata portion of real estate taxes. These leases are set forth in the table below as "Operating lease."
On December 1, 2004 the Company entered into a lease agreement with a third party owner to manage the operations of one of their communities. The lease has a term of five years, but after two years, (from the 24th month to the 36th month) the owner may require us to buy the property. From the 36th month to the end of the lease term, we have the right to require the owner to sell the property to the Company. It is the Company's expectation that closing on the acquisition of the property will occur no later than 36 months after the commencement of the lease. The estimated future acquisition cost of $140 million is included in the total purchase obligations amount for the year 2007 in the table below.
Purchase obligations represent those costs that the Company is contractually obligated to in the future. The significant components of this caption are costs for capital improvements at the Company's properties, as well as costs for normal operating and maintenance expenses at the site level that are tied to contracts such as utilities, landscaping and grounds maintenance and advertising. The purchase obligations include amounts tied to contracts some of which expire in 2005. It is the Company's intention to renew these normal operating contracts; however, there has been no attempt to estimate the length or future costs of these contracts.
Tabular Disclosure of Contractual Obligations:
Payments Due by Period (in thousands) ------------------------------------- Contractual Obligations Total 2005 2006 2007 2008 2009 Thereafter ----------------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt $1,644,722 $40,006 $72,295 $198,502 $203,215 $62,952 $1,067,752 Ground lease 1,120 70 70 70 70 70 770 Operating lease 6,222 1,445 1,016 974 975 929 883 Purchase obligations 158,309 15,916 2,093 140,272 24 4 - ---------- ------- ------- -------- -------- ------- ----------
Total* $1,810,373 $57,437 $75,474 $339,818 $204,284 $63,955 $1,069,405 ========== ======= ======= ======== ======== ======= ==========
* The contractual obligation and other commitments in the table are set forth as required by Item 303(a)(5) of Regulation 5-K promulgated by the SEC in January of 2003 and are not prepared in accordance with generally-accepted accounting principles.
As discussed in the section entitled "Off-Balance Sheet Investments," the Company, through its general partnership interests in certain affordable property limited partnerships, has guaranteed the Low Income Housing Tax Credits to limited partners in 10 partnerships totaling approximately $21,000,000. With respect to the guarantee of the low income housing tax credits, the Company believes the properties operations conform to the applicable requirements (as set forth above in the second paragraph of the "Off Balance Sheet Investment" section) and does not anticipate any payment on the guarantees. In addition, the Company, acting as general partner in certain partnerships, is obligated to advance funds to meet partnership operating deficits. The Company has required the buyers of its general partner interests in the limited partnerships to secure releases of the Company's guarantees from the limited partner and/or to indemnify the Company against payment on those guarantees.
Capital Improvements --------------------
The Company has a policy to capitalize costs related to the acquisition, development, rehabilitation, construction, and improvement of properties. Capital improvements are costs that increase the value and extend the useful life of an asset. Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred. Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn. Recurring capital improvements typically include: appliances, carpeting and flooring, HVAC equipment, kitchen/ bath cabinets, new roofs, site improvements and various exterior building improvements. Non- recurring upgrades include, among other items: community centers, new windows, and kitchen/ bath apartment upgrades. The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.
The following table is a list of the items that management considers recurring, non-revenue enhancing capital and maintenance expenditures for a standard garden style apartment. Included are the per unit replacement cost and the useful life that management estimates the Company incurs on an annual basis.
Maintenance Capitalized Expense Total Capitalized Expenditure Cost per Cost per Cost per Useful Per Unit Unit Unit Category Unit Life(1) Per Year(2) Per Year(3) Per Year --------------------------------------------------------------------------------------------------
Appliances $1,000 18 $ 55 $ 5 $ 60 Blinds/Shades 130 6 22 6 28 Carpets/cleaning 840 6 140 97 237 Computers, equipment, misc.(4) 120 5 22 29 51 Contract repairs - - - 102 102 Exterior painting (5) 84 5 17 1 18 Flooring 250 8 31 - 31 Furnace/Air (HVAC) 765 24 32 43 75 Hot water heater 130 7 19 - 19 Interior painting - - - 138 138 Kitchen/bath cabinets 1,100 25 44 - 44 Landscaping - - - 106 106 New roof 800 23 35 - 35 Parking lot 400 15 27 - 27 Pool/ Exercise facility 100 15 7 23 30 Windows 980 36 27 - 27 Miscellaneous (6) 705 15 47 40 87 -------------------------------------------------------------------------------------------------- Total $7,404 $525 $590 $1,115 --------------------------------------------------------------------------------------------------
(1) Estimated weighted average actual physical useful life of the expenditure capitalized.
(2) This amount is not necessarily incurred each and every year. Some years, per unit expenditures in any category will be higher, or lower depending on the timing of certain longer lived capital or maintenance items.
(3) These expenses are included in the operating and maintenance line item of the Consolidated Statement of Operations. Maintenance labor costs are not included in the $590 per unit maintenance estimate. All personnel costs for site supervision, leasing agents, and maintenance staff are combined and disclosed in the Company's same- store expense detail schedule. The annual per unit cost of maintenance staff would add another $570 to expenses and total cost figures provided.
(4) Includes computers, office equipment/ furniture, and maintenance vehicles.
(5) The level of exterior painting may be lower than other similar titled presentations as the Company's portfolio has a significant amount of brick exteriors. In addition, other exposed exterior surfaces are most often covered with aluminum or vinyl.
(6) Includes items such as; balconies, siding, and concrete/sidewalks.
The Company's strategy in operating apartments is to improve every property every year regardless of age. Another part of its strategy is to purchase older properties and rehab and reposition them to enhance internal rates of return. This strategy results in higher costs of capital expenditures and maintenance costs than may be reported by other apartment companies, but the Company's experience is that the strategy results in higher revenue growth, higher net operating income growth and a higher rate of property appreciation.
The Company estimates that during 2004, approximately $525 per unit was spent on recurring capital expenditures. The table below summarizes the breakdown of capital improvements by major categories between recurring and non-recurring, revenue generating capital improvements as follows:
For the year- ended December 31, (in thousands, except per unit data) 2004 2003 ---------------------------------------------------------------------- ------------------------- Non- Recurring Per Recurring Per Total Capital Per Total Capital Per Cap Ex Unit(a) Cap Ex Unit(a) Improvements Unit(a) Improvements Unit(a) ------ ------- ------ ------- ------------ ------- ------------ ------- New Buildings $ - $ - $3,702 $ 91 $ 3,702 $ 91 $ 1,840 $ 47 Major building improvements 3,721 91 15,958 390 19,679 481 20,929 537 Roof replacements 1,422 35 2,429 59 3,851 94 4,226 109 Site improvements 1,363 33 8,003 196 9,366 229 7,666 197 Apartment upgrades 2,685 66 23,982 587 26,667 653 34,017 873 Appliances 2,230 55 1,987 49 4,217 104 4,720 121 Carpeting/Flooring 7,001 171 3,670 90 10,671 261 11,774 302 HVAC/Mechanicals 2,062 50 12,129 297 14,191 347 13,136 337 Miscellaneous 915 24 2,553 62 3,468 86 3,389 87 ------- ---- ------- ------ -------- ------ -------- ------ Totals $21,399 $525 $74,413 $1,821 $ 95,812 $2,346 $101,697 $2,610
(a) Calculated using the weighted average number of units owned, including 38,560 core units, 2003 acquisition units of 730 and 2004 acquisition units of 1,593 for the year-ended December 31, 2004 and 38,560 core units and 2003 acquisition units of 386 for the year-ended December 31, 2003.
The schedule below summarizes the breakdown of total capital improvements between core and non-core as follows:
For the year- ended December 31, (in thousands, except per unit data) 2004 2003 ---------------------------------------------------------------------- ------------------------- Non- Recurring Per Recurring Per Total Capital Per Total Capital Per Cap Ex Unit Cap Ex Unit Improvements Unit Improvements Unit ------ ------- ------ ------- ------------ ------- ------------ ------- Core Communities $20,183 525 $70,968 $1,840 $ 91,151 $2,365 $101,398 $2,630 2004 Acquisition Communities 834 525 2,562 1,608 3,396 2,133 - - 2003 Acquisition Communities 382 525 883 1,209 1,265 1,734 299 774 ------- ---- ------- ------ -------- ------ -------- ------ Sub-total 21,399 525 74,413 1,821 95,812 2,346 101,697 2,610 2004 Disposed Communities 699 525 1,844 1,379 2,543 1,904 3,014 1,831 2003 Disposed Communities - - - - - - 752 863 Corporate office expenditures(1) - - - - 4,345 - 883 - ------- ---- ------- ------ -------- ------ -------- ------ $22,098 $525 $76,257 $1,806 $102,700 $2,331 $106,346 $2,546
(1) No distinction is made between recurring and non-recurring expenditures for corporate office.
Environmental Issues --------------------
Phase I environmental audits have been completed on substantially all of the Owned Properties. There are no recorded amounts resulting from environmental liabilities as there are no known contingencies with respect thereto. Furthermore, no condition is known to exist that would give rise to a material liability for site restoration or other costs that may be incurred with respect to the sale or disposal of a property.
During the past few years, there has been media attention given to the subject of mold in residential communities. The Company has responded to this attention by providing to its community management the Company's "Operation and Maintenance Plan For the Control of Moisture" ("The Plan"). The Plan, designed to analyze and manage all exposures to mold, has been implemented at all of the Company's communities. There have been only limited cases of mold identified to management due to the application and practice of The Plan. No condition is known to exist that would give rise to a material liability for site restoration or other costs that may be incurred with respect to mold.
New Accounting Pronouncements -----------------------------
In May 2003, FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this pronouncement for the year ended December 31, 2004, and it did not have a material impact on the Company's results of operations, financial position or liquidity.
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). This interpretation addresses consolidation by business enterprises of variable interest entities in which the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or in which the equity investors do not have the characteristics of a controlling financial interest. This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Effective March 31, 2004, the Company adopted FIN 46R. See footnotes #1 and #3 to the financial statements for a discussion of the impact on the Company from the adoption of FIN 46R.
In March 2004, the FASB issued EITF 03-6 "Participating Securities and the Two-Class Method under FASB Statement 128, Earnings per Share. EITF 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. The EITF is effective for the first fiscal periods beginning after March 31, 2004. The Company adopted the provisions of this EITF effective April 1, 2004, and had no impact on the Company's results of operations, financial position or liquidity.
In November 2004, the FASB issued EITF Issue 04-8 "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share". EITF 04-8 addresses a number of issues relating to issued securities with embedded market price contingent conversion features, which includes contingently convertible preferred stock, and the impact on the calculation of earnings per share on a quarterly basis. The EITF is effective for periods ending after December 15, 2004. The Company adopted the provisions of this EITF for the year ended December 31, 2004, and it did not have a material impact on the Company's results on operations, financial position or liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R Share Based Payment (SFAS No. 123R). The statement is a revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No 123R supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires that entities recognize the cost of employee services received in exchange for awards of equity instruments (i.e. stock options) based on the grant-date fair value of those awards. The Statement is effective for the first fiscal periods beginning after December 15, 2005. On January 1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS No. 123. Effective on that date, the Company began recognizing compensation cost related to stock option grants. Based upon the Company's adoption of SFAS No. 148, the issuance of SFAS No. 123R will have no impact on the Company's results of operations, financial position or liquidity.
Economic Conditions -------------------
Substantially all of the leases at the communities are for a term of one year or less, which enables the Company to seek increased rents upon renewal of existing leases or commencement of new leases. These short-term leases minimize the potential adverse effect of inflation on rental income, although residents may leave without penalty at the end of their lease terms and may do so if rents are increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic conditions, which affect various real estate sectors and geographic regions with differing intensities and at different times. Starting in 2002 and continuing into 2004 many regions of the United States have 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. In light of this, we will continue to review our business strategy; however, we believe that given our property type and the geographic regions in which we are located, we do not anticipate any changes in our strategy or material effects in financial performance.
Contingencies -------------
In 2001, the Company underwent a state tax audit. The state has assessed taxes of $469,000 for the 1998 and 1999 tax years under audit. If the state's position is applied to all tax years through December 31, 2001, the assessment would be $1.3 million. At the time, the Company believed the assessment and the state's underlying position were not supportable by the law nor consistent with previously provided interpretative guidance from the office of the State Secretary of Revenue. After two subsequent enactments by the state legislation during 2002 affecting the pertinent tax statute, the Company has been advised by outside tax counsel that its filing position for 1998-2001 should prevail. During December 2003, the state's governor signed legislation which included the REIT tax provisions. Based upon this, Company's tax counsel expects that the outstanding litigation should now be able to be resolved. Effective January 1, 2003, the Company reorganized the ownership of Home Properties Trust, which should subject the Company to a much lower level of tax going forward. In September 2004, the Company settled the 1998 year under audit for a total of $39,000, including interest. The 1999-2001 tax years will take time to resolve; however, the Company's outside counsel still maintains that the Company should not have any additional liability.
During April, 2004, the Company finalized negotiations with New York State settling a sales and use tax audit covering the period June 1, 1999 through May 31, 2002. The total cost to the Company as a result of the audit amounted to $861,000. This was included in the first quarter results and allocated $448,000 to expense and $413,000 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter the Company examined its sales and use tax compliance in the other states in which the Company operates. Based upon its internal analysis, the Company estimated its liability as of June 30, 2004 in those states where it found non-compliance and recorded at June 30, 2004 a liability of $1,712,000. This was included in the second quarter results and allocated $761,000 to expense and $951,000 capitalized to real estate assets for improvements. The liability recorded relates to the period beginning on the later of: (i) the date the Company first purchased property in the applicable state; or (ii) January 1, 1997 and ending on June 30, 2004. In addition, the Company increased the liability for sales tax exposure by $68,000 for the six-month period ended December 31, 2004. The Company recognizes that the liability recorded is an estimate and that the actual tax liability that will be paid in the future may be less than or greater than this estimate. The Company has determined that the likely range is between $1,325,000 and $2,300,000. The Company has filed voluntary disclosure agreements with the four states where it has financial exposure. Once an official agreement is reached with each state, assuming the statute of limitations for voluntary disclosure is respected, there is a potential to reverse up to approximately $440,000 of prior period accruals in 2005. The portion of this reduction that would affect the statement of operations is approximately $230,000.
In connection with the issuance of the Series F Preferred Stock, the Company is required to maintain for each fiscal quarterly period a fixed charge coverage ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Articles Supplementary to the Company's Articles of Incorporation, of 1.75 to 1.0. The fixed charge coverage ratio and the components thereof do not represent a measure of cash generated from operating activities in accordance with generally accepted accounting principles and are not necessarily indicative of cash available to fund cash needs. Further, this ratio should not be considered as an alternative measure to net income as an indication of the Company's performance or of cash flow as a measure of liquidity. The Company has been in compliance with the covenant since the Series F Preferred Stock was issued. If the Company fails to be in compliance with this covenant for six or more consecutive fiscal quarters, the holders of the Series F Preferred Stock would be entitled to elect two directors to the board of directors of the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk -------- ----------------------------------------------------------
The Company's primary market risk exposure is interest rate risk. At December 31, 2004 and December 31, 2003, approximately 89% and 98%, respectively, of the Company's debt bore interest at fixed rates with a weighted average maturity of approximately 8 and 9 years and a weighted average interest rate of approximately 6.23% and 6.47%, respectively, including the $34.0 million and $25.2 million of debt, respectively which has been swapped to a fixed rate. The remainder of the Company's debt bears interest at variable rates with a weighted average maturity of approximately 8 and 2 years, respectively, and a weighted average interest rate of 2.98% and 2.32%, respectively, at December 31, 2004 and December 31, 2003. The Company does not intend to utilize a significant amount of permanent variable rate debt to acquire properties in the future. On occasion, the Company may use its line of credit in connection with a property acquisition with the intention to refinance at a later date. The Company believes, however, that in no event would increases in interest expense as a result of inflation significantly impact the Company's distributable cash flow.
At December 31, 2004 and December 31, 2003, the interest rate risk on $34 million and $25.2 million, respectively of such variable rate debt has been mitigated through the use of interest rate swap agreements (the "Swaps") with major financial institutions. The Company is exposed to credit risk in the event of non-performance by the counter-parties to the Swaps. The Company believes it mitigates its credit risk by entering into these Swaps with major financial institutions. The Swaps effectively convert an aggregate of $34 million at December 31, 2004 in variable rate mortgages to fixed rates of 5.35%, 5.39%, 8.22% and 8.40% and $25.2 million at December 31, 2003 in variable rate mortgages to fixed rates of 5.91%, 8.22% and 8.40%.
At December 31, 2004 and December 31, 2003, the fair value of the Company's fixed rate debt, including the $34 million at December 31, 2004 and $25.2 million at December 31, 2003 which was swapped to a fixed rate, amounted to a liability of $1.7 billion and $1.5 billion, respectively, compared to its carrying amount of $1.64 billion and $1.4 billion, respectively. The Company estimates that a 100 basis point increase in market interest rates at December 31, 2004 would have changed the fair value of the Company's fixed rate debt to a liability of $1.63 billion.
The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio and may enter into swap positions based upon market fluctuations. In addition, the Company believes that it has the ability to obtain funds through additional equity offerings or the issuance of UPREIT Units. Accordingly, the cost of obtaining such interest rate protection agreements in relation to the Company's access to capital markets will continue to be evaluated. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of December 31, 2004, the Company had no other material exposure to market risk.
Additional disclosure about market risk is incorporated herein by reference to the discussion under the heading "Results of Operations" in Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 8.
Item 8. Financial Statements and Supplementary Data ------- -------------------------------------------
The financial statements and supplementary data are listed under Item 15(a) and filed as part of this report on the pages indicated.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and ------- ----------------------------------------------------------------------- Financial Disclosure --------------------
None.
Item 9A.
Item 9A. Controls and Procedures --------------------------------
Evaluation of Disclosure Controls and Procedures. -------------------------------------------------
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the officers who certify the Company's financial reports and to the other members of senior management and the Board of Directors.
The principal executive officer and principal financial officer evaluated, as of December 31, 2004, 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 fourth quarter of the year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has not identified any material weaknesses in its internal controls.
Management's Report on Internal Control Over Financial Reporting ----------------------------------------------------------------
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with the United States of America generally accepted accounting principles.
Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under that framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein, which expresses unqualified opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004.
Item 9B.
Item 9B. Other Information --------------------------
On November 2, 2004, the Board of Directors approved director compensation for 2005. A summary sheet detailing 2005 compensation is attached to this report as Exhibit 10.72.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant -----------------------------------------------------------
Directors ---------
The Board of Directors (the "Board") currently consists of twelve members, two of whom were appointed by the Board in 2004 and are, therefore, standing for election by the shareholders for the first time. The terms for all of the directors of Home Properties expire at the 2004 Shareholders' Meeting.
The information sets forth, as of February 24, 2005, for each director of the Company such director's name, experience during the last five years, other directorships held, age and the year such director was first elected as director of the Company.
Year First Name of Director Age Elected Director ---------------- --- ---------------- William Balderston, III 77 1994 Josh E. Fidler 49 2004 Alan L. Gosule 64 1996 Leonard F. Helbig, III 59 1994 Roger W. Kober 71 1994 Nelson B. Leenhouts 69 1993 Norman Leenhouts 69 1993 Edward J. Pettinella 53 2001 Clifford W. Smith, Jr. 58 1994 Paul L. Smith 69 1994 Thomas S. Summer 51 2004 Amy L. Tait 46 1993
William Balderston, III has been a director of the Company since 1994. From 1991 to the end of 1992, he was an Executive Vice President of The Chase Manhattan Bank, N.A. From 1986 to 1991, he was President and Chief Executive Officer of Chase Lincoln First Bank, N.A., which was merged into The Chase Manhattan Bank, N.A. He is a Senior Trustee of the University of Rochester and a member of the Board of Governors of the University of Rochester Medical Center. Mr. Balderston is a graduate of Dartmouth College.
Josh E. Fidler has been a director of the Company since August, 2004. Mr. Fidler is a General Partner and co-founder of Boulder Ventures, Ltd., a manager of venture capital funds, which has been in operation since 1995. Since 1985, he has also been a principal in a diversified real estate development business known as The Macks Group. In 1999, the Company acquired 3,297 apartment units from affiliates of The Macks Group. Mr. Fidler was also a principal of the entity which owned a 240-unit apartment community which the Company purchased in 2004. He is a graduate of Brown University and received a law degree from New York University. Mr. Fidler is a member of the Maryland Region Advisory Board of SunTrust Bank and the Board of Trustees of The Park School.
Alan L. Gosule, has been a director of the Company since 1996. Mr. Gosule has been a partner in the law firm of Clifford Chance US LLP, New York, New York, since August 1991 and prior to that time was a partner in the law firm of Gaston & Snow. He serves as Regional Head of the Clifford Chance US LLP Real Estate Department for the Americas. Mr. Gosule is a graduate of Boston University and its Law School and received an LL.M. from Georgetown University. Mr. Gosule also serves on the Board of Directors of MFA Mortgage Investments, Inc. He is a member of the Board of Advisors of Paloma, LLC, which is the general partner of Simpson Housing Limited Partnership, and is a voting trustee of F.L. Putnam Investment Management Company.
Leonard F. Helbig, III has been a director of the Company since 1994. Since September 2002 he has served as a Director of Integra Realty Advisors in Philadelphia. Between 1980 and 2002 he was employed with Cushman & Wakefield, Inc. From 1990 until 2002, Mr. Helbig served as President, Financial Services for Cushman & Wakefield, Inc.. Prior to that and since 1984, Mr. Helbig was the Executive Managing Director of the Asset Services and Financial Services Groups. He was a member of that firm's Board of Directors and Executive Committee. Mr. Helbig is a member of the Urban Land Institute, the Pension Real Estate Association and the International Council of Shopping Centers. Mr. Helbig is a graduate of LaSalle University and holds the MAI designation of the American Institute of Real Estate Appraisers.
Roger W. Kober has been a director of the Company since 1994. Mr. Kober is currently a member of the Advisory Board of Rochester Gas and Electric Corporation, an Energy East Company. He was employed by Rochester Gas and Electric Corporation from 1965 until his retirement on January 1, 1998. From March 1996 until January 1, 1998, Mr. Kober served as Chairman and Chief Executive Officer of Rochester Gas and Electric Corporation. He is a member of the Board of Trustees of Rochester Institute of Technology. Mr. Kober is a graduate of Clarkson College and holds a Masters Degree in Engineering from Rochester Institute of Technology.
Nelson B. Leenhouts has served as Board Co-Chair since his retirement as Co-Chief Executive Officer effective January 1, 2004. He had served as Co-Chief Executive Officer, President and a director of the Company since its inception in 1993. Since their formation, he has also served as President and Chief Executive Officer and a director of HP Management, a director of HPRS, which he has also served as President since 2000 and as a Vice President prior to that. Mr. Leenhouts also currently serves as a Senior Advisor to the Company pursuant to an Employment Agreement with a term that expires on December 31, 2006. Nelson Leenhouts was the founder, and a co-owner, together with Norman Leenhouts, of Home Leasing, and has served as President of Home Leasing since 1967. He is a member of the Board of Directors of the Genesee Valley Trust Company. Nelson Leenhouts is a graduate of the University of Rochester. He is the twin brother of Norman Leenhouts.
Norman P. Leenhouts has served as Board Co-Chair since his retirement as Co-Chief Executive Officer effective January 1, 2004. He had served as Board Chair, Co-Chief Executive Officer and a director of the Company since its inception in 1993. Since their formation, he has also served as Board Chair of HP Management and as a director of HPRS, which he also has served as Board Chair since 2000. Mr. Leenhouts also currently serves as a Senior Advisor to the Company pursuant to an Employment Agreement with a term that expires on December 31, 2006. Norman Leenhouts is a co-owner, together with Nelson Leenhouts, of Home Leasing and has served as Board Chair of Home Leasing since 1971. He is a member of the Board of Trustees of the University of Rochester, Roberts Wesleyan College, The Charles E. Finney School and the Free Methodist Foundation, where he also serves as Board Chair. He is a graduate of the University of Rochester and is a certified public accountant. He is the twin brother of Nelson Leenhouts.
Edward J. Pettinella has served as President and Chief Executive Officer of the Company since January 1, 2004. He is also a director. He was previously an Executive Vice President and director since February 2001, when he joined the Company. He has also served as an Executive Vice President of HP Management and HPRS since May 2002. From 1997 until February 2001, Mr. Pettinella served as President, Charter One Bank (NY Division) and Executive Vice President of Charter One Financial, Inc. From 1980 through 1997, Mr. Pettinella served in several managerial capacities for Rochester Community Savings Bank, Rochester, NY, including the positions of Chief Operating Officer and Chief Financial Officer. Mr. Pettinella serves on the Board of Directors of United Way of Greater Rochester, Rochester Business Alliance, The Lifetime Healthcare Companies, National Multi Housing Counsel, State University at Geneseo, Geneseo Foundation, Syracuse University School of Business and YMCA of Greater Rochester. He is also on the Board of Governors of National Association of Real Estate Investment Trusts and is a member of Urban Land Institute. Mr. Pettinella is a graduate of the State University at Geneseo and holds an MBA Degree in finance from Syracuse University.
Clifford W. Smith, Jr. has been a director of the Company since 1994. Mr. Smith is the Epstein Professor of Finance of the William E. Simon Graduate School of Business Administration of the University of Rochester, where he has been on the faculty since 1974. He has written numerous books and articles on a variety of financial, capital markets and risk management topics and has held editorial positions for a variety of journals. Mr. Smith is a graduate of Emory University and has a PhD from the University of North Carolina at Chapel Hill.
Paul L. Smith has been a director of the Company since 1994. Mr. Smith was a director, Senior Vice President and the Chief Financial Officer of the Eastman Kodak Company from 1983 until he retired in 1993. He is currently a director of Constellation Brands, Inc. He is also a member of the Board of Trustees of the George Eastman House and Ohio Wesleyan University. Mr. Smith is a graduate of Ohio Wesleyan University and holds an MBA Degree in finance from Northwestern University.
Thomas S. Summer has been a director of the Company since August, 2004. Mr. Summer has been the Executive Vice President and Chief Financial Officer of Constellation Brands, Inc. since 1997. Prior to that, he held various positions in financial management with Cardinal Health, Inc., PepsiCo, Inc., and Inland Steel Industries. He is also a member of the Boards of Wilson Greatbatch Technologies, Rochester Philharmonic Orchestra, and AIDS Rochester, Inc. Mr. Summer is a graduate of Harvard University and holds an MBA degree in finance and accounting from the University of Chicago.
Amy L. Tait has served as a director of the Company since its inception in 1993. Effective February 15, 2001, Mrs. Tait resigned her full-time position as Executive Vice President of the Company and as a director of HP Management. She is currently the principal of Tait Realty Advisors, LLC, and continued as a consultant in the Company pursuant to a consulting agreement that terminated on February 15, 2002. Mrs. Tait joined Home Leasing in 1983 and held several positions with the Company, including Senior and Executive Vice President and Chief Operating Officer. She currently serves on the M&T Bank Regional Advisory Board and the boards of the United Way of Rochester, Princeton Club of Rochester, Al Sigl Center, Center for Governmental Research, Allendale Columbia School, and Monroe County Center for Entrepreneurship. Mrs. Tait is a graduate of Princeton University and holds an MBA from the William E. Simon Graduate School of Business Administration of the University of Rochester. She is the daughter of Norman Leenhouts.
See Item 4A in Part I hereof for information regarding executive officers of the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934. ---------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Officers, directors and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 2004, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were satisfied, except that the following events were not reported on a timely-filed Form 4 but were subsequently reported on Form 4: (i) the issuance under the Company's Deferred Bonus Plan of 54 shares to Johanna Falk at the end of her deferral period; (ii) the issuance of 4 gift shares to Janine Schue from the Company; (iii) the issuance of 704 shares to Amy Tait's spouse pursuant to the Company's Dividend Reinvestment and Direct Stock Purchase Plan as a result of 7,062 shares of her spouse's stock being inadvertently enrolled in dividend reinvestment; (iv) the transfer of 6,036 shares from a custodial account controlled by Norman Leenhouts to a custodial account controlled by Amy Tait; (v) the gift of 1,300 shares from Norman Leenhouts to Amy Tait; and (vi) the deposit of 96 shares into John Smith's 401-K account through dividend reinvestment transactions.
Audit Committee, Audit Committee Independence and Financial Expert ------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on May 6, 2005 under "Audit Committee." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Stockholder Nominations to Board --------------------------------
The information required by this item is incorporated herein by reference to the Company's Proxy Statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on May 6, 2005 under "Board of Directors." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Code of Ethics --------------
The Company has adopted a Code of Business Conduct and Ethics and a Code of Ethics for Senior Financial Officers, both which apply to the Company's Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller. Both codes are available on the Company's website at www.homeproperties.com under the heading "Investment Information, Investor Overview". In addition, the Company will provide a copy of the codes to anyone without charge, upon request addressed to the Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.
The Company intends to disclose any amendment to its Code of Ethics on its Web site. In addition, in the event that the Company waives compliance by its Chief Executive Officer, principal financial officer, principal accounting officer or Controller, or persons performing similar functions, of any of the standards of its Code of Conduct, the Company will post on its Web site within four business days the nature of the waiver in satisfaction of its disclosure requirement under Item 5.05 of Form 8-K.
Corporate Guidelines and Committee Charters -------------------------------------------
The Board of Directors has adopted corporate Governance Guidelines and revised charters in compliance with applicable law and NYSE listing standards for the Company's Audit, Compensation, Corporate Governance Nominating Committees, and Real Estate Investment Committee. The Guidelines and charters are available on the Company's Web site, www.homeproperties.com, and by request addressed to the Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.
Item 11.
Item 11. Executive Compensation -------------------------------
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on May 6, 2005 under "Executive Compensation." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 12.
Item 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ---------------------------
The information required by this Item, including Equity Compensation Plan Information, is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on May 6, 2005 under "Security Ownership of Certain Beneficial Owners and Management" and under "Equity Compensation Plan Information." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions -------------------------------------------------------
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on May 6, 2005 under "Certain Relationships and Transactions." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 14.
Item 14. Principal Accountant Fees and Services -----------------------------------------------
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on May 6, 2005 under "Report of the Audit Committee" and "Principal Accounting Fees and Services." The proxy statement will be filed within 120 days after the end of the Company's fiscal year.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) 1 and 2. Financial Statements and Schedule
The financial statements and schedule listed below are filed as part of this annual report on the pages indicated.
HOME PROPERTIES, INC.
Consolidated Financial Statements Page ----
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts
Schedule III: Real Estate and Accumulated Depreciation
3. Exhibits
Exhibit Number Exhibit ------ -------
2.1 Agreement among Home Properties of New York, Inc. and Philip J. Solondz, Daniel Solondz and Julia Weinstein Relating to Royal Gardens I, together with Amendment No. 1
2.2 Agreement among Home Properties of New York, Inc and Philip Solondz and Daniel Solondz relating to Royal Gardens II, together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Home Properties of New York between Home Properties of New York, L.P. and Berger/Lewiston Associates Limited Partnership; Stephenson-Madison Heights Company Limited Partnership; Kingsley- Moravian Company Limited Partnership; Woodland Garden Apartments Limited Partnership; B&L Realty Investments Limited Partnership; Southpointe Square Apartments Limited Partnership; Greentrees Apartments Limited Partnership; Big Beaver-Rochester Properties Limited Partnership; Century Realty Investment Company Limited Partnership
2.24 Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Braddock Lee Limited Partnership and Tower Construction Group, LLC
2.25 Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Park Shirlington Limited Partnership and Tower Construction Group, LLC
2.27 Form of Contribution Agreement among Home Properties of New York, L.P. and Strawberry Hill Apartment Company LLLP, Country Village Limited Partnership, Morningside Six, LLLP, Morningside North Limited Partnership and Morningside Heights Apartment Company Limited Partnership with schedule setting forth material details in which documents differ from form
2.29 Form of Contribution Agreement dated June 7, 1999, relating to the CRC Portfolio with schedule setting forth material details in which documents differ from form
2.30 Form of Contribution Agreement relating to the Mid-Atlantic Portfolio with schedule setting forth material details in which documents differ from form
2.31 Contribution Agreement among Home Properties of New York, L.P., Leonard Klorfine, Ridley Brook Associates and the Greenacres Associates
2.33 Contribution Agreement among Home Properties of New York, L.P., Gateside-Bryn Mawr Company, L.P., Willgold Company, Gateside-Trexler Company, Gateside-Five Points Company, Stafford Arms, Gateside-Queensgate Company, Gateside Malvern Company, King Road Associates and Cottonwood Associates
2.34 Contribution Agreement between Old Friends Limited Partnership and Home Properties of New York, L.P. and Home Properties of New York, Inc., along with Amendments Number 1 and 2 thereto
2.35 Contribution Agreement between Deerfield Woods Venture Limited Partnership and Home Properties of New York, L.P.
2.36 Contribution Agreement between Macomb Apartments Limited Partnership and Home Properties of New York, L.P.
2.37 Contribution Agreement between Home Properties of New York, L.P. and Elmwood Venture Limited Partnership
2.38 Sale Purchase and Escrow Agreement between Bank of America as Trustee and Home Properties of New York, L.P.
2.39 Contribution Agreement between Home Properties of New York, L.P., Home Properties of New York, Inc. and S&S Realty, a New York General Partnership (South Bay)
2.40 Contribution Agreement between Hampton Glen Apartments Limited Partnership and Home Properties of New York, L.P.
2.41 Contribution Agreement between Home Properties of New York, L.P. and Axtell Road Limited Partnership
2.42 Contribution Agreement between Elk Grove Terrace II and III, L.P., Elk Grove Terrace, L.P. and Home Properties of New York, L.P.
3.1 Articles of Amendment and Restatement of Articles of Incorporation of Home Properties of New York, Inc.
3.2 Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.
3.3 Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.
3.4 Amended and Restated Articles Supplementary of Series A Senior Convertible Preferred Stock of Home Properties of New York, Inc.
3.5 Series B Convertible Cumulative Preferred Stock Articles Supplementary to the Amended and Restated Articles of Incorporation of Home Properties of New York, Inc.
3.6 Series C Convertible Cumulative Preferred Stock Articles Supplementary to the Amended and Restated Articles of Incorporation of Home Properties of New York, Inc.
3.7 Series D Convertible Cumulative Preferred Stock Articles Supplementary to the Amended and Restated Articles of Incorporation of Home Properties of New York, Inc.
3.8 Series E Convertible Cumulative Preferred Stock Articles Supplementary to the Amended and Restated Articles of Incorporation of Home Properties of New York, Inc.
3.9 Amended and Restated By-Laws of Home Properties of New York, Inc. (Revised 12/30/96)
3.10 Series F Cumulative Redeemable Preferred Stock Articles Supplementary to the Amended and Restated Articles of Incorporation of Home Properties of New York, Inc.
3.11 Articles of Amendment to the Articles of Incorporation of Home Properties of New York, Inc.
3.12 Amendment Number One to Home Properties of New York, Inc. Amended and Restated Bylaws
4.1 Form of certificate representing Shares of Common Stock
4.2 Agreement of Home Properties of New York, Inc. to file instruments defining the rights of holders of long-term debt of it or its subsidiaries with the Commission upon request
4.7 Spreader, Consolidation, Modification and Extension Agreement between Home Properties of New York, L.P. and John Hancock Mutual Life Insurance Company, dated as of October 26, 1995, relating to indebtedness in the principal amount of $20,500,000
4.8 Amended and Restated Stock Benefit Plan of Home Properties of New York, Inc.
4.9 Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.10 Amendment No. One to Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.11 Amendment No. Two to Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.12 Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.13 Amendment No. Three to Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.14 Directors' Stock Grant Plan
4.16 Home Properties of New York, Inc., Home Properties of New York, L.P. Executive Retention Plan
4.17 Home Properties of New York, Inc. Deferred Bonus Plan
4.18 Fourth Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.19 Directors Deferred Compensation Plan
4.23 Home Properties of New York, Inc. Amendment Number One to the Amended and Restated Stock Benefit Plan
4.24 Fifth Amended and Restated Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan
4.25 Sixth Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan
4.26 Home Properties of New York, Inc. Amendment Number Two to the Amended and Restated Stock Benefit Plan
4.27 Amendment No. One to Home Properties of New York, Inc. Deferred Bonus Plan
4.28 Amended and Restated Director Deferred Compensation Plan
4.29 Amendment No. Two to Deferred Bonus Plan
4.30 Amendment Number One to Sixth Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan
10.1 Second Amended and Restated Agreement Limited Partnership of Home Properties of New York, L.P.
10.2 Amendments No. One through Eight to the Second Amended and Restated Agreement of Limited Partnership of Home Properties of New York, L.P.
10.3 Articles of Incorporation of Home Properties Management, Inc.
10.4 By-Laws of Home Properties Management, Inc.
10.5 Articles of Incorporation of Conifer Realty Corporation
10.6 Articles of Amendment to the Articles of Incorporation of Conifer Realty Corporation Changing the name to Home Properties Resident Services, Inc.
10.7 By-Laws of Conifer Realty Corporation (now, Home Properties Resident Services, Inc.)
10.8 Home Properties Trust Declaration of Trust, dated September 19, 1997
10.13Indemnification Agreement between Home Properties of New York, Inc. and certain officers and directors
10.15Indemnification Agreement between Home Properties of New York, Inc. and Alan L. Gosule
10.17Agreement of Operating Sublease, dated October 1, 1986, among KAM, Inc., Morris Massry and Raintree Island Associates, as amended by Letter Agreement Supplementing Operating Sublease dated October 1, 1986
10.26Amendment No. Nine to the Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.27Master Credit Facility Agreement by and among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp., dated as of August 28, 1998
10.28First Amendment to Master Credit Facility Agreement, dated as of December 11, 1998 among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae
10.29Second Amendment to Master Credit Facility Agreement, dated as of August 30, 1999 among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae
10.30Amendments Nos. Ten through Seventeen to the Second Amended and Restated Limited Partnership Agreement
10.31Amendments Nos. Eighteen through Twenty- Five to the Second Amended and Restated Limited Partnership Agreement
10.32Credit Agreement, dated 8/23/99 between Home Properties of New York, L.P., certain lenders, and Manufacturers and Traders Trust Company as Administrative Agent
10.33Amendment No. Twenty-Seven to the Second Amended and Restated Limited Partnership Agreement
10.34Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to the Second Amended and Restated Limited Partnership Agreement
10.37 2000 Stock Benefit Plan
10.39Purchase Agreement between Home Properties of New York, Inc. and The Equitable Life Assurance Society of the United States
10.41Home Properties of New York, L.P. Amendment Number One to Executive Retention Plan
10.42Amendments No. Thirty-One and Thirty-Two to the Second Amended and Restated Limited Partnership Agreement
10.49Amendment No. Thirty Three to the Second Amended and Restated Limited Partnership Agreement
10.50Amendment No. Thirty Five to the Second Amended and Restated Limited Partnership Agreement
10.51Amendment No. Forty Two to the Second Amended and Restated Limited Partnership Agreement
10.52Amendments Nos. Thirty Four, Thirty Six through Forty One, Forty Three and Forty Four to the Second Amended and Restated Limited Partnership Agreement
10.57Amendment Nos. Forty-Five through Fifty-One to the Second Amendment and Restated Limited Partnership Agreement
10.58Home Properties of New York, Inc. Amendment No. One to 2000 Stock Benefit Plan
10.59Home Properties of New York, Inc. Amendment No. Two to 2000 Stock Benefit Plan
10.60Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended and Restated Limited Partnership Agreement
10.61Amendment Nos. Fifty-Six to Fifty-Eight to the Second Amended and Restated Limited Partnership Agreement
10.62 Amendment No. Two to Credit Agreement
10.63Purchase and Sale Agreement, dated as of January 1, 2004 among Home Properties of New York, L.P., Home Properties Management, Inc. and Home Leasing, LLC, dated January 1, 2004
10.64Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Amended and Restated Limited Partnership Agreement
10.65Home Properties of New York, Inc. Amendment No. Three to 2000 Stock Benefit Plan
10.66Employment Agreement, dated as of October 28, 2003 between Home Properties, L.P., Home Properties, Inc., and Nelson B. Leenhouts
10.67Employment Agreement, dated as of October 28, 2003 between Home Properties, L.P., Home Properties, Inc. and Norman B. Leenhouts
10.68 Home Properties of New York, Inc. 2003 Stock Benefit Plan
10.69Amendment Number Two to Home Properties of New York, Inc. and Home Properties of New York, L.P. Executive Retention Plan
10.70Employment Agreement, dated as of May 17, 2004, between Home Properties, L.P., Home Properties, Inc. and Edward J. Pettinella]
10.71Amendment Nos. Sixty-Eight through Seventy-Three to the Second Amended and Restated Limited Partnership Agreement
10.72 Summary of Non-Employee Director Compensation Effective January 1, 2005
10.73 Summary of Named Executive Compensation effective January 1, 2005
10.74Amendment No. Three to Credit Agreement, dated April 1, 2004 between Home Properties, L.P., certain lenders, and Manufacturers and Traders Trust Company as Administrative Agent
10.75 Amended and Restated Incentive Compensation Plan
10.76Libor Grid Note, dated November 23, 2004 from Home Properties, L.P. to Manufacturers and Traders Trust Company
10.77Mutual Release, dated January 24, 2005, given by Home Properties, L.P. and Home Properties, Inc. and Boston Capital Tax Credit Fund XIV, a Limited Partnership, Boston Capital Tax Credit Fund XV, a Limited Partnership and BCCC, Inc. relating to certain obligations pertaining to Green Meadows and related Letter Agreement.
11 Computation of Per Share Earnings Schedule
14.1 Home Properties, Inc. Code of Ethics for Senior Finance Officers
14.2 Home Properties, Inc. Code of Business Conduct and Ethics
21 List of Subsidiaries of Home Properties, Inc.
23 Consent of PricewaterhouseCoopers LLP
31.1* Section 302 Certification of Chief Executive Officer (furnished)
31.2* Section 302 Certification of Chief Financial Officer(furnished)
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
99 Additional Exhibits - Debt Summary Schedule
*These exhibits are not incorporated by reference in any registration statement or report which incorporates this Annual Report on Form 10-K for the year ended December 31, 2004.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOME PROPERTIES, INC.
/s/ Edward J. Pettinella Edward J. Pettinella Director, President and Chief Executive Officer
Date: March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of Home Properties, Inc. and in the capacities and on the dates indicated.
Signature Title Date /s/ Edward J. Pettinella Director, President and Chief Executive Officer March 15, 2005 Edward J. Pettinella
/s/ David P. Gardner Executive Vice President, Chief Financial Officer March 15, 2005 David P. Gardner (Principal Financial Officer)
/s/ Robert J. Luken Senior Vice President, Chief Accounting Officer March 15, 2005 Robert J. Luken and Treasurer (Principal Accounting Officer)
/s/ Joseph M. Stafford Vice President and Controller March 15, 2005 Joseph M. Stafford
/s/ Norman P. Leenhouts Director, Co-Chairman of the Board of Directors March 15, 2005 Norman P. Leenhouts
/s/ Nelson B. Leenhouts Director, Co-Chairman of the Board of Directors March 15, 2005 Nelson B. Leenhouts
/s/ William Balderston, III Director March 15, 2005 William Balderston, III
/s/ John E. Fidler Director March 15, 2005 Josh E. Fidler
/s/ Alan L. Gosule Director March 15, 2005 Alan L. Gosule
/s/ Leonard F. Helbig, III Director March 15, 2005 Leonard F. Helbig, III
/s/ Roger W. Kober Director March 15, 2005 Roger W. Kober
/s/ Clifford W. Smith, Jr. Director March 15, 2005 Clifford W. Smith, Jr.
/s/ Paul L. Smith Director March 15, 2005 Paul L. Smith
/s/ Thomas S. Summer Director March 15, 2005 Thomas S. Summer
/s/ Amy L. Tait Director March 15, 2005 Amy L. Tait
HOME PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts Schedule III: Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm -------------------------------------------------------
To the Board of Directors and Shareholders of Home Properties, Inc.:
We have completed an integrated audit of Home Properties, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules -------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the Index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Home Properties, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(1) and (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9(a), that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Boston, Massachusetts March 15, 2005
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 and 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004 2003 ---- ---- ASSETS Real estate: Land $ 402,620 $ 387,655 Buildings, improvements and equipment 2,642,570 2,365,337 Real estate held for sale or disposal, net 78,711 - ---------- ---------- 3,123,901 2,752,992 Less: accumulated depreciation (405,919) (330,062) ---------- ---------- Real estate, net 2,717,982 2,422,930
Cash and cash equivalents 7,925 5,103 Cash in escrows 43,883 39,660 Accounts receivable 6,664 4,437 Prepaid expenses 18,224 18,184 Investment in and advances to affiliates - 5,253 Deferred charges 13,778 9,057 Other assets 8,340 8,693 ---------- ---------- Total assets $2,816,796 $2,513,317 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable $1,644,722 $1,380,696 Line of credit 58,000 - Accounts payable 24,600 13,178 Accrued interest payable 8,876 7,013 Accrued expenses and other liabilities 26,750 18,959 Security deposits 22,651 21,664 ---------- ----------
Total liabilities 1,785,599 1,441,510 ---------- ----------
Commitments and contingencies Minority interest 310,775 330,544 ---------- ---------- Stockholders' equity: Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares issued and outstanding at December 31, 2004 and 2003, respectively 60,000 60,000 Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares authorized; 250,000 shares issued and outstanding at December 31, 2004 and 2003, respectively 25,000 25,000 Common stock, $.01 par value; 80,000,000 shares authorized; 32,625,413 and 31,966,240 shares issued and outstanding at December 31, 2004 and 2003, respectively 326 320 Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding - - Additional paid-in capital 807,212 785,710 Accumulated other comprehensive (loss) ( 362) ( 542) Distributions in excess of accumulated earnings ( 171,754) ( 128,910) Officer and director notes for stock purchases - ( 315) ---------- ---------- Total stockholders' equity 720,422 741,263 ---------- ---------- Total liabilities and stockholders' equity $2,816,796 $2,513,317 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004 2003 2002 ---- ---- ---- Revenues: Rental income $436,724 $400,178 $355,520 Property other income 18,299 14,910 13,470 Interest and dividend income 480 516 1,315 Other income 2,827 4,426 1,977 ---------- ---------- ---------- Total Revenues 458,330 420,030 372,282 ---------- ---------- ----------
Expenses: Operating and maintenance 202,479 181,773 154,583 General and administrative 23,978 22,607 12,649 Interest 90,506 84,368 76,783 Depreciation and amortization 89,929 76,206 62,823 Impairment of assets held as General Partner 1,116 2,518 3,533 ---------- ---------- ---------- Total Expenses 408,008 367,472 310,371 ---------- ---------- ---------- Income from operations 50,322 52,558 61,911 Equity in earnings (losses) of unconsolidated affiliates ( 538) ( 1,892) ( 17,493) ---------- ---------- ---------- Income before minority interest, discontinued operations and extraordinary item 49,784 50,666 44,418 Minority interest 13,637 13,965 9,451 ---------- ---------- ---------- Income from continuing operations 36,147 36,701 34,967 ---------- ---------- ---------- Discontinued operations Income (loss) from operations, net of ($80), $1,387, and $2,775, in 2004, 2003 and 2002 allocated to minority interest, respectively ( 154) 2,507 4,478 Gain on disposition of property, net of $5,382, $1,359 and $3,511 in 2004, 2003 and 2002 allocated to minority interest, respectively 11,417 2,599 5,696 ---------- ---------- ---------- Discontinued operations 11,263 5,106 10,174 ---------- ---------- ---------- Income before loss on sale of property and business and cumulative effect of change in accounting principle 47,410 41,807 45,141 Loss on sale of property and business, net of $33, $4, and $154 in 2004, 2003, and 2002 allocated to minority interest ( 67) ( 9) ( 202) ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 47,343 41,798 44,939 Cumulative effect of change in accounting principle net of $159 in 2004 allocated to minority interest ( 321) - - ---------- ---------- ---------- Net income 47,022 41,798 44,939 Preferred dividends ( 7,593) ( 11,340) ( 14,744) Premium on Series B preferred stock repurchase - - ( 5,025) ---------- ---------- ---------- Net income available to common shareholders $ 39,429 $ 30,458 $ 25,170 ========== ========== ==========
Basic earnings per share data: Income from continuing operations $ .87 $ .87 $ .58 Discontinued operations .34 .17 .39 Cumulative effect of change in accounting principle ( .01) - - ---------- ---------- ---------- Net income available to common shareholders $ 1.20 $ 1.04 $ .97 ========== ========== ==========
Diluted earnings per share data: Income from continuing operations $ .85 $ .86 $ .57 Discontinued operations .34 .17 .39 Cumulative effect of change in accounting principle ( .01) - - ---------- ---------- ---------- Net income available to common shareholders $ 1.18 $ 1.03 $ .96 ========== ========== ==========
Weighted average number of shares outstanding: Basic 32,911,945 29,208,242 26,054,535 ========== ========== ========== Diluted 33,314,038 29,575,660 26,335,316 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accumu- lated Officer/ Preferred Distributions Other Director Stock at Common Stock Additional in Excess of Compre- Notes for Liquidation ------------ Paid-In Accumulated hensive Stock Preference Shares Amount Capital Earnings Income Purchase ---------- ------ ------ ------- -------- ------ --------
Balance, January 1, 2002 $114,000 24,010,855 $240 $572,273 ($57,768) ($ 532) ($ 7,617) Issuance of common stock, net 1,770,150 18 54,065 Issuance of preferred stock, net 60,000 (1,902) Conversion of Series E preferred stock for common stock (6,320) 200,000 2 6,318 Conversion of Series B preferred stock for common stock 839,771 8 24,359 Premium on Series B preferred stock repurchase (5,025) Payments on notes for stock purchase 6,425 Interest receivable on notes for stock purchase 419 Net income 44,939 Change in fair value of hedge instruments, net of minority interest (440) Conversion of UPREIT Units for stock 206,227 2 6,609 Adjustment of minority interest (7,208) Preferred dividends ( 14,744) Dividends paid ($2.41 per share) ( 61,879) ------- ---------- ---- -------- --------- ------- ----
Balance, December 31, 2002 167,680 27,027,003 270 649,489 (89,452) ( 972) ( 773) Issuance of common stock, net 1,330,733 14 44,608 Conversion of Series C preferred stock for common stock (59,500) 1,983,470 20 59,480 Conversion of Series E preferred stock for common stock (23,180) 749,367 7 23,173 Exercise of Series C Warrants 231,560 2 9,001 Exercise of Series E Warrants 285,000 3 6,927 Payments on notes for stock purchase 425 Interest receivable on notes for stock purchase 33 Net income 41,798 Change in fair value of hedge instruments, net of minority interest 430 Conversion of UPREIT Units for stock 359,107 4 13,038 Adjustment of minority interest (20,006) Preferred dividends ( 11,340) Dividends paid ($2.45 per share) ( 69,916) ------- ---------- ---- -------- --------- ------- ---- Balance, December 31, 2003 85,000 31,966,240 320 785,710 (128,910) ( 542) ( 315) Issuance of common stock, net 1,251,949 12 43,086 Repurchase of common stock (1,280,196) ( 13) ( 53,783) Payments on notes for stock purchase 307 Interest receivable on notes for stock purchase 8 Net income 47,022 Change in fair value of hedge instruments, net of minority interest 180 Conversion of UPREIT Units for stock 687,420 7 26,569 Adjustment of minority interest 5,630 Preferred dividends ( 7,593) Dividends paid ($2.49 per share) ( 82,273) ------- ---------- ---- -------- --------- ------- ---- Balance, December 31, 2004 $85,000 32,625,413 $326 $807,212 ($171,754) ($ 362) $ - ======= ========== ==== ======== ========= ======= ====
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS)
2004 2003 2002 ---- ---- ----
Net income $47,022 $41,798 $44,939 Other comprehensive income (loss): Change in fair value of hedged instruments 180 430 ( 440) ------- ------- ------- Net comprehensive income $47,202 $42,228 $44,499 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS)
2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net income $ 47,022 $ 41,798 $ 44,939 --------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities:
Equity in (earnings) losses of unconsolidated affiliates 538 1,892 17,493 Income allocated to minority interest 18,747 16,706 15,583 Depreciation and amortization 98,051 80,915 68,799 Impairment of assets held as General Partner 1,116 2,518 3,533 Impairment of real property 1,100 423 1,565 Gain on disposition of property and business ( 26,424) ( 3,945) ( 8,851) Changes in assets and liabilities: Other assets ( 1,431) 3,644 ( 3,160) Accounts payable and accrued liabilities 20,476 156 711 --------- -------- -------- Total adjustments 112,173 102,309 95,673 --------- -------- -------- Net cash provided by operating activities 159,195 144,107 140,612 --------- -------- --------
Cash flows used in investing activities: Purchase of properties and other assets, net of mortgage notes assumed and UPREIT Units issued (153,535) ( 66,760) (267,940) Additions to properties (102,700) (106,346) (115,692) Advances to affiliates ( 820) ( 3,410) ( 11,748) Payments on advances to affiliates 149 6,990 16,120 Proceeds from sale of affordable properties, net 2,412 3,835 - Proceeds from sale of properties and business, net 89,028 53,666 84,079 --------- -------- -------- Net cash used in investing activities (165,466) (112,025) (295,181) --------- -------- --------
Cash flows from financing activities: Proceeds from sale of preferred stock, net - - 58,098 Proceeds from sale of common stock, net 43,095 59,788 54,090 Repurchase of Series B preferred stock - - ( 29,392) Repurchase of common stock ( 53,796) - - Proceeds from mortgage notes payable 191,772 130,259 346,525 Payments of mortgage notes payable ( 97,734) ( 75,352) (159,657) Proceeds from line of credit 291,600 186,000 281,000 Payments on line of credit (233,600) (221,000) (278,500) Payments of deferred loan costs ( 2,672) ( 1,498) ( 4,866) Withdrawals from (additions to) cash escrows, net ( 1,953) 6,075 ( 6,505) Repayment of officer and director loans 315 458 6,844 Dividends and distributions paid ( 128,784) (120,491) (115,005) --------- -------- -------- Net cash provided by (used in) financing activities 8,243 ( 35,761) 152,632 --------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,972 ( 3,679) ( 1,937) Cash and cash equivalents: Beginning of year 5,103 8,782 10,719 Cash assumed in connection with FIN 46 consolidation 850 - - --------- -------- -------- End of year $ 7,925 $ 5,103 $ 8,782 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION
Organization
Home Properties, Inc. (the "Company ") was formed in November 1993, as a Maryland corporation and is engaged primarily in the ownership, management, acquisition, and rehabilitation of residential apartment communities in the Northeastern, Mid-Atlantic, Midwestern and Southeast Florida regions of the United States. The Company conducts its business through Home Properties, L.P. (the "Operating Partnership"), a New York limited partnership. As of December 31, 2004, the Company operated 169 apartment communities with 47,378 apartments. Of this total, the Company owned 150 communities, consisting of 41,776 apartments, managed as general partner 14 partnerships that owned 2,793 apartments, and fee managed 2,809 apartments for affiliates and third parties. For an approximately five-year period from 1996 to 2000, the Company actively diversified its portfolio by developing, redeveloping, owning, and managing government-assisted "affordable" multi-family communities. On December 31, 2000, the Company disposed of its affordable housing development activities, and in December 2002, determined to sell virtually all of the balance of its interests in various affordable housing limited partnerships. See Note 3 below.
Basis of Presentation ---------------------
The accompanying consolidated financial statements include the accounts of the Company and its 67.7% (66.7% at December 31, 2003) interest in the Operating Partnership. Such interest has been calculated as the percentage of outstanding common shares divided by the total outstanding common shares and Operating Partnership Units ("UPREIT Units") outstanding. The remaining 32.3% (33.3% at December 31, 2003) is reflected as Minority Interest in these consolidated financial statements. The Company owns a 1.0% general partner interest in the Operating Partnership and the remainder indirectly as a limited partner through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of the limited partner, Home Properties Trust. Home Properties Trust was formed in September 1997, as a Maryland real estate trust and as a qualified REIT subsidiary ("QRS") and owns the Company's share of the limited partner interests in the Operating Partnership. For financing purposes, the Company has formed a limited liability company (the "LLC") and a partnership (the "Financing Partnership"), which beneficially own certain apartment communities encumbered by mortgage indebtedness. The LLC is wholly owned by the Operating Partnership. The Financing Partnership is owned 99.9% by the Operating Partnership and 0.1% by the QRS.
Effective January 1, 2003, the accompanying consolidated financial statements include the accounts of Home Properties Management, Inc. and Home Properties Resident Services, Inc. (the "Management Companies"). The Operating Partnership acquired all of the shares held by Nelson and Norman Leenhouts ("the Leenhoutses") in the first quarter of 2003. The value of the Leenhoutses shares was based upon an internal valuation and amounted to approximately $81.
As a result, the Management Companies are now wholly owned subsidiaries of the Company. Prior to January 1, 2003, investments in these entities were accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in these consolidated financial statements.
Through March 30, 2004, the Company accounted for its investment as managing general partner ("GP") in unconsolidated affordable housing limited partnerships ("LP") using the equity method of accounting. Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). This interpretation addresses consolidation by business enterprises of variable interest entities in which the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or in which the equity investors do not have the characteristics of a controlling financial interest. This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. As
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION (Continued) - --------------------------------------------------
of March 31, 2004, the Company was the general partner in 41 limited partnerships in Upstate New York, Pennsylvania, Ohio and Maryland. The Company had made a determination that all 41 limited partnerships were Variable Interest Entities ("VIE's"). The Company had further determined that it was the primary beneficiary in 34 of the VIE's and therefore consolidated these entities effective March 31, 2004. Beginning with the second quarter of 2004, the Company consolidated the results of operations of the VIE's. As of December 31, 2004, the Company continued to own ten affordable properties. Eight of the ten properties, with a total of 612 units, were sold effective January 1, 2005. Of the remaining two properties (three partnerships), with a total of 1,925 units, the Company will retain its ownership interest and will continue to manage one of them while it pursues various disposition options. The other property (two partnerships) is being disposed of through a default on the non-recourse financing. The Company has met with the federal agency which insured the repayment of that financing. That agency has agreed that the Company may continue to manage the property until the agency can auction or sell the loan in a note sale. The note sale is expected to occur in March, 2005. The Company repurchased in January, 2005 the limited partner's 99.99% interests in accordance with the partnership agreements in satisfaction of any tax credit guarantees or other obligations for $5.7 million. The results of operations of the VIE's for the year-end December 31, 2004 are classified as held for sale in the consolidated statement of operations
As of March 31, 2004, Home Properties determined that it was not the primary beneficiary in seven partnerships syndicated under U.S. Department of Housing and Urban Development subsidy programs three of which remained as of December 31, 2004. These investments will continue to be accounted for under the equity method until their sale. For those investments, the Company will continue to record its allocable share of the respective partnership's income or loss based on the terms of the agreement. To the extent it is determined that the LPs cannot absorb their share of the losses, if any, the GP will record the LPs share of such losses. The Company will absorb such losses to the extent the Company has outstanding loans or advances and the limited partner has no remaining capital account.
Reclassifications -----------------
Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform to the 2004 presentation.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------
Change in Accounting Estimate -----------------------------
During the first quarter of 2002, the Company completed a comprehensive review of its real estate-related useful lives for certain of its asset classes. As a result of this review, the Company changed its estimate of the remaining useful lives for its buildings and apartment improvements. Effective January 1, 2002, the estimated useful life of all buildings has been extended to 40 years and the estimated useful life of apartment improvements has been changed from 10 years to 20 years. Certain buildings had previously been depreciated over useful lives ranging from 30 to 40 years. As a result of the change, income before extraordinary item for the year-ended December 31, 2002 increased approximately $6.2 million or $.24 on a diluted per share basis. The Company believes the change reflects more appropriate remaining useful lives of the assets based upon the nature of the expenditures and is consistent with prevailing industry practice. This change has been accounted for prospectively in accordance with the provisions of Accounting Principle Board Opinion No. 20, Accounting Changes.
Real Estate -----------
Real estate is recorded at cost. Costs related to the acquisition, development, construction and improvement of properties are capitalized. Recurring capital replacements typically include carpeting and tile, appliances, HVAC equipment, new roofs, site improvements and various exterior building improvements. Non-recurring upgrades include, among other items, community centers, new appliances, new windows, kitchens and bathrooms. Interest
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Real Estate (Continued) -----------------------
costs are capitalized until construction is substantially complete. There was $763, $920, and $960 of interest capitalized in 2004, 2003 and 2002, respectively. Salaries and related costs capitalized for the years ended December 31, 2004,2003 and 2002 were $3,391, $6,008, and $4,057, respectively. When retired or otherwise disposed of, the related asset cost and accumulated depreciation are cleared from the respective accounts and the net difference, less any amount realized from disposition, is reflected in income. Ordinary repairs and maintenance that do not extend the life of the asset are expensed as incurred.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." This standard superseded SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of," but also retained its basic provision requiring: (i) recognition of an impairment loss of the carrying amount of a long-lived asset if it is not recoverable from its undiscounted cash flows, and (ii) measurement of an impairment loss as the difference between the carrying amount and fair value of the asset unless an asset is held for sale, in which case it would be stated at the lower of carrying amount or fair value less costs to dispose. However, SFAS No. 144 also describes a probability-weighted cash flow estimation approach to deal with situations which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated. The determination of undiscounted cash flows requires significant estimates made by management and considers the expected course of action at the balance sheet date. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could impact the determination of whether an impairment exists.
Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset's carrying value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The Company records impairment losses and reduces the carrying amounts of assets held for sale when the carrying amounts exceed the estimated selling proceeds less the costs to sell.
The Company accounts for its acquisitions of investments in real estate in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, which requires the fair value of the real estate acquired to be allocated to the acquired tangible assets, consisting of land, building, and personal property and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of resident relationships, based in each case on their fair values. The Company considers acquisitions of operating real estate assets to be businesses as that term is contemplated in Emerging Issues Task Force Issue No. 98.3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.
The Company allocates purchase price to the fair value of the tangible assets of an acquired property (which includes the land, building, and personal property) determined by valuing the property as if it were vacant. The as-if-vacant value is allocated to land, buildings, and personal property based on management's determination of the relative fair values of these assets.
Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Real Estate (Continued) -----------------------
Other intangible assets acquired include amounts for in-place lease values that are based upon the Company's evaluation of the specific characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on the property acquired.
The total amount of other intangible assets acquired is further allocated to in-place leases, which includes other resident relationship intangible values based on management's evaluation of the specific characteristics of the residential leases and the Company's resident retention history.
The value of in-place leases and resident relationships are amortized as a leasing cost expense over the initial term of the respective leases and any expected renewal period.
The acquisitions of minority interests for shares of the Company's Common Stock are recorded under the purchase method with assets acquired reflected at the fair market value of the Company's Common Stock on the date of acquisition. The acquisition amounts are allocated to the underlying assets based on their estimated fair values.
Depreciation ------------
Properties are depreciated using a straight-line method over the estimated useful lives of the assets as follows: buildings, improvements and equipment - 3-40 years. As discussed above under the heading "Change in accounting estimate", effective January 1, 2002, the Company changed the estimated useful lives of certain assets. Depreciation expense charged to operations was $88,816, $75,977, and $62,686 from continuing operations and $5,300, $3,210, and $4,924 from discontinued operations for the years ended December 31, 2004, 2003 and 2002, respectively.
Cash and Cash Equivalents -------------------------
Cash and cash equivalents include all cash and highly liquid investments purchased with original maturities of three months or less. The Company estimates that the fair value of cash equivalents approximates the carrying value due to the relatively short maturity of these instruments.
Cash in Escrows ---------------
Cash in escrows consists of cash restricted under the terms of various loan agreements to be used for the payment of property taxes and insurance as well as required replacement reserves and resident security deposits for residential properties.
Allowance for Doubtful Receivables
The allowance for doubtful receivables was $567, $241 and $125 as of December 31, 2004, 2003 and 2002, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Deferred Charges ----------------
Costs relating to the financing of properties are deferred and amortized over the life of the related financing agreement. The straight-line method, which approximates the effective interest method, is used to amortize all financing costs; such amortization is reflected as interest expense in the consolidated statement of operations. The range in the terms of the agreements are from 1-18 years. Accumulated amortization was $5,640 and $3,212, as of December 31, 2004 and 2003, respectively.
Intangible Assets -----------------
Intangible assets of $1,276 and $2,510 at December 31, 2004 and 2003, respectively, included in Other Assets, consist primarily of property management contracts obtained through the acquisition of real estate management businesses, and intangible assets recorded in connection with SFAS No. 141. Intangible assets associated with SFAS No. 141 are amortized on the straight-line basis over their estimated useful lives of 7 months to 3 years. Subsequent to 2002, the Company has not amortized intangibles expected to be sold (see Notes 3 and 4). Accumulated amortization of intangible assets was $2,005 and $893 as of December 31, 2004 and 2003, respectively. Amortization expense was $1,112, $92, and $135 for the years ended December 31, 2004, 2003 and 2002, respectively. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets is less than their carrying value. During 2004 and 2003, in connection with the sale of the assets associated with the general partnership interests in certain affordable housing limited partnerships, the Company sold $1,771 and $1,284 of intangible assets, respectively. In addition, during 2002, in connection with the Company's decision to sell the assets associated with its general partnership interests in certain affordable properties (see Note 3), the Company wrote-down $985 (included in the line "Impairment of assets held as General Partner" on the Consolidated Statements of Operations) of the intangible balance as of December 31, 2002, in order to reflect the recorded assets at their estimated fair value.
Revenue Recognition -------------------
The Operating Partnership leases its residential properties under leases with terms generally one year or less. Rental income is recognized on a straight-line basis over the related lease term. As a result, deferred rents receivable are created when rental income is recognized during the concession period of certain negotiated leases and amortized over the remaining term of the lease. Property other income, which consists primarily of income from operation of laundry facilities, administrative fees, garage and carport rentals and miscellaneous charges to residents, is recognized when earned - when the services are provided, or when the resident incurs the charge.
Property management fees are recognized when earned based on a contractual percentage of net monthly cash collected on rental income.
Other Income ------------
Other income for the years ended December 31, 2004, 2003 and 2002 primarily reflects management and other real estate service fees.
Gains on Real Estate Sales --------------------------
Gains on disposition of properties are recognized using the full accrual method in accordance with the provisions of Statement of Financial Accounting Standards No. 66, Accounting for Real Estate Sales, provided that various criteria relating to the terms of sale and any subsequent involvement by the Company with the properties sold are met.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Advertising -----------
Advertising expenses are charged to operations during the year in which they were incurred. Advertising expenses incurred and charged to operations were approximately $6,673, $6,878, and $5,754 from continuing operations, and $120, $350, and $487 from discontinued operations, for the years ended December 31, 2004, 2003 and 2002, respectively.
Legal Settlements -----------------
In March 2005, the Company settled a legal claim for a total cost of $3,800. The legal claim was brought against the Company, the Operating Partnership, and Home Leasing Corporation. Home Leasing is owned by Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board of Directors and Senior Advisors to the Company. The Company was originally formed to expand and continue Home Leasing's business. The essence of the complaint is that the entity in which plaintiffs were investors was wrongfully excluded from the Company's initial organization as a real estate investment trust and the investors, therefore, did not obtain the benefits from exchanging their equity interests in that entity for equity in the Operating Partnership. In their original complaint, plaintiffs sought damages in the amount of $3,000. In the subsequent discovery process, plaintiffs increased the damages sought to $10,000. Included in general and administrative expenses is the accrual for payment in settlement of $3,500 and for legal fees of $300 were made on behalf of Home Leasing Corporation, as well as the Company and the Operating Partnership. Payment was made on behalf of Home Leasing in recognition of the fact that the matters alleged in the action against Home Leasing related directly and solely to the promotion and creation of the Company.
In October 2001, the Company resolved a legal claim with an insurance provider and received a total settlement of $4.9 million. This refund was allocated to insurance expense in relation to the Company's estimate of loss spread over the corresponding policy term. The policy term covered November 1, 2000 to October 31, 2001 and November 1, 2001 to October 31, 2002. The amount of the settlement relating to the period from November 1, 2000 to December 31, 2001 was estimated to be $2.2 million, and that amount reduced insurance expense in the fourth quarter of 2001. The remaining settlement of $2.7 million related to the policy period from January 1, 2001, through October 31, 2002, and was amortized on a straight-line basis over that period. In addition, an additional $600 was received in December 2002 relating to the settlement above for the policy period January 1, 2003 through October 31, 2003, and was amortized to insurance expense on a straight-line basis over that period.
Federal Income Taxes --------------------
The Company has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. As a result, the Company generally is not subject to Federal or State income taxation at the corporate level to the extent it distributes annually at least 90% of its REIT taxable income to its shareholders and satisfies certain other requirements. For the years ended December 31, 2004, 2003 and 2002, the Company distributed in excess of 100% of its taxable income; accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements. Stockholders of the Company are taxed on dividends and must report distributions from the Company as either ordinary income, capital gains, or as return of capital.
The tax basis of assets is less than the amounts reported in the accompanying consolidated financial statements by approximately $476 million and $432 million at December 31, 2004 and 2003, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Federal Income Taxes(Continued) -------------------------------
The following table reconciles net income to taxable income for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002 ---- ---- ---- Net income $47,022 $41,798 $44,939 Add back: Net loss of taxable REIT Subsidiaries included in net income above 987 2,534 10,627 Deduct: Net income of taxable REIT subsidiaries included in net income above - - - ------- ------- ------- Net income from REIT operations 48,009 44,332 55,566 Add: Book depreciation and amortization 64,886 55,570 39,214 Less: Tax depreciation and amortization ( 69,532) ( 63,110) ( 44,307) Book/tax difference on gains/losses from capital transactions ( 8,128) 2,754 ( 4,237) Other book/tax differences, net ( 79) 4,895 ( 6,171) ------- ------- ------- Adjusted taxable income subject to 90% REIT dividend requirement $35,156 $44,441 $40,065 ======= ======= =======
The Company made actual distributions in excess of 100% of taxable income before capital gains. All adjustments to net income from REIT operations are net of amounts attributable to minority interest and taxable REIT subsidiaries.
Included in total assets on the Consolidated Balance Sheets are deferred tax assets of $8,737 and $8,394 as of December 31, 2004 and 2003, respectively. Management does not believe it is more likely than not that these deferred assets will be used, and accordingly has recorded a reserve against the deferred tax asset of $8,680 and $8,185 for the years ended December 31, 2004 and 2003, respectively.
Earnings Per Share ------------------
Basic Earnings Per Share ("EPS") is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options (using the treasury stock method) and the conversion of any cumulative convertible preferred stock. The exchange of an Operating Partnership 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.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Earnings Per Share (Continued) ------------------------------
Income from continuing operations is the same for both the basic and diluted EPS calculation. The reconciliation of the basic and diluted earnings per share for the years ended December 31, 2004, 2003, and 2002, is as follows:
2004 2003 2002
Income from continuing operations $36,147 $36,701 $34,967 Add: Gain (loss) on sale of business, net of minority interest ( 67) ( 9) ( 202) Less: Preferred dividends ( 7,593) ( 11,340) ( 14,744) Less: Premium on Series B preferred stock repurchase - - ( 5,025) ------- ------- ------- Basic and Diluted - Income from continuing operations applicable to common shareholders $28,487 $25,352 $14,996 ======= ======= =======
Basic weighted average number of shares outstanding 32,911,945 29,208,242 26,054,535 Effect of dilutive stock options 402,093 367,418 280,781 ---------- ---------- ---------- Diluted weighted average number of shares outstanding 33,314,038 29,575,660 26,335,316 ========== ========== ==========
Basic earnings per share data: Income from continuing operations $ .87 $ .87 $ .58 Discontinued operations .34 .17 .39 Cumulative effect of change in accounting principle ( .01) - - ------- ------ ------- Net income available to common shareholders $ 1.20 $ 1.04 $ .97 ======= ====== =======
Diluted earnings per share data: Income from continuing operations $ .85 $ .86 $ .57 Discontinued operations .34 .17 .39 Cumulative effect of change in accounting principle ( .01) - - ------- ------ ------- Net income available to common shareholders $ 1.18 $ 1.03 $ .96 ======= ====== =======
Unexercised stock options to purchase 641,550, and 669,090 shares of the Company's common stock were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the Company's stock during the years ended December 31, 2003, and 2002, respectively. For the year ended December 31, 2004, the 833,333 common stock equivalents on an as-converted basis of the Series D Convertible Cumulative Preferred Stock have an antidilutive effect and are not included in the computation of diluted EPS. For the years ended December 31, 2003 and 2002, there were 2,229,719 and 4,123,533, respectively of common stock equivalents on an as-converted basis of certain convertible preferred stock that had an antidilutive effect and were not included in the computation of diluted EPS. To the extent the preferred stock was converted, the common shares would be included in outstanding shares from the date of conversion.
Use of Estimates ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock Based Employee Compensation ---------------------------------
Effective January 1, 2003, the Company adopted the fair value based method of accounting for stock options in accordance with SFAS No. 123. The Company applied the modified-prospective approach in adopting SFAS No. 123 in conformity with the transition provisions of SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No. 123. Under this approach, the Company recognizes
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
Stock Based Employee Compensation (Continued) ---------------------------------------------
stock-based employee compensation cost from the beginning of the fiscal year in which the recognition provisions are first applied as if the fair value based accounting method in this Statement had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 1994. For 2004 and 2003, total compensation costs recognized by the Company on its stock options and restricted stock, (including in 2003 $5,000 recognized in connection with a 129,870 share restricted stock grant to the Leenhoutses upon their retirement as Co-CEO's), amounted to $2,119 and $6,341, respectively. For the years prior to 2003, the Company used the intrinsic value method in accordance with the Accounting Principle Board Opinion No. 25 ("APB No. 25") to account for stock-based employee compensation arrangements. Under this method, the Company did not recognize compensation cost for stock options when the option exercise price equaled or exceeded the market value on the date of grant. Restricted stock grants are recognized as compensation expense over the vesting period based upon the market value on the date of grant. If the Company had determined compensation cost based upon the fair value of the stock option grants under SFAS No. 123, "Accounting for Stock-Based Compensation" in prior years, the fair values of the options granted at the grant dates have been recognized as compensation expense over the vesting periods, and the Company's net income and earnings per share at December 31 would have been as follows:
----
Net income, as reported $44,939 Total stock compensation cost recognized 241 Total stock compensation cost if SFAS 123 had been adopted (1,143) Minority interest for net stock compensation cost 343 -------
Proforma net income if SFAS 123 had been adopted $44,380 ======= Per share data: Basic - as reported $0.97 ===== Basic - proforma $0.94 =====
Diluted - as reported $0.96 ===== Diluted - proforma $0.93 =====
The fair value of each option grant reflected in the table above is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2004, 2003, and 2002: dividend yields ranging from 6.74% to 9.40%; expected volatility of 19.79%; and expected lives of 7.5 years for the options with a lifetime of ten years, and five years for options with a lifetime of five years. The interest rate used in the option-pricing model is based on a risk free interest rate ranging from 3.22% to 6.12%.
New Accounting Pronouncements -----------------------------
In May 2003, FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this pronouncement for the year ended December 31, 2004, and it did not have a material impact on the Company's results of operations, financial position or liquidity.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - ------------------------------------------------------
New Accounting Pronouncements (Continued) -----------------------------------------
In December 2003, the FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). This interpretation addresses consolidation by business enterprises of variable interest entities in which the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or in which the equity investors do not have the characteristics of a controlling financial interest. This interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. Effective March 31, 2004, the Company adopted FIN 46R. See the Basis of Presentation disclosure in Note 1 and the Company's disclosure on its Investments in and Advances to Affiliates in Note 3 for a discussion of the impact on the Company from the adoption of FIN 46R.
In March 2004, the FASB issued EITF 03-6 "Participating Securities and the Two-Class Method under FASB Statement 128, Earnings per Share. EITF 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. The EITF was effective for the fiscal periods beginning after March 31, 2004. The Company adopted the provisions of this EITF effective April 1, 2004, and had no impact on the Company's results of operations, financial position or liquidity.
In November 2004, the FASB issued EITF Issue 04-8 "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share". EITF 04-8 addresses a number of issues relating to issued securities with embedded market price contingent conversion features, which includes contingently convertible preferred stock, and the impact on the calculation of earnings per share on a quarterly basis. The EITF is effective for periods ending after December 15, 2004. The Company adopted the provisions of this EITF for the year ended December 31, 2004, and it and had no impact on the Company's results on operations, financial position or liquidity.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R Share Based Payment (SFAS No. 123R). The statement is a revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No 123R supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R, requires that entities recognize the cost of employee services received in exchange for awards of equity instruments (i.e. stock options) based on the grant-date fair value of those awards. The Statement is effective for the first fiscal periods beginning after December 15, 2005. On January 1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS No. 123. Effective on that date, the Company began recognizing compensation cost related to stock option grants. Based upon the Company's adoption of SFAS No. 148, the issuance of SFAS No. 123R will have no impact on the Company's results of operations, financial position or liquidity.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (INVESTMENT IN AND ADVANCES TO AFFILIATES) - ---------------------------------------------------------------------
Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R - Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 - Consolidated Financial Statements. The interpretation addresses consolidation by businesses of special purpose entities (variable interest entities, "VIE"). The Company has made a determination that all 41 of the remaining limited partnerships are Variable Interest Entities.
The Company determined that it is not the primary beneficiary in seven partnerships syndicated under U.S. Department of Housing and Urban Development subsidy programs of which four have been sold as of December 31, 2004. The three remaining partnerships are all under contract to be sold as of December 31, 2004. These three investments will continue to be accounted for under the equity method and included in equity in earnings of unconsolidated affiliates until final sale closing. The Company purchased the general partnership interests in these seven partnerships in January, 1996. These partnerships were set up to provide low income housing to residents through subsidized rents and below market debt governed by HUD. The Company as general partner and managing agent manages the day-to-day operations of each partnership for a fee (5% of rents collected). The Company's economic benefit from these partnerships is the management fee. There is no further exposure to the Company of loss as a result of its involvement with these partnerships. The management fees earned on these partnerships was $104 for the year ended December 31, 2004. The assets and liabilities of the three remaining partnerships total $4.7 million and $7.4 million at December 31, 2004, respectively. Unconsolidated non-recourse debt associated with the three partnerships continuing to be accounted for under the equity method amounted to $7 million, of which the Company's proportionate share, based on its legal ownership, was $213.
The Company has further determined that it is the primary beneficiary in 34 of the VIE's and therefore consolidated these entities effective March 31, 2004. Beginning with the second quarter of 2004, the Company consolidated the results of operations of the VIE's. The results of operations of the 34 VIE's for the year ended December 31, 2004 are included in discontinued operations as all of the VIE's are held for sale as described below.
The Company is the general partner in these 34 VIE's 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 these partnerships for a management fee. In addition, the Company has certain operating deficit and tax credit guarantees to its limited partners. The Company is responsible to fund operating deficits to the extent there are any and can receive operating incentive awards when cash flow reaches certain levels. The effect on the consolidated balance sheet as of December 31, 2004 includes Total assets of $87.8 million, Total liabilities of $80.6 million, Minority interest of $7.5 million, and Stockholders' equity of ($321). In connection with the adoption of FIN 46R, the Company recorded a $321 charge of a cumulative effect of a change in accounting principle during the first quarter of 2004. This charge was a result of the negative capital accounts of minority interest partners that were absorbed by the Company. Of the $80.6 million increase in total liabilities, $77.6 million represented non-recourse mortgage debt.
Effective December 31, 2004, the Company has closed on the sale of 26 of the 41 VIE's and is under contract for the sale of an additional twelve VIE's pending lender approval. Based upon the final contract price established during final negotiations with the buyers for these 38 partnerships, an additional $4.1 million loss was recorded during 2004. Additionally, the Company is marketing for sale one partnership as to which, based upon the Company's estimate of fair market value, an $800 impairment charge was recorded in the period ended December 31, 2004. During the third quarter of 2004, the Company began an exit strategy with one additional property (two partnerships) with 1,057 units. The property is currently experiencing high vacancy. The regulatory agreement between the entity which owns the property and the State Housing Authority requires a percentage of residents to meet certain income qualifications. The Company has had difficulty renting the units subject to those requirements to persons it believes are economically qualified to rent the units. Although the Company does not anticipate that occupancy levels or other aspects of the operational outlook will improve in the foreseeable future, it does not anticipate future cash shortfalls since the debt service is not being paid. The Company has met with the
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (INVESTMENT IN AND ADVANCES TO AFFILIATES) - -------- -------- -------- ----------- ------ ----------- ----------- (Continued) -----------
federal agency that insured repayment of the loan to discuss the weak financial performance of the property. That agency has agreed the Company may continue to manage the property until the agency can sell the mortgage note. The note sale is expected to occur in March, 2005. In addition, the Company has repurchased the limited partner's interests in satisfaction of any tax credit guarantees or other obligations to that partner in January, 2005 for $5.7 million. The Company has therefore recorded a $5.7 million liability to the limited partner resulting in a loss on disposition of property of $5.0 million for the twelve month period ended December 31, 2004.
During the first quarter of 2004, prior to the adoption of FIN 46R, the Company recorded an impairment charge of $1.6 million to reduce the value of the assets associated with the VIE's to management's estimate of fair market value. The impairment charge is classified in the financial statements as "Impairment of assets held as general partner" of $1,116 and "Equity in earnings (losses) of unconsolidated affiliates" of ($538). A portion of the total $1,116 charge, or $171, represents monies loaned to certain affordable properties during the first quarter of 2004 to fund operating shortfalls, which are not anticipated to be recovered from projected sale proceeds. The remaining balance of $945 pertains to an additional net impairment charge taken to reduce the assets to estimated fair market value. Of the total impairment charge recorded of $1.6 million for the three-month period ended March 31, 2004, $655 relates to cash advances to fund operating shortfalls.
Through March 31, 2004, the Company accounted for its investments as general partner in unconsolidated affordable housing limited partnerships using the equity method of accounting. As of December 31, 2003, the Company had investments in and advances to 44 limited partnerships where the Company acts as the managing general partner. The following is summarized financial information for the investment in and advances to affiliates carried under the equity method of accounting, excluding the Management Companies discussed in Note 4, as of December 31, 2003 and 2002 and for each of the two years ended December 31, 2003 and 2002.
2003 2002 ---- ---- Balance Sheets: Real estate, net $163,950 $266,613 Other assets 21,247 37,764 -------- -------- Total assets $185,197 $304,377 ======== ========
Mortgage notes payable $142,717 $253,285 Advances from affiliates 22,678 24,725 Other liabilities 11,420 15,125 Partners' equity 8,382 11,242 -------- -------- Total liabilities and partners' equity $185,197 $304,377 ======== ========
The Company's proportionate share of mortgage notes payable was $1,487 at December 31, 2003. The mortgage notes payable are all non-recourse to the affiliated partnership and the Company.
2003 2002 ---- ---- Operations: Gross revenues $ 43,586 $ 47,468 Operating expenses ( 30,275) ( 29,994) Mortgage interest expense ( 11,266) ( 11,914) Depreciation and amortization ( 14,872) ( 13,503) -------- -------- Net loss ($ 12,827) ($ 7,943) ======== ======== Company's share [included in equity in earnings (losses) of unconsolidated affiliates]* ($ 921) ($ 1,171) ======== ========
* In addition to the amounts presented above, the Company recorded additional losses of $971 and $3,092 for 2003 and 2002 respectively, related to operating losses in excess of limited partners' capital accounts where the Company also had loans outstanding to the investing entities required the accounting requirements of EITF 99-10 described in the following paragraphs.
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (INVESTMENT IN AND ADVANCES TO AFFILIATES) - -------- -------- -------- ----------- ------ ----------- ----------- (Continued) -----------
Reconciliation of interests in the underlying net assets to the Company's carrying value of investments in and advances to affiliates:
2003 2002 ---- ----
Partners' equity, as above $ 8,382 $11,242 Equity of other partners ( 9,477) ( 9,236) ------- ------- Company's share of investments in limited partnerships ( 1,095) 2,006 Less - impairment charge 400) ( 899) ------- ------- Company's investment in limited partnerships ( 1,495) 1,107 Company's investment in Management Companies (see Note 4) - 5,996 Company's advances to affiliates 6,748 - Company's advances to Management Companies - 12,372 ------- ------- Carrying amount of investments in and advances to affiliates $ 5,253 $19,475 ======= =======
The Company, including its equity affiliates (Management Companies - Note 4), determined in the fourth quarter of 2002 that it would market for sale the assets associated with its interests in various affordable property limited partnerships. Prior to the fourth quarter of 2002, the Company had been assessing whether to expand its holding in such assets, including seeking out additional management opportunities, to consider the sale of such assets, or to retain its existing portfolio of assets without further growth. The Company ultimately concluded that it would not seek to grow its portfolio of these types of assets. It was then determined that the existing affordable property limited partnerships required a disproportionate effort to manage which was not justified by their overall contribution to profit. The Company concluded that its strategic focus should be on the direct ownership and management of market rate properties. Accordingly, the decision to sell its assets in the affordable property limited partnerships was made.
The Company's assets related to the limited partnerships are comprised of management contracts, loans, advances and receivables and general partnership interests. An aggregate impairment charge of $1.7 and $14.2 million was recorded by the Company and its equity affiliates and resulted from adjusting the recorded amount of the assets to their estimated fair market value, for the year ended December 31, 2003 and 2002, respectively. In 2002, the impairment charge was comprised of the following: (i) intangible assets (i.e. management contracts) were written down $985 to their estimated fair market value, (ii) loans, advances and other receivables which had previously been assessed for impairment based upon their estimated collectibility as determined under applicable accounting standards, are now, subsequent to the Company's decision to sell, required to be reflected at their estimated fair market value and, accordingly, were written down by an aggregate of $12,363, and (iii) the general partnership equity interests were written down $899 as certain of the Company's investments are now considered to have suffered an other than temporary impairment. As the assets are held by both the Company and its equity affiliates, the resultant impairment triggered by the decision to sell these assets is reflected in the statement of operations within the line items as follows:
2003 2002 ---- ----
Impairment of assets held as general partner $1,696 $ 2,448 Equity in earnings (losses) of unconsolidated affiliates (Note 4) - 11,799 ------ ------- $1,696 $14,247 ====== =======
In addition to the above impairment charge, the Company's results of operations, prior to the decision to sell, were impacted by losses incurred by certain of the affordable property limited partnerships. These losses were a direct result of the weak economy and resulting decrease in occupancy levels. Loans, advances and other receivables of
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (INVESTMENT IN AND ADVANCES TO AFFILIATES) - -------- -------- -------- ----------- ------ ----------- ----------- (Continued) -----------
$1,793 and $3,606 ($514 by the Company and $3,092 by the equity affiliates) for the years ended December 31, 2003 and 2002, respectively, were written down due both to (i) the accounting requirements of EITF 99-10, "Percentage Used to Determine the Amount of Equity Method Losses," which require the general partner to record a greater share of the underlying investment's losses where the investor (i.e., the Company including its equity affiliates) also has loans outstanding to the investment entity and the limited partner has no capital account and (ii) the assessment of recoverability of recorded amounts based upon the projected performance of the properties over the respective repayment terms. In addition, during 2002 the Company recorded an other than temporary impairment of $571,000, $546,000 of this amount related to the expiration in December 2002, of an option to acquire one of its equity interests. This change in circumstances was unrelated to the Company's decision to sell its interest. These assets are held by both the Company and its equity affiliates. The resultant charges that would have been recognized regardless of the Company's decision to sell the assets is reflected in the consolidated statement of operations within the line items as follows:
2003 2002 ---- ---- Impairment of assets held as general partner $ 822 $ 1,085 Equity in earnings (losses) of unconsolidated affiliates 971 3,092 ------ ------ $1,793 $4,177 ====== ======
The summary of the impairment and other charges made in 2002 related to the assets associated with the affordable property limited partnerships referenced in the previous paragraphs is as follows (in thousands):
Sale Impairment Other Charges Totals --------------- ------------- ------ Assets Company1 Affiliates2 Total Company1 Affiliates2 Total Company1 Affiliates2 Combined ------ -------- ----------- ----- -------------------------- -------------------- --------
Loans, advances and other receivables $ 564 $11,799 $12,363 $ 514 $3,092 $3,606 $ 1,078 $14,891 $15,969 Intangible assets 985 - 985 - - - 985 - 985 General partner equity 899 - 899 571 - 571 1,470 - 1,470 ------ ------- ------- ------ ------ ------ ------ ------- ------- $2,448 $11,799 $14,247 $1,085 $3,092 $4,177 $3,533 $14,891 $18,424 ====== ======= ======= ====== ====== ====== ====== ======= =======
1 Recorded by the Company in the line item "Impairment of assets held as General Partner"
2 Recorded by the Affiliates, and reflected by the Company in the line item "Equity in earnings (losses) of unconsolidated affiliates" HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 VARIABLE INTEREST ENTITIES (INVESTMENT IN AND ADVANCES TO AFFILIATES) - -------- -------- -------- ----------- ------ ----------- ----------- (Continued) -----------
The following table reconciles various items described in this Note 3 and Note 4 to the Consolidated Financial Statements with respect to various unconsolidated affiliates the Management Companies on the Company's Consolidated Statements of Operations for the items "Impairment of assets held as General Partner" and "Equity in earnings (losses) of unconsolidated affiliates":
2003 2002 ---- ---- Impairment of assets held as General Partner (Note 3): Sale impairment $1,696 $ 2,448 Advance impairment 822 1,085 ------- -------- $2,518 $ 3,533 ------- --------
Equity in earnings (losses) of unconsolidated affiliates: Company's share of net income (loss) from general partnership investments (Note 3) ($ 921) ($ 1,171) Company direct EITF 99-10 advance losses (Note 3) ( 971) - Equity in earnings (losses) of unconsolidated Management Companies (Note 4) - ( 16,322) ------- -------- ($1,892) ($17,493) ======= ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4 MANAGEMENT COMPANIES - --------------------
Certain property management, leasing and development activities are performed by Home Properties Management, Inc. and Home Properties Resident Services, Inc. (together, the "Management Companies"). Both are Maryland corporations and, effective January 1, 2001, elected to convert to taxable REIT subsidiaries under the Tax Relief Extension Act of 1999. The Operating Partnership owned non-voting common stock in the Management Companies which entitles it to receive 95% and 99% of the economic interest in Home Properties Management, Inc. and Home Properties Resident Services, respectively. Effective March 1, 2001, the Company recapitalized Home Properties Resident Services, Inc. by contributing to capital $23.7 million of loans due from affiliated partnerships. Simultaneous with the recapitalization, the Company increased its effective economic interest from 95% to 99% diluting the economic interest held by certain of the Company's officers and inside directors. Effective January 1, 2003, the accompanying consolidated financial statements include the accounts of the Management Companies. The Operating Partnership acquired all of the shares held by the Leenhoutses in the first quarter of 2003. The value of the Leenhoutses shares was based upon an internal valuation and amounted to approximately $81. The Company's share of income from the Management Companies, included in "Equity in earnings (losses) of unconsolidated affiliates" in the Consolidated Statements of Operations, for the twelve months ended December 31, 2002 is summarized as follows:
----
Management fees $ 2,864 Interest income 867 General and administrative ( 3,850) Interest expense ( 734) Other expenses ( 767) Impairment and other charges ( 14,891) -------- Net income (loss) ($16,511) ========
Equity in earnings (losses) of unconsolidated affiliates ($16,322) ========
Equity in earnings (losses) of unconsolidated affiliates, after minority interest ($10,188) ========
Total assets $18,468 ========
Total liabilities $12,741 ========
The general and administrative expenses reflected above represent an allocation of direct and indirect costs incurred by the Company estimated by management to be associated with the operations of the Management Companies.
As discussed in Note 3, in 2002 the "Impairment and other charges" of $14,891 is a result of the Company's decision to sell the assets associated with the affordable property limited partnerships ($11,799), and the operating losses directly associated with the performance of certain limited partnerships due to the weak economy ($3,092).
In connection with the adoption of FIN 46R on March 31, 2004, the Company consolidated the accounts and results of operations related to its investments in affordable limited partnerships for which the Company was the primary beneficiary. As result, all intercompany notes and other receivables have been eliminated in consolidation as of December 31, 2004. Included in assets of the Company for 2003 and of the Management Companies for 2002 are notes and other receivables due from affiliated partnerships (Note 3) of approximately $6,748 and $12,599, net of allowances, impairments and other charges of $10,514 and $10,091 at December 31, 2003 and 2002, respectively. The interest rates of the notes receivable include both fixed and variable rate terms. The variable rate loans are at one percent over the prime rate of interest. The fixed rate agreements range from 8.47% to 10% per annum. The maturity dates for these notes receivable range from 2018 to 2032. HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5 MORTGAGE NOTES PAYABLE - ----------------------
The Company's mortgage notes payable are summarized as follows:
2004 2003 ---- ----
Fixed rate mortgage notes payable $1,516,926 $1,350,056 Variable rate mortgage notes payable 127,796 30,640 ---------- ---------- Total mortgage notes payable $1,644,722 $1,380,696 ========== ==========
Mortgage notes payable are collateralized by certain apartment communities and mature at various dates from 2005 through 2042. The weighted average interest rate of the Company's variable rate notes and credit facility was 2.98% and 2.32% at December 31, 2004 and 2003, respectively. The weighted average interest rate of the Company's fixed rate notes was 6.23% and 6.47% at December 31, 2004 and 2003, respectively.
Principal payments on the mortgage notes payable for years subsequent to December 31, 2004 are as follows:
2005 $ 40,006 2006 72,295 2007 198,502 2008 203,215 2009 62,952 Thereafter 1,067,752 ----------
$1,644,722 ==========
The Company determines the fair value of the mortgage notes payable based on the discounted future cash flows at a discount rate that approximates the Company's current effective borrowing rate for comparable loans. Based on this analysis, the Company has determined that the fair value of the mortgage notes payable approximates $1,704,410 and $1,463,499, at December 31, 2004 and 2003, respectively.
Included in the consolidated mortgage balance of $1,644,722 as of December 31, 2004 is $77,637 of mortgage notes payable related to the Company's affordable limited partnerships, consolidated in connection with the Company's adoption of FIN 46R.
Prepayment penalties of approximately $305, $1,610, and $3,275 were incurred for the years ended December 31, 2004, 2003, and 2002, respectively. For 2004 the prepayment penalties were incurred in connection with both debt restructurings and the sale of property, whereas in 2003 the prepayment penalties were incurred strictly in connection with the sale of property. In 2002, the Company incurred such penalties on certain debt restructurings. During 2004, repayments on three debt instruments totaled $14,338 and were refinanced by three new borrowings of $52,957. In addition, the Company added additional financing on six properties totaling $76,853. The 2003 repayments on two debt instruments totaled $23,800 and were refinanced by two new borrowings of $46,045. The 2002 repayments on thirteen debt instruments totaled $101,341 and were refinanced by sixteen new borrowings in excess of $236,000.
6 LINE OF CREDIT - --------------
As of December 31, 2004, the Company had an unsecured line of credit of $115 million. The Company's outstanding balance as of December 31, 2004 was $58 million. The line of credit is led by M&T Bank, as Administrative Agent, with three other participants: Chevy Chase Bank FSB, Citizens Bank of Rhode Island, and Comerica Bank. Borrowings under the line of credit bear interest at 1.05% over the one-month LIBOR rate. The one-month Libor rate was 2.4% at December 31, 2004. HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 LINE OF CREDIT (Continued) - --------------------------
Increases in interest rates will increase the Company's interest expense on any outstanding balances and as a result would affect the Company's results of operations and financial condition. The line of credit expires on September 1, 2005. The LIBOR interest rate was 2.4% at December 31, 2004. The Credit Agreement relating to this line of credit provides for the Company to maintain certain financial ratios and measurements. One of these covenants is that the Company may not pay any distribution to its shareholders and holders of its Operating Partnership units if a distribution, when added to other distributions paid during the three immediately preceding fiscal quarters, exceeds the greater of: (i) 90% of funds from operations and 110% of cash available for distribution; and (ii) the amount required to maintain the Company's status as a REIT. Due to the granting of restricted stock to the retiring Co-CEO's in the fourth quarter of 2003 and the impairment charges recorded in the fourth quarter of 2002, (see Note 3) the Company did not meet the required ratio. The funds from operations payout ratio was 91% and 94%, respectively, when measured for the calendar years. Waivers have been granted by the participating banks for the excess payout incurred in 2003 and 2002 as indicated above.
On November 23, 2004, the Company signed a supplemental demand note with M&T Bank. The note has a maximum principal amount of $42 million. Borrowings on the note bear interest at 1.25% over the one-month LIBOR rate. The demand note was entered into to fund the Company's stock repurchase program. The Company had no outstanding balance on the note as of December 31, 2004.
7 MINORITY INTEREST - -----------------
Minority interest in the Company relates to the interest in the Operating Partnership and affordable limited partnerships not owned by Home Properties, Inc. Holders of UPREIT Units may redeem a Unit for one share of the Company's common stock or cash equal to the fair market value at the time of the redemption, at the option of the Company.
For 2004, the effect of consolidating the affordable limited partnership in connection with FIN 46R has been reflected in the change in minority interest for the year. The changes in minority interest for the two years ended December 31 are as follows:
2004 2003 ---- ---- Balance, beginning of year $330,544 $333,061 Issuance of UPREIT Units associated with property acquisitions 12,104 4,806 Issuance of UPREIT units associated with 1031 exchange transaction - 2,400 Adjustment between minority interest and stockholders' equity ( 5,630) 20,006 Exchange of UPREIT Units for Common Shares ( 14,106) ( 7,432) Net income 18,987 16,706 Accumulated other comprehensive loss 117 232 Distributions ( 38,918) ( 39,235) Effect of consolidating affordable limited partnerships under FIN 46R 7,677 - -------- -------- Balance, end of year $310,775 $330,544 ======== ========
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY - ----------------------------------------
Preferred Stock ---------------
On September 30, 1999, the Company privately placed 2,000,000 of its 8.36% Series B convertible cumulative preferred stock ("Series B Preferred Shares"), $25 liquidation preference per share. This offering generated net proceeds of approximately $48.7 million after offering costs of $1.3 million. The net proceeds were used to pay down Company borrowings. The Series B Preferred Shares were convertible at any time by the holder into Common Shares at a conversion price of $29.77 per Common Share, equivalent to a conversion ratio of .8398
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued) - ----------------------------------------------------
Preferred Stock (Continued) ---------------------------
Common Shares for each Series B Preferred Share (equivalent to 1,679,543 Common Shares assuming 100% converted). The Series B Preferred Shares are non-callable for five years. Each Series B Preferred Share received the greater of a quarterly distribution of $0.5225 per share or the dividend paid on a share of common stock on an as converted basis. On February 14, 2002, 1.0 million of the Series B Preferred Stock were converted into 839,771 shares of common stock. The conversion had no effect on the reported results of operations. On May 24, 2002 the Company repurchased the remaining 1.0 million shares outstanding at an amount equivalent to 839,772 common shares (as if the preferred shares had been converted). The Company repurchased the shares for $29,392, equal to the $35.00 common stock trading price when the transaction was consummated. A premium of $5,025 was incurred on the repurchase and has been reflected as a charge to net income available to common shareholders' in the consolidated statement of operations. As of December 31, 2002, there were no Series B preferred shares outstanding.
In May and June of 2000, the Company privately placed 600,000 of its 8.75% Series C convertible cumulative preferred stock ("Series C Preferred Shares"), $100 liquidation preference per share. This offering generated net proceeds of approximately $60 million. The net proceeds were used to fund acquisitions and property upgrades. The Series C Preferred shares were convertible at any time by the holder into Common Shares at a conversion price of $30.25 per Common Share, equivalent to a conversion ratio of 3.3058 Common Shares for each Series C Preferred share (equivalent to 1,983,471 Common shares assuming 100% converted). The Series C Preferred shares are non-callable for five years. Each Series C Preferred share received the greater of a quarterly distribution of $2.1875 per share or the dividend paid on a share of common stock on an as-converted basis. The Company also issued 240,000 additional warrants to purchase common shares at a price of $30.25 per share, expiring in 2005. In January 2003, holders of 100,000 shares of Series C Preferred Shares elected to convert those shares for 330,579 shares of common stock. On May 8, 2003, 200,000 shares of Series C Preferred Shares were converted into 661,157 shares of common stock. On August 26, 2003, 200,000 shares of Series C Preferred Shares were converted into 661,157 of common stock. On November 5, 2003, the remaining 100,000 shares of Series C Preferred Shares elected to convert those shares for 330,579 shares of common stock. On September 9, 2003, 17,780 warrants were exercised, resulting in the issuance of 17,780 shares of common stock. During the fourth quarter of 2003, the remaining 222,220 common stock warrants were exercised, resulting in the issuance of 222,220 shares of common stock. Neither the conversions nor the warrant exercise had an effect on the reported results of operations. As of December 31, 2003, there were no Series C preferred shares outstanding.
In June 2000, the Company privately placed 250,000 of its 8.78% Series D convertible cumulative preferred stock ("Series D Preferred Shares"), $100 liquidation preference per share. This offering generated net proceeds of approximately $25 million. The net proceeds were used to fund Company acquisitions and property upgrades. The Series D Preferred Shares are convertible at any time by the holder into Common Shares at a conversion price of $30.00 per Common Share, equivalent to a conversion ratio of 3.333 Common Shares for each Series D Preferred share (equivalent to 833,333 Common Shares assuming 100% converted). The Series D Preferred shares are non-callable for five years. Each Series D Preferred share will receive the greater of a quarterly distribution of $2.195 per share or the dividend paid on a share of common stock on an as-converted basis.
In December 2000, the Company privately placed 300,000 of its 8.55% Series E convertible cumulative preferred stock ("Series E Preferred Shares"), $100 liquidation preference per share. This offering generated net proceeds of approximately $30 million. The net proceeds were used to pay down Company borrowings. The Series E Preferred Shares are convertible at any time by the holder into Common Shares at a conversion price of $31.60 per Common Share, equivalent to a conversion ratio of 3.1646 Common Shares for each Series E Preferred Share (equivalent to 949,367 Common Shares assuming 100% converted). The Series E Preferred Shares are non-callable for five years. Each Series E Preferred Share received the greater of a quarterly distribution of $2.1375 per share or the dividend paid on a share of common stock on an as-converted basis. In addition, the Company issued warrants to purchase
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued) - ----------------------------------------------------
Preferred Stock (Continued) ---------------------------
285,000 common shares at a price of $31.60 per share, expiring in 2005. On August 20, 2002, 63,200 of the Series E Convertible Preferred Shares were converted into 200,000 shares of common stock. On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted into 116,456 shares of common stock. The conversions had no effect on the reported results of operations. On August 26, 2003 the remaining 200,000 shares of Series E Preferred Shares were converted into 632,911 of common stock. On September 9, 2003, 17,100 warrants were exercised, resulting in the issuance of 17,100 shares of common stock. During the fourth quarter of 2003, the remaining 267,900 common stock warrants were exercised, resulting in the issuance of 267,900 shares of common stock. Neither the conversions nor the warrant exercise had an effect on the reported results of operations. As of December 31, 2003, there were no Series E preferred shares outstanding.
In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a $25.00 liquidation preference per share. This offering generated net proceeds of approximately $58 million. The net proceeds were used to fund the Series B preferred stock repurchase, property acquisitions, and property upgrades. The Series F Preferred Shares are redeemable by the Company at anytime on or after March 25, 2007 at a redemption price of $25.00 per share, plus any accumulated, accrued and unpaid dividends. Each Series F Preferred share will receive an annual dividend equal to 9.00% of the liquidation preference per share (equivalent to a fixed annual amount of $2.25 per share).
Common Stock ------------
In 1997, the Company's Board of Directors approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units. The shares/units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board's action did not establish a target price or a specific timetable for repurchase. At December 31, 2001, there was approval remaining to purchase 1,135,800 shares. On August 6, 2002 the Board of Directors approved a 2,000,000-share increase in the stock repurchase program. During 2004, the Company repurchased 1,135,800 shares at a total cost of $47.4 million. During 2003 and 2002, there were no shares or UPREIT Units repurchased by the Company. At December 31, 2004 the Company had authorization to repurchase 2,000,000 shares of common stock and UPREIT Units under the stock repurchase program. From January 1, 2005 through February 16, 2005, the Company repurchased 1,300,700 additional shares at a cost of $53.3 million, leaving a remaining share authorization level of 699,300 shares. On February 16, 2005, the Board of Directors approved a 2,000,000-share increase in the stock repurchase program, resulting in an authorization level of 2,699,300 shares.
In February 2002, the Company closed on two common equity offerings totaling 704,602 shares of the Company's common stock, at a weighted average price of $30.99 per share, resulting in net proceeds to the Company of approximately $21.8 million.
Dividend Reinvestment Plan --------------------------
The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in common stock. In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock. The maximum monthly investment without prior Company approval is currently $1,000. The DRIP was amended, effective April 10, 2001, in order to reduce management's perceived dilution from issuing new shares at or below the underlying net asset value. The discount on reinvested dividends and optional cash purchases was reduced from 3% to 2%. The maximum monthly investment (without receiving approval from the Company) was reduced from $5,000 to $1,000. As expected, these changes significantly reduced participation in the Plan. Effective December 10, 2004, the discount was further reduced from 2% to 0%. In addition, in the fourth quarter of 2004, the Company has begun meeting share demand in
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued) - ----------------------------------------------------
Dividend Reinvestment Plan (Continued) --------------------------------------
the program through share repurchase by the transfer agent in the open market on the Company's behalf instead of new share issuance. This removes essentially 100% of the dilution caused by issuing new shares at a price less than the net asset value in an economic and efficient manner. A total of $18 million, $30 million, and $27 million was raised through this program during 2004, 2003, and 2002, respectively.
Officer/Director Notes for Stock Purchases and Stock Purchase and Loan Plan ---------------------------------------------------------------------------
On August 12, 1996, eighteen officers and the six independent directors purchased an aggregate of 208,543 shares of Common Stock through the DRIP at the price of $19.79. The purchases were financed 50% from a bank loan and 50% by a recourse loan from the Company. The Company loans bear interest at 7% per annum and mature in August 2016. The Company loans are subordinate to the above-referenced bank loans, and are collateralized by pledges of the 208,543 Common Shares. The loans are paid from the regular quarterly dividends paid on the shares of common stock pledged, after the corresponding bank loans are paid in full. During 2002 certain key officers and directors repaid their loans in full in connection with the Company's recently issued Corporate Governance policies.
On November 10, 1997, twenty-one officers and five of the independent directors purchased an aggregate of 169,682 shares of common stock through the DRIP at the price of $26.66. The purchases were financed 50% from a bank loan and 50% by a recourse loan from the Company. The Company loans bear interest at 6.7% per annum and mature in November 2017. The Company loans are subordinate to the above-referenced bank loans, and are collateralized by pledges of the 169,682 common shares. The loans are expected to be repaid from the regular quarterly dividends paid on the shares of common stock pledged, after the corresponding bank loans are paid in full. During 2002 certain key officers and directors repaid their loans in full in connection with the Company's recently issued Corporate Governance policies.
In May 1998, the Company adopted the Director, Officer and Employee Stock Purchase and Loan Plan (the "Stock Purchase Plan"). The program provides for the sale and issuance, from time to time as determined by the Board of Directors, of up to 500,000 shares of the Company's Common Stock to the directors, officers and key employees of the Company for consideration of not less than 97% of the market price of the Common Stock. The Stock Purchase Plan also allowed the Company to loan, on a recourse basis, the participants up to 100% of the purchase price (50% for non-employee directors).
On August 12, 1998, thirty officers/key employees and the six independent directors purchased an aggregate of 238,239 shares of common stock through the Stock Purchase Plan at the price of $24.11. The purchases for the officers/key employees were financed 100% by a recourse loan from the Company (50% for non-employee directors). The loans bear interest at 7.13% per annum and mature on the earlier of the maturity of the 1996 and 1997 phases of the loan program or August 2018. The loans are collateralized by pledges of the common stock and are expected to be repaid from the regular quarterly dividends paid on the shares. During 2002 certain key officers and directors repaid their loans in full in connection with the Company's recently issued Corporate Governance policies.
On February 1, 2001, one officer purchased an aggregate of 75,000 shares of common stock through the Stock Purchase Plan at the price of $26.20. The purchases were financed by a recourse loan from the Company. The loan is collateralized by pledges of the common stock, bears interest at 8% per annum and matures on February 15, 2021. The loan was repaid in full on January 25, 2002.
During 2004, the loan balances aggregating $315, outstanding as of December 31, 2003, under the officer and director share purchase program were repaid in full. On August 5, 2002, the Board of Directors of the Company prohibited any further loans to officers and directors in accordance with the Sarbanes-Oxley Act of 2002. HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued) - ----------------------------------------------------
Dividends ---------
Stockholders are taxed on dividends and must report such dividends as either ordinary income, capital gains, or as return of capital. The Company has declared a $2.49 distribution per common share (CUSIP 437306103) and a $2.25 distribution per Series F preferred share (CUSIP 437306509) during its most recent fiscal year. Pursuant to Internal Revenue Code Section 857 (b) (3) (C), for the years ended December 31, 2004, 2003, and 2002, the Company designates the taxable composition of the following cash distributions to holders of common and preferred shares in the amounts set forth in the tables below and on the next page:
Common Distribution Type --------------------------------------------------------- Ordinary 20% Unrecaptured Declaration Record Payable Distributions Taxable Return of Long-Term Sec. 1250 Dates Dates Dates Per Share Dividend Capital Capital Gain Gain ---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2/3/2004 2/17/2004 2/27/2004 $0.62 41.83% 0% 55.24% 0% 5/4/2004 5/17/2004 5/28/2004 $0.62 41.83% 0% 55.24% 0% 8/3/2004 8/16/2004 8/27/2004 $0.62 41.83% 0% 55.24% 0% 11/2/2004 11/16/2004 11/26/2004 $0.63 41.83% 0% 55.24% 0% ----- ----- - ----- -
TOTALS $2.49 41.83% 0% 55.24% 0% ===== ===== = ===== =
The taxable composition of cash distributions for each common share for 2003 and 2002 is as follows:
Distribution Type --------------------------------------------------------- Ordinary 20% Unrecaptured Distributions Taxable Return of Long-Term Sec. 1250 Year Per Share Dividend Capital Capital Gain Gain ---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2003 $2.45 55.62% 38.12% 0.00% 6.21% 2002 $2.41 62.28% 37.17% 0.00% 0.55%
Series F Preferred Distribution Type --------------------------------------------------------- Ordinary 20% Unrecaptured Declaration Record Payable Distributions Taxable Return of Long-Term Sec. 1250 Dates Dates Dates Per Share Dividend Capital Capital Gain Gain ---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2/3/2004 2/17/2004 3/1/2004 $0.56250 93.44% 0% 0% 6.56% 5/4/2004 5/17/2004 6/1/2004 $0.56250 93.44% 0% 0% 6.56% 8/3/2004 8/16/2004 8/31/2004 $0.56250 93.44% 0% 0% 6.56% 11/2/2004 11/16/2004 11/30/2004 $0.56250 93.44% 0% 0% 6.56% -------- ----- - - ----
TOTALS $2.25000 93.44% 0% 0% 6.56% ======== ===== = = ====
The taxable composition of cash distributions for each common share for 2003 and 2002 is as follows:
Distribution Type --------------------------------------------------------- Ordinary 20% Unrecaptured Distributions Taxable Return of Long-Term Sec. 1250 Year Per Share Dividend Capital Capital Gain Gain ---------------- ------------- ------------- --------------- ------------- ------------- ------------- ---------------
2003 $2.25 89.87% 0.00% 0.00% 10.04% 2002 $1.55 99.11% 0.00% 0.00% 0.89%
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued) - ----------------------------------------------------
Total Shares/Units Outstanding ------------------------------
At December 31, 2004, 32,625,413 common shares, 833,333 convertible preferred shares (assuming a conversion of the Preferred Shares to Common Shares) and 15,591,300 UPREIT Units were outstanding for a total of 49,050,046 common share equivalents.
In addition, 2,400,000 shares of Series F cumulative redeemable preferred shares were outstanding as of December 31, 2004.
9 STOCK BENEFIT PLAN - ------------------
The Company has adopted the 1994 Stock Benefit Plan, as amended (the "Plan"). Plan participants include officers, non-employee directors, and key employees of the Company. The Plan provided for the issuance of up to 1,596,000 shares to officers and employees and 154,000 shares for issuance to non-employee directors. Options granted to officers and employees of the Company vest 20% for each year of service until 100% vested on the fifth anniversary. Certain officers' options (264,000) and directors' options (149,100) vest immediately upon grant. The exercise price per share for stock options may not be less than 100% of the fair market value of a share of common stock on the date the stock option is granted (110% of the fair market value in the case of incentive stock options granted to employees who hold more than 10% of the voting power of the Company's common stock). Options granted to directors and employees who hold more than 10% of the voting power of the Company expire after five years from the date of grant.
All other options expire after ten years from the date of grant. The Plan also allows for the grant of stock appreciation rights and restricted stock awards. No additional options will be granted under this Plan.
On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan (the "2000 Plan"). The 2000 Plan participants include directors, officers, regional managers and on-site property managers. The 2000 Plan limits the number of shares issuable under the plan to 2,755,000, of which 205,000 were to be available for issuance to the non-employee directors. No additional options will be granted under the 2000 Plan to non-employee directors. At December 31, 2004, 775,666 common shares were available for future grant of options or awards under the 2000 plan for officers and employees.
On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan (the "2003 Plan"). Plan participants include directors, officers, regional managers and on-site property managers. The 2003 Plan limits the number of shares issuable under the plan to 1,450,000, of which 200,000 are to be available for issuance to the non-employee directors. At December 31, 2004, 206,010 and 84,400 common shares were available for future grant of options or awards under the 2003 plan for officers and employees and non-employee directors, respectively.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued) - ------------------------------
Details of stock option activity during 2004, 2003, and 2002 are as follows:
Weighted Average Number Exercise Price of Options Per Option ---------- ----------
Options outstanding at January 1, 2002 2,105,102 $28.69 (764,819 shares exercisable)
Granted, 2002 682,590 $34.77 Exercised, 2002 ( 185,255) $23.92 Cancelled, 2002 ( 175,084) $30.16 ---------
Options outstanding at December 31, 2002 2,427,353 $30.66 (921,781 shares exercisable)
Granted, 2003 678,370 $36.80 Exercised, 2003 ( 255,502) $28.31 Cancelled, 2003 ( 221,088) $32.50 ---------
Options outstanding at December 31, 2003 2,629,133 $32.32 (1,070,995 shares exercisable)
Granted, 2004 607,160 $38.75 Exercised, 2004 ( 605,053) $29.47 Cancelled, 2004 ( 177,524) $34.63 ---------
Options outstanding at December 31, 2004 2,453,716 $34.41 ========= (959,292 shares exercisable)
The following table summarizes information about options outstanding at December 31, 2004:
Weighted Weighted Average Average Weighted Remaining Fair Value Average Exercise Year Number Contractual of Options on Exercise Number Price Range Granted Outstanding Life Grant Date Price Exercisable Per Option ------- ----------- ---- ---------- ----- ----------- ----------
1996 6,517 1 $1.20 $19.637 6,517 $19.00-$20.50 1997 4,750 3 $1.55 26.500 4,750 $26.50 1998 16,017 4 $1.32 25.125 16,017 $25.125 1999 83,963 5 $1.57 27.125 83,963 $27.125 2000 245,096 6 $1.88 31.206 176,456 $28.313-$31.375 2001 467,672 7 $1.64 29.354 308,592 $27.01-$31.60 2002 489,981 8 $1.95 34.817 248,457 $32.20-$36.03 2003 558,860 9 $1.78 36.786 114,540 $36.28-$36.85 2004 580,860 10 $3.33 38.749 - $37.91-$38.83 --------- -- ----- ------- ------- ------------- Totals 2,453,716 8 $2.15 $34.411 959,292 $19.00-$38.83 ========= == ===== ======= ======= =============
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued) - ------------------------------
In 2004 and 2003, the Company granted 65,932 and 198,420 shares of restricted stock. The restricted stock outstanding at December 31, 2004 and 2003, was 267,928 and 236,170 shares, respectively. The 62,332 shares of restricted stock granted to key employees of the Company during 2004, vests 25% on each anniversary of the date of grant for the period of four years. The 65,850 shares of restricted stock granted to key employees of the Company during 2003, vests 100% on the fifth anniversary of the date of grant. In addition, in the fourth quarter of 2003, $5,000 of restricted stock was granted to the Leenhoutses (129,870 shares at $37.75 per share). The total amount of the grant was expensed in the fourth quarter of 2003 as it was part of their retirement award and was fully earned at that date. The restrictions on this restricted stock granted to the Leenhoutses vests 20% on each anniversary of the grant date. The restricted shares were granted during 2003 and 2004 at a weighted average price of $35.64 to $40.10 per share, respectively. Total compensation cost recorded for the years ended December 31, 2004, 2003 and 2002 for the restricted share grants was $1,171, $5,537, and $241, respectively.
In January 2003, the Company adopted the fair value method of recording stock compensation awards in accordance with SFAS 148 "Accounting for Stock Based Compensation - An Amendment of SFAS 123" (SFAS 148) using the Modified Prospective approach of adoption as outlined in the pronouncement. In 2004 and 2003, the Company recognized $948 and $804 in stock compensation costs related to its outstanding stock options.
10 SEGMENT REPORTING -- -----------------
The Company is engaged in the ownership and management of market rate apartment communities. Each apartment community is considered a separate operating segment. Each segment on a stand alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segments. The operating segments are aggregated and segregated as Core and Non-core properties.
Non-segment revenue to reconcile total revenue consists of interest and dividend income and other income. Non-segment assets to reconcile to total assets include cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, investments in and advances to affiliates, deferred charges and other assets.
Core properties consist of all apartment communities owned throughout 2003 and 2004 where comparable operating results are available. Therefore, the Core Properties represent communities owned as of January 1, 2003. Non-core properties consist of apartment communities acquired during 2003 and 2004, such that full year comparable operating results are not available.
The accounting policies of the segments are the same as those described in Notes 1 and 2.
The Company assesses and measures segment operating results based on a performance measure referred to as Funds from Operations ("FFO"). FFO is defined as net income (computed in accordance with GAAP) excluding gains or losses from the sales of property and business (including loss associated with early extinguishment of debt in connection with the sale) or non-cash real estate impairment charge, minority interest in the Operating Partnership, extraordinary items, plus real estate depreciation, less dividends from non-convertible preferred shares. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Other companies may calculate similarly titled performance measures in a different manner.
During 2003 and 2004, the Company reclassified certain property related operating expenses from general and administrative to operating and maintenance which would impact the segment contribution of FFO. This reclassification is also reflected in the prior period presentations.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10 SEGMENT REPORTING (Continued) -- -----------------------------
The revenues, profit (loss), and assets for each of the reportable segments are summarized as follows for the years ended December 31, 2004, 2003, and 2002.
2004 2003 2002 Revenues Apartments owned Core properties $ 425,844 $ 409,916 $ 342,739 Non-core properties 29,179 5,172 26,251 Reconciling items 3,307 4,942 3,292 --------- -------- -------- Total Revenue $ 458,330 $ 420,030 $ 372,282 ========= ======== ========
Profit (loss) Funds from operations: Apartments owned Core properties $ 234,927 $ 229,798 $ 197,544 Non-core properties 17,617 3,517 16,863 Reconciling items 3,307 4,942 3,292 --------- -------- -------- Segment contribution to FFO 255,851 238,257 217,699
General and administrative expenses ( 23,978) ( 22,607) ( 12,649) Interest expense ( 90,506) ( 84,368) ( 76,783) Prepayment penalties included in interest 36 1,610 3,275 Depreciation of unconsolidated affiliates 556 2,441 1,346 Non-real estate depreciation/amortization ( 3,446) ( 2,327) ( 1,174) FAS 141 acquisition rent /intangibles 1,111 46 - Redeemable preferred dividend ( 5,400) ( 5,400) ( 4,155) Equity in earnings (losses) of unconsolidated affiliates ( 538) ( 1,892) ( 17,493) Impairment of assets held as General Partner ( 1,116) ( 2,518) ( 3,533) Impairment of affordable assets not in FFO 945 2,034 1,470 Loss on disposition of discontinued operations before minority interest ( 9,725) - - Income from discontinued operations before minority interest depreciation and loss on disposition of property 3,163 7,527 13,742 --------- -------- -------- Funds from Operations 126,953 132,803 121,745 Depreciation - apartments owned ( 88,454) ( 77,089) ( 66,573) Depreciation of unconsolidated affiliates ( 1,998) ( 2,441) ( 1,346) FAS 141 acquisition rent /intangibles ( 1,111) ( 46) Prepayment penalties - - ( 3,275) Prepayment penalties in connection with sale of real estate ( 36) ( 1,610) - Impairment of real property - ( 423) ( 1,565) Redeemable preferred dividend 5,400 5,400 4,155 Impairment of affordable assets not in FFO ( 945) ( 2,034) ( 1,470) Minority interest in earnings ( 13,637) ( 13,965) ( 9,451) Loss on disposition of discontinued operations before minority interest 9,725 - - Income from discontinued operations before minority interest and loss on disposition of property 250 ( 3,894) ( 7,253) --------- -------- -------- Income from continuing operations $ 36,147 $ 36,701 $ 34,967 ========= ======== ========
Assets Apartments owned Core properties $2,277,130 $2,252,103 Non-core properties 440,852 170,827 Reconciling items 98,814 90,387 ---------- ---------- Total Assets $2,816,796 $2,513,317 ========== ========== Real Estate Capital Expenditures New property acquisitions $ 256,208 $ 96,801 Additions to properties Core properties 91,151 101,398 Non-core properties 11,549 4,948 Increase in real estate associated with the purchase of UPREIT Units 11,864 5,600 ---------- ---------- Total Real Estate Capital Expenditures $ 370,772 $208,747 ========== ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 DERIVATIVE FINANCIAL INSTRUMENTS -- --------------------------------
The Company has entered into interest rate swaps to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company does not utilize these arrangements for trading or speculative purposes. The principal risk to the Company through its interest rate hedging strategy is the potential inability of the financial institutions from which the interest rate protection was purchased to cover all of their obligations. To mitigate this exposure, the Company purchases its interest rate swaps from either the institution that holds the debt or from institutions with a minimum A- credit rating.
All derivatives, which have historically been limited to interest rates swaps designated as cash flow hedges, are recognized on the balance sheet at their fair value. On the date that the Company enters into an interest rate swap, it designates the derivative as a hedge of the variability of cash flows that are to be received or paid in connection with a recognized liability. To the extent effective, subsequent changes in the fair value of a derivative designated as a cash flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness will be reported in interest expense in the consolidated statement of operations.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods. Should it be determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company will discontinue hedge accounting prospectively.
The Company has four interest rate swaps that effectively convert variable rate debt to fixed rate debt. The notional amount amortizes in conjunction with the principal payments of the hedged items. The terms as follows:
Original Notional Amount Fixed Interest Rate Variable Interest Rate Maturity Date --------------- ------------------- ---------------------- ------------- $16,384,396 5.35% LIBOR + 1.50% June 25, 2007 $10,000,000 5.39% LIBOR + 1.50% June 25, 2007 $3,000,000 8.22% LIBOR + 1.40% June 25, 2007 $4,625,000 8.40% LIBOR + 1.40% June 25, 2007
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. At that time, the Company designated all of its interest rate swaps as cash flow hedges in accordance with the requirements of SFAS 133. The aggregate fair value of the derivatives on January 1, 2001 was $583, prior to the allocation of minority interest, and was recorded as a liability on the consolidated balance sheet with an offset to other comprehensive income representing the cumulative effect of the transition adjustment pursuant to the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes. HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11 DERIVATIVE FINANCIAL INSTRUMENTS (Continued) -- --------------------------------------------
As of December 31, 2004, the aggregate fair value of the Company's interest rate swaps was $659 prior to the allocation of minority interest, and is included in accrued expenses and other liabilities in the consolidated balance sheets. For the twelve months ending December 31, 2004, as the critical terms of the interest rate swaps and the hedged items are the same, no ineffectiveness was recorded in the consolidated statements of operations. All components of the interest rate swaps were included in the assessment of hedge effectiveness. The Company expects that within the next twelve months it will reclassify as a charge to earnings $382, prior to the allocation of minority interest, of the amount recorded in accumulated other comprehensive loss. The fair value of the interest rate swaps is based upon the estimate of amounts the Company would receive or pay to terminate the contract at the reporting date and is estimated using interest rate market pricing models.
12 TRANSACTIONS WITH AFFILIATES -- ----------------------------
The Company and the Management Companies recognized management and development fee revenue, interest income and other miscellaneous income from affiliated entities of $696, $3,679, and $5,783 for the years ended December 31, 2004, 2003, and 2002, respectively. The Company had accounts receivable outstanding due from affiliated entities of $12 and $162 at December 31, 2004 and 2003, respectively.
On January 1, 2004, the Company sold certain assets of its commercial property management division to Home Leasing, LLC, which is owned by Nelson and Norman Leenhouts. This division managed approximately 2.2 million square feet of gross leasable area, as well as certain planned communities. The initial amount paid was $82. In addition, the Company is entitled to receive a percentage of the management fee received by Home Leasing in connection with the management of one of the commercial properties for a period not to exceed 36 months. The expected monthly fee as outlined in the contract is approximately $4.6, or $55.2 per year. If Home Leasing continues to manage the property for three years, the Company is expected to receive total additional deferred purchase price of $165.6, of which $55.2 has been received for the year ended December 31, 2004. The current gain recorded on the sale of these assets as of December 31, 2004 amounts to $24.4. If the management of this property is retained for the entire three years, the Company expects to receive an additional $110.4 for the period January 1, 2005 through January 1, 2007. The gain on sale would then be approximately $134.8.
On March 2, 2004, the Company acquired Wellington Trace Apartments from an affiliated partnership owned by one of the Company's directors for $27.1 million.
A director and former officer of the Company provided consulting services to the Company during 2002 for fees approximating $54.
In 1997, certain officers and inside directors of the Company entered into a lease termination agreement with the Company. The agreement provided for a contingent termination fee based on the performance of the underlying property. In 2002, an amount of $312 became payable to the Company under the terms of the agreement. This amount was classified in "Property other income" in the Consolidated Statements of Operations. The agreement expired in 2002.
The Company leases its corporate office space from an affiliate. The lease requires an annual base rent of $884 and $895 for the years ended 2005 and 2006, respectively. The lease also requires the Company to pay a pro rata portion of property improvements, real estate taxes and common area maintenance. Rental expense was $1,694, $1,609, and $1,296 for the years ended December 31, 2004, 2003, and 2002, respectively.
During 2004, the loan balances aggregating $315, outstanding as of December 31, 2003, under the officer and director share purchase program were repaid in full. On August 5, 2002, the Board of Directors of the Company prohibited any further loans to officers and directors in accordance with the Sarbanes-Oxley Act of 2002.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES -- -----------------------------
Property Lease --------------
On December 1, 2004 the Company entered in to a lease agreement with a third party owner to manage the operations of one of their communities with 1,387 apartment units. The lease has a term of five years, but after two years (from the 24th month to the 36th month), the owner may require us to buy the property. From the 36th month to the end of the lease term, the Company has the right to require the owner to sell the property to the Company. It is the Company's expectation that closing on the acquisition of the property will occur no later than 36 months after the commencement of the lease. The estimated future acquisition price of the property is $140 million. The agreement required an initial deposit of $5,000, with an additional $1,000 estimated deposit requirement for each of the next two years, representing capital improvements paid by the owner. The net operating income of the property (as defined in the lease agreement) is remitted back to the owner as rent on a monthly basis. In exchange for services, the Company is entitled to receive monthly; a management fee equal to 5% of Collected Income, as defined in the lease, an incentive fee of $25, and interest payments equal to 3% annual interest on the outstanding deposit. Including interest, the total income recognized by the Company for the year-end December 31, 2004 amounted to $98.
Ground Lease ------------
The Company has a non-cancelable operating ground lease for one of its properties. The lease expires May 1, 2020, with options to extend the term of the lease for two successive terms of twenty-five years each. The lease provides for contingent rental payments based on certain variable factors. The lease also requires the lessee to pay real estate taxes, insurance and certain other operating expenses applicable to the leased property. Ground lease expense was $226, $219, and $210, including contingent rents of $156, $149, and $140, for the years ended December 31, 2004, 2003, and 2002, respectively. At December 31, 2004, future minimum rental payments required under the lease are $70 per year until the lease expires.
401(k) Savings Plan -------------------
The Company sponsors a contributory savings plan. Under the plan, the Company will match 75% of the first 4% of participant contributions. The matching expense under this plan was $690, $1,010, and $638 for the years ended December 31, 2004, 2003, and 2002, respectively.
Incentive Compensation Plan ---------------------------
The Incentive Compensation Plan provides that eligible officers and key employees may earn a cash bonus based on the percentage growth in the Company's "funds from operations" per share/unit (computed based on the diluted shares/units outstanding) as compared against the industry average growth. The bonus expense charged to operations (including that portion allocated to the Management Companies) was $3,414, $1,729, and $2,764 for the years ended December 31, 2004, 2003 and 2002, respectively.
Contingencies -------------
In 2001, the Company underwent a state tax audit. The state has assessed taxes of $469 for the 1998 and 1999 tax years under audit. If the state's position is applied to all tax years through December 31, 2001, the assessment would be $1.3 million. At the time, the Company believed the assessment and the state's underlying position were not supportable by the law nor consistent with previously provided interpretative guidance from the office of the State Secretary of Revenue. After two subsequent enactments by the state legislation during 2002 affecting the pertinent tax statute, the Company has been advised by outside tax counsel that its filing position for 1998-2001 should prevail. During December 2003, the state's governor signed legislation which included the REIT tax provisions. Based upon this, Company's tax counsel expects that the outstanding litigation should now be able to be resolved. Effective January 1, 2003, the Company reorganized the ownership of Home Properties Trust, which
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued) -- -----------------------------------------
Contingencies (Continued) -------------------------
should subject the Company to a much lower level of tax going forward. During the fourth quarter of 2004, the State Department of Revenue formally approved the settlement offer of $29 on the 1998 tax year which was made during the third quarter. For the remaining years, 1999-2001 or $1.1 million in exposure, the Company is still dealing with the State Department of Revenue, pursuing 100% relief as supported by interpretation of tax law by outside counsel.
During April, 2004, the Company finalized negotiations with New York State settling a sales and use tax audit covering the period June 1, 1999 through May 31, 2002. The total cost to the Company as a result of the audit amounted to $861. This was included in the first quarter results and allocated $448 to expense and $413 capitalized to real estate assets for improvements.
As a result of this audit, during the second quarter the Company examined its sales and use tax compliance in the other states in which the Company operates. Based upon its internal analysis, the Company estimated its liability as of June 30, 2004 in those states where it found non-compliance and recorded at June 30, 2004 a liability of $1,712. This was included in the second quarter results and allocated $761 to expense and $951 capitalized to real estate assets for improvements. The liability recorded relates to the period beginning on the later of: (i) the date the Company first purchased property in the applicable state; or (ii) January 1, 1997 and ending on June 30, 2004. In addition, the Company increased the liability for sales tax exposure by $68 for the six-month period ended December 31, 2004. The Company recognizes that the liability recorded is an estimate and that the actual tax liability that will be paid in the future may be less than or greater than this estimate. The Company has determined that the likely range is between $1,325 and $2,300.
In connection with various UPREIT transactions, the Company has agreed to maintain certain levels of nonrecourse debt for a period of 5 to 10 years associated with the contributed properties acquired. In addition, the Company is restricted in its ability to sell certain contributed properties (47% of the owned portfolio) for a period of 5 to 15 years except through a tax deferred Internal Revenue Code Section 1031 like-kind exchange.
Debt Covenants --------------
The line of credit loan agreement contains restrictions which, among other things, require maintenance of certain financial ratios and limit the payment of dividends (See Note 6).
In connection with the issuance of the Series F Preferred Stock, the Company is required to maintain for each fiscal quarterly period a fixed charge coverage ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Article Supplementary, of 1.75 to 1.0. The fixed charge coverage ratio and the components thereof do not represent a measure of cash generated from operating activities in accordance with generally accepted accounting principles and are not necessarily indicative of cash available to fund cash needs. Further, this ratio should not be considered as an alternative measure to net income as an indication of the Company's performance or of cash flow as a measure of liquidity.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued) -- -----------------------------------------
Debt Covenants (Continued) --------------------------
The calculation of the fixed charge coverage ratio for the four most recent quarters since the issuance of the Series F Preferred Stock are presented below (in thousands). EBITDA is defined in the Series F Cumulative Redeemable Preferred Stock Article Supplementary as consolidated income before gain (loss) on disposition of property and business, minority interest and extraordinary items, before giving effect to expenses for interest, taxes, depreciation and amortization. Net operating income from discontinued operations in the calculation below is defined as total revenues from discontinued operations less operating and maintenance expenses.
Calculation Presented for Series F Covenants Three-months ended Dec. 31 Sept. 30 June 30 Mar. 31 2004 2004 2004 2004 ---- ---- ---- ---- EBITDA Total revenues $118,357 $118,942 $118,017 $113,197 Net operating income from discontinued operations 2,143 1,364 1,069 - Operating and maintenance (52,227) (50,372) (51,081) (54,232) General and administrative ( 9,482) ( 4,879) ( 4,892) ( 4,725) Impairment of assets held as General Partner - - - ( 1,116) Equity in earnings (losses) of unconsolidated affiliates - 25 ( 25) ( 538) -------- -------- -------- -------- $ 58,791 $ 65,080 $ 63,088 $ 52,586 Fixed Charges Interest expense $ 23,891 $ 23,496 $ 23,783 $ 21,332 Interest expense on discontinued operations 442 40 476 - Preferred dividends 1,898 1,898 1,899 1,898 Capitalized interest 191 230 171 171 -------- -------- -------- -------- $ 26,422 $ 25,664 $ 26,329 $ 23,401
Times Coverage ratio: 2.23 2.54 2.40 2.25
Guarantees ----------
As of December 31, 2004, the Company, through its general partnership interests in certain affordable property limited partnerships, has guaranteed the Low Income Housing Tax Credits to limited partners in 10 partnerships totaling approximately $21,000. As of December 31, 2004, there were no known conditions that would make such payments necessary, and no amounts have been recorded. In addition, the Company, acting as general partner in certain partnerships, is obligated to advance funds to meet partnership operating deficits.
Executive Retention Plan ------------------------
Effective February 2, 1999, the Executive Retention Plan provides for severance benefits and other compensation to be received by certain employees in the event of a change in control of the Company and a subsequent termination of their employment without cause or voluntarily with good cause.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14 PROPERTY ACQUISITIONS -- ---------------------
For the years ended December 31, 2004, 2003, and 2002, the Company has acquired the communities listed below:
Cost of Market Date Year Number Cost of Acquisition Community Area Acquired Constructed of Units Acquisition Per Unit --------- ---- -------- ----------- -------- ----------- -------- 11 Property Portfolio Long Island 3/1-5/31/02 1949-79 1,688 $ 152,794 $ 87 Gardencrest Boston 6/28/02 1948 696 $ 85,885 $ 123 Brittany Place Northern VA 8/22/02 1968 591 $ 44,336 $ 70 Cider Mill Northern VA 9/27/02 1978 864 $ 81,490 $ 85 5 Property Portfolio Hudson Valley 10/11/02 1969 224 $ 13,990 $ 57 W. Springfield Terrace Northern VA 11/18/02 1978 244 $ 34,198 $140 The Sycamores Northern VA 12/16/02 1978 185 $ 20,350 $ 110 Stone Ends Boston 2/12/03 1972 280 $ 34,028 $ 121 Falkland Chase Northern VA 9/10/03 1937 450 $ 58,942 $ 131 Chatham Hill New Jersey 1/30/04 1967 308 $ 48,215 $ 157 Northwood New Jersey 1/30/04 1965 134 $ 15,186 $ 113 Fairmount New Jersey 1/30/04 1943 54 $ 2,256 $ 42 Kensington New Jersey 1/30/04 1943 38 $ 1,843 $ 49 Wellington Trace Northern VA 3/2/04 2002 240 $ 27,134 $ 113 Village @ Marshfield Boston 3/17/04 1972 276 $ 31,695 $ 115 Woodleaf Northern VA 3/19/04 1985 228 $ 20,672 $ 91 The Hamptons/Vinings Southeast Florida 7/7/04 1986-1989 836 $ 70,381 $ 84 Regency Club New Jersey 9/24/04 1974 372 $ 37,610 $ 101
15 DISCONTINUED OPERATIONS -- -----------------------
The Company adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also retains the basic provisions for presenting discontinued operations in the income statement but broadened the scope to include a component of an entity rather than a segment of a business. Pursuant to the definition of a component of an entity in the SFAS, assuming no significant continuing involvement by the former owner after the sale, the sale of an apartment community is now considered a discontinued operation. In addition, apartment communities classified as held for sale are also considered a discontinued operation. The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date. Properties classified in this manner through December 31, 2004, as discussed below, were reclassified as such in the accompanying Consolidated Statements of Operations for each of the three years ended December 31, 2004.
Included in discontinued operations for the three years ended December 31, 2004 are the operating results, net of minority interest, of twenty four apartment community dispositions (five sold in 2004, seven sold in 2003 and twelve sold in 2002). In addition, discontinued operations for the year ended December 31, 2004 includes the operating results, net of minority interest of twenty two VIE's sold during 2004 and twelve VIE's held for sale as of December 31, 2004. For purposes of the discontinued operations presentation, the Company only includes interest expense associated with specific mortgage indebtedness of the properties that are considered discontinued operations.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15 DISCONTINUED OPERATIONS (Continued) -- -----------------------------------
The operating results of discontinued operations are summarized as follows for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002 ---- ---- ---- Revenues: Rental Income $26,860 $19,877 $29,783 Property other income 1,677 983 1,193 -------- -------- -------- Total Revenues 28,537 20,860 30,976 -------- -------- --------
Operating and Maintenance 17,388 9,805 13,194 Interest expense 6,256 3,528 4,040 Depreciation and amortization 5,300 3,210 4,924 Impairment of real property 1,100 423 1,565 -------- -------- -------- Total Expenses 30,044 16,966 23,723 -------- -------- --------
Income (loss) from discontinued operations before minority interest and gain (loss) on disposition of property ( 1,507) 3,894 7,253
Minority interest in limited partnerships 1,273 - - Minority interest in operating partnerships 80 ( 1,387) ( 2,775) -------- -------- --------
Income from discontinued operations ($ 154) $ 2,507 $ 4,478 ======== ======== ========
The table below provides a more detailed presentation of the components of discontinued operations for year-ended December 31, 2004.
Owned Communities VIE's Total ----------- ----- ----- Revenues Rental Income $ 11,444 $15,416 $26,860 Property other income 639 1,038 1,677 -------- -------- -------- Total Revenues 12,083 16,454 28,537
Expenses Operating and Maintenance 5,451 11,937 17,388 Interest expense 2,168 4,088 6,256 Depreciation and amortization 1,971 3,329 5,300 Impairment of real property 1,100 - 1,100 -------- -------- -------- Total Expenses 10,690 19,354 30,044 -------- -------- --------
Income (loss) from discontinued operations before minority interest and gain (loss) on disposition of property 1,393 ( 2,900) ( 1,507) Minority interest in limited partnerships - 1,273 1,273 Minority interest in operating partnerships 448 ( 528) ( 80) -------- -------- -------- Income (loss) from discontinued operations $ 945 ($1,099) ($ 154) ======== ======== ========
The results of discontinued operations in the table above have been presented for the year-ended December 31, 2004 only, as the discontinued operations for 2003 and 2002 solely represents the results from owned communities.
16 PROFORMA CONDENSED FINANCIAL INFORMATION -- ----------------------------------------
The Company acquired ten apartment communities ("2004 Acquired Communities") with a combined 2,486 units in six unrelated transactions during the twelve-month period ended December 31, 2004. The total combined purchase price (including closing costs) of $257.4 million equates to approximately $104 per unit. Consideration for the communities was funded through the assumption or placement of new debt of $146.6 million of debt, $98.7 million from the Company's line of credit and $12.1 million of UPREIT Units.
The following unaudited proforma information was prepared as if: (i) the 2004 transactions related to the acquisition of the "2004 Acquired Communities" occurred on January 1, 2003, and (ii) the 2003 transactions related to
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16 PROFORMA CONDENSED FINANCIAL INFORMATION (Continued) -- ----------------------------------------------------
the acquisition of two apartment communities in two separate transactions had occurred on January 1, 2002. The proforma financial information is based upon the historical consolidated financial statements and is not necessarily indicative of the consolidated results which actually would have occurred if the transactions had been consummated at January 1, 2002 or 2003, nor does it purport to represent the results of operations for future periods. Adjustments to the proforma condensed combined statement of operations for the twelve months ended December 31, 2004, 2003, and 2002 consist principally of providing net operating activity and recording interest, depreciation and amortization from January 1, 2002 or 2003 to the acquisition date as appropriate.
For the years ended December 31, (unaudited)
2004 2003 ---- ----
Total revenues $467,738 $448,251 Net income available to common shareholders before cumulative effect of change in accounting principle 28,936 27,584 Net income available to common shareholders 28,615 27,584
Per common share data: Net income available to common shareholders before cumulative effect of change in accounting principle Basic $0.88 $0.94 Diluted $0.87 $0.93 Net income available to common shareholders: Basic $0.87 $0.94 Diluted $0.86 $0.93 Weighted average numbers of shares outstanding: Basic 32,911,945 29,208,242 ========== ========== Diluted 33,314,038 29,575,660 ========== ==========
For the years ended December 31, (unaudited)
2003 2002 ---- ----
Total revenues $424,316 $381,491 Net income available to common shareholders 25,872 18,600
Per common share data: Net income available to common shareholders: Basic $0.89 $0.71 Diluted $0.89 $0.71 Weighted average numbers of shares outstanding: Basic 29,208,242 26,054,535 ========== ========== Diluted 29,575,660 26,335,316 ========== ==========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17 SUPPLEMENTAL CASH FLOW DISCLOSURES -- ----------------------------------
Supplemental cash flow information including non cash financing and investing activities for the years ended December 31, 2004, 2003, and 2002 are as follows:
2004 2003 2002 ---- ---- ---- Cash paid for interest $92,150 $85,895 $76,326 Mortgage loans assumed associated with property acquisitions 90,568 25,239 153,581 Issuance of UPREIT Units associated with property and other acquisitions 12,105 4,806 11,522 Increase in real estate associated with the purchase of UPREIT Units 12,470 5,600 2,200 Exchange of UPREIT Units for common shares 14,106 7,442 4,411 Fair value of hedge instruments 659 956 1,618 Compensation cost of stock options issued 948 804 - Net real estate assumed in connection with FIN 46R consolidation 152,319 - - Other assets assumed in connection with FIN 46R consolidation 11,916 - - Mortgage debt assumed in connection with FIN 46R consolidation 129,149 - - Other liabilities assumed in connection with FIN 46R consolidation 5,363 - - Net real estate disposed in connection with FIN 46R consolidation 69,743 - - Other assets disposed in connection with FIN 46R consolidation 3,054 - - Mortgage debt disposed in connection with FIN 46R consolidation 48,611 - - Other liabilities disposed in connection with FIN 46R consolidation 2,759 - -
18 GAIN (LOSS) ON DISPOSITION OF PROPERTY AND BUSINESS -- ---------------------------------------------------
During 2004, the Company disposed of five apartment communities with 1,646 units in four unrelated transactions. The total sales price of $92.5 million equates to $56 per unit. The total gain on sale of these transactions amounted to approximately $26.6 million.
During 2003, the Company disposed of seven apartment communities with 1,568 units in seven unrelated transactions. The total sales price of $59 million equates to $38 per unit. The total gain on sale of these transactions amounted to approximately $4 million.
During 2002, the Company disposed of twelve apartment communities with 1,724 units in eight unrelated transactions. The total sales price of $87 million equates to $50 per unit. The total gain on sale of these transactions amounted to approximately $7.6 million.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19 QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED) -- -----------------------------------------------------
Quarterly financial information for the years ended December 31, 2004 and 2003 are as follows:
---- First Second Third Fourth ----- ------ ----- ------
Revenues $109,556 $113,894 $116,523 $118,357 Adjustment for discontinued operations 3,641 4,123 2,419 - -------- -------- -------- -------- Revenues as reported on Form 10-Q 113,197 118,017 118,942 118,357
Net Income 6,478 10,641 4,925 24,978
Per share data:
Basic earnings per share data: Net income available to common shareholders $0.14 $0.27 $0.09 $0.70
Diluted earnings per share data: Net income available to common shareholders $0.14 $0.26 $0.09 $0.69
---- First Second Third Fourth ----- ------ ----- ------
Revenues $101,631 $104,266 $106,358 $107,775 Adjustment for discontinued operations 3,502 2,396 2,412 3,683 -------- -------- -------- -------- Revenues as reported on Form 10-Q 105,133 106,662 108,770 111,458
Net Income 7,389 12,134 11,604 10,669
Per share data:
Basic earnings per share data: Net income available to common shareholders $0.14 $0.32 $0.30 $0.28
Diluted earnings per share data: Net income available to common shareholders $0.14 $0.31 $0.30 $0.27
Full year per share data does not equal the sum of the quarterly data due to the impact of the convertible securities on the quarterly results and not the year to date amounts. The quarterly reports for the years ended December 31, 2004 and 2003 have been reclassified to reflect discontinued operations in accordance with SFAS No. 144.
20 SUBSEQUENT EVENTS -- -----------------
On January 13, 2005 the Company acquired a 204-unit community in Westminster, Maryland. The total purchase price of $19.7 million, including closing costs, equates to approximately $96 per apartment unit. Consideration for this property was funded through the use of the Company's line of credit.
On March 1, 2005, the Company acquired a 198-unit community in Hackensack, New Jersey. The total purchase price of $12.9 million, including closing costs, equates to approximately $65 per apartment unit. Consideration for this property included assumed debt of $4.9 million and $8.0 million in UPREIT units of the Company. In addition, the Company acquired a 148-unit community in Aberdeen, New Jersey. The total purchase price of $7.4 million, including closing costs, equates to approximately $50 per apartment unit. Consideration for this property included assumed debt of $3.0 million and $4.4 million in UPREIT units of the Company.
SCHEDULE II
HOME PROPERTIES, INC.
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31: (IN THOUSANDS)
Balance at Charged to beginning Costs and Amounts Balance at of year Expenses Written Off end of year ------- -------- ----------- -----------
Allowance for Doubtful Receivables ----------------------------------
December 31, 2004: $ 241 3,527 (3,201) $ 567 ------- --- ----- -------
December 31, 2003: $ 125 2,954 (2,838) $ 241 ------- --- ----- -------
December 31, 2002: $ 12 1,934 (1,821) $ 125 ------- --- ----- -------
Deferred Tax Valuation Allowance --------------------------------
December 31, 2004: $ 8,185 495 - $ 8,680 ------- --- ----- -------
December 31, 2003: $ 559 7,626 - $ 8,185 ------- --- ----- -------
December 31, 2002: $ 360 199 - $ 559 ------- --- ----- -------
SCHEDULE III HOME PROPERTIES, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2004 (IN THOUSANDS)
Initial Costs Total Total Cost Capital- Cost Cost Buildings, ized Buildings, Net of Improve- Subse- Improve- Accumu- Accumu- ments & quent to ments & lated lated Year of Encum- Equip- Adjust- Acqui- Equip- Depre- Depre- Acqui- Community brances Land ment ments(a) sition Land ment Total(b) ciation ciation sition --------- ------- ---- ---- -------- ------ ---- ---- -------- ------- ------- ------
1600 East Avenue 1,000 8,527 5,092 1,000 13,619 14,619 3,219 11,400 1997 1600 Elmwood 11,027 299 5,698 3,339 4,326 299 13,363 13,662 7,129 6,533 1983 Bayview/Colonial 5,428 1,600 8,471 3,732 1,600 12,203 13,803 1,452 12,351 2000 Beechwood 560 3,442 2,258 560 5,700 6,260 1,146 5,114 1998 Blackhawk 13,736 2,968 14,568 4,661 2,968 19,229 22,197 2,422 19,775 2000 Bonnie Ridge 36,068 4,830 42,769 19,891 4,830 62,660 67,490 10,075 57,415 1999 Braddock Lee 21,915 3,810 8,842 4,973 3,810 13,815 17,625 3,181 14,444 1998 Brittany Place 19,049 4,728 39,608 5,897 4,728 45,505 50,233 3,027 47,206 2002 Brook Hill 330 7,920 4,717 330 12,637 12,967 3,955 9,012 1994 Cambridge Village 3,246 2,460 3,188 1,501 2,460 4,689 7,149 359 6,790 2002 Canterbury -MD 30,072 4,944 21,384 4,747 4,944 26,131 31,075 3,737 27,338 1999 Canterbury Square 5,955 2,352 10,791 4,871 2,352 15,662 18,014 3,559 14,455 1997 Carriage Hill - MI 3,380 840 5,974 1,896 840 7,870 8,710 1,613 7,097 1998 Carriage Hill - NY 5,841 570 3,827 2,984 570 6,811 7,381 1,843 5,538 1996 Carriage Park 4,878 1,280 8,184 3,205 1,280 11,389 12,669 2,472 10,197 1998 Castle Club 6,804 948 8,909 2,246 948 11,155 12,103 1,463 10,640 2000 Cedar Glen 715 2,018 1,880 715 3,898 4,613 839 3,774 1998 Charter Square 10,058 3,952 18,247 8,217 3,952 26,464 30,416 5,642 24,774 1997 Chatham Hill 27,220 1,848 46,150 1,553 1,848 47,703 49,551 1,132 48,419 2004 Cherry Hill Club 1,937 492 4,096 3,182 492 7,278 7,770 1,566 6,204 1998 Cherry Hill Village 5,205 1,120 6,835 2,556 1,120 9,391 10,511 1,834 8,677 1998 Chesterfield 7,764 1,482 8,206 4,224 1,482 12,430 13,912 2,785 11,127 1997 Cider Mill 64,585 15,552 65,938 4,234 15,552 70,172 85,724 4,312 81,412 2002 Cornwall Park 5,645 439 2,947 4,039 439 6,986 7,425 1,800 5,625 1996 Country Village 6,193 2,236 11,149 6,019 2,236 17,168 19,404 3,416 15,988 1998 Courtyards Village 4,983 3,360 9,824 2,098 3,360 11,922 15,282 1,165 14,117 2001 Coventry Village 784 2,328 2,539 784 4,867 5,651 996 4,655 1998 Curren Terrace 14,998 1,908 10,957 5,722 1,908 16,679 18,587 3,739 14,848 1997 Cypress Place 6,219 2,304 7,861 3,005 2,304 10,866 13,170 1,361 11,809 2000 Deerfield Woods 3,148 864 4,877 1,769 864 6,646 7,510 888 6,622 2000 Devonshire Hills 23,583 14,850 32,934 4,122 14,850 37,056 51,906 3,504 48,402 2001 East Hill 231 1,560 987 231 2,547 2,778 510 2,268 1998 East Meadow 7,140 2,250 10,803 753 2,250 11,556 13,806 1,336 12,470 2000 East Winds 960 5,079 2,263 960 7,342 8,302 900 7,402 2000 Elmwood Terrace 21,761 6,048 14,680 4,029 6,048 18,709 24,757 2,386 22,371 2000 Emerson Square 2,230 384 2,019 1,120 384 3,139 3,523 854 2,669 1997 Executive 3,162 600 3,420 2,563 600 5,983 6,583 1,385 5,198 1997 Fairmount 324 1,914 62 324 1,976 2,300 50 2,250 2004 Fairview 7,503 580 5,305 2,828 3,716 580 11,849 12,429 5,885 6,544 1985 Falcon Crest 15,297 2,772 11,116 5,459 2,772 16,575 19,347 2,773 16,574 1999 Falkland Chase 40,058 9,000 49,705 1,205 9,000 50,910 59,910 1,737 58,173 2003 Fenland Field 12,295 3,510 11,050 2,598 3,510 13,648 17,158 1,304 15,854 2001 Fordham Green 2,756 802 5,280 2,802 802 8,082 8,884 1,689 7,195 1997 Gardencrest Apts. 24,360 61,525 11,207 24,360 72,732 97,092 4,941 92,151 2002 Gateway Village 7,074 1,320 6,621 1,275 1,320 7,896 9,216 1,141 8,075 1999 Glen Brook 1,414 4,816 1,948 1,414 6,764 8,178 1,044 7,134 1999 Glen Manor 5,999 1,044 4,564 1,942 1,044 6,506 7,550 1,304 6,246 1997 Golf Club 15,946 3,990 21,236 10,400 3,990 31,636 35,626 4,497 31,129 2000 Greentrees 4,421 1,152 8,608 3,325 1,152 11,933 13,085 2,576 10,509 1997 Hampton Court 3,297 1,252 4,615 3,496 1,252 8,111 9,363 1,009 8,354 2000 Harborside 8,555 250 6,113 4,274 250 10,387 10,637 3,561 7,076 1995 Hawthorne Consolidation 38,245 8,940 23,447 12,609 8,940 36,056 44,996 2,713 42,283 2002 Heritage Square 6,482 2,000 4,805 1,180 2,000 5,985 7,985 431 7,554 2002 Hill Brook Place 11,568 2,192 9,118 3,448 2,192 12,566 14,758 1,851 12,907 1999 Holiday/Muncy Consolidation 3,582 3,575 6,109 722 3,575 6,831 10,406 480 9,926 2002 Home Properties of Bryn Mawr 13,306 3,160 17,907 8,875 3,160 26,782 29,942 3,777 26,165 2000 Home Properties of Devon 28,892 6,280 35,545 18,651 6,280 54,196 60,476 7,122 53,354 2000 Home Properties of Newark 16,858 2,592 12,713 11,242 2,592 23,955 26,547 3,910 22,637 1999 Idylwood 8,623 700 16,927 9,754 700 26,681 27,381 8,223 19,158 1995 Kensington 228 1,593 63 228 1,656 1,884 42 1,842 2004 Kingsley 6,027 1,640 11,671 4,246 1,640 15,917 17,557 3,449 14,108 1997 Lake Grove 26,691 7,360 11,952 11,454 7,360 23,406 30,766 5,626 25,140 1997 Lakeshore 5,047 573 3,849 3,799 573 7,648 8,221 1,872 6,349 1996 Lakeview 8,917 636 4,552 2,403 636 6,955 7,591 1,453 6,138 1998 Macomb Manor 3,681 1,296 7,357 1,505 1,296 8,862 10,158 1,199 8,959 2000 Maple Tree 840 4,445 1,414 840 5,859 6,699 723 5,976 2000 Mid-Island 6,675 4,160 6,567 4,353 4,160 10,920 15,080 2,662 12,418 1997 Mill Company 2,525 384 1,671 989 384 2,660 3,044 565 2,479 1982 Mill Towne Village 8,530 3,840 13,747 7,876 3,840 21,623 25,463 2,193 23,270 2001 Morningside 18,054 6,147 28,699 18,398 6,147 47,097 53,244 10,017 43,227 1998 New Orleans Consolidation 7,980 2,920 13,215 7,571 2,920 20,786 23,706 4,229 19,477 1997&1999 Newcastle 197 4,007 3,684 3,444 197 11,135 11,332 5,431 5,901 1982 Northwood 8,423 804 14,286 174 804 14,460 15,264 345 14,919 2004 Oak Manor 6,054 616 4,111 2,199 616 6,310 6,926 1,345 5,581 1998 Oak Park Manor 4,708 1,192 9,188 4,399 1,192 13,587 14,779 2,957 11,822 1997 Orleans Village 43,745 8,510 58,912 12,316 8,510 71,228 79,738 8,566 71,172 2000 Owings Run 31,450 5,537 32,622 1,968 5,537 34,590 40,127 5,040 35,087 1999 Paradise 8,753 972 7,134 3,950 972 11,084 12,056 3,157 8,899 1997 Park Shirlington 14,557 4,410 10,180 6,511 4,410 16,691 21,101 3,752 17,349 1998 Patricia 5,353 600 4,196 2,253 600 6,449 7,049 1,279 5,770 1998 Pavilion 29,236 5,184 25,314 23,330 5,184 48,644 53,828 7,056 46,772 1999 Pearl Street 1,105 49 1,189 685 49 1,874 1,923 582 1,341 1995 Perinton Manor 9,282 224 6,120 3,629 3,102 224 12,851 13,075 6,354 6,721 1982 Pleasant View 49,019 5,710 47,816 16,121 5,710 63,937 69,647 12,921 56,726 1998 Pleasure Bay 15,502 1,620 6,234 5,221 1,620 11,455 13,075 2,036 11,039 1998 Racquet Club 21,937 1,868 23,107 5,191 1,868 28,298 30,166 5,271 24,895 1998 Racquet Club South 2,879 309 3,891 1,654 309 5,545 5,854 1,051 4,803 1999 Raintree 6,973 - 6,654 3,217 9,504 - 19,375 19,375 8,164 11,211 1985 Redbank Village 15,577 2,000 14,030 7,283 2,000 21,313 23,313 4,024 19,289 1998 Regency Club 27,198 2,604 34,825 443 2,604 35,268 37,872 309 37,563 2004 Rider Terrace 240 1,270 436 240 1,706 1,946 196 1,750 2000 Ridley Brook 10,012 1,952 7,719 2,683 1,952 10,402 12,354 1,646 10,708 1999 Riverton 5,682 240 6,640 2,523 5,230 240 14,393 14,633 7,315 7,318 1983 Royal Garden 32,933 5,500 14,067 11,460 5,500 25,527 31,027 6,257 24,770 1997 Scotsdale 8,687 1,692 11,920 3,632 1,692 15,552 17,244 3,187 14,057 1997 Selford Townhomes 3,960 1,224 4,200 1,943 1,224 6,143 7,367 968 6,399 1999 Seminary Hill 9,900 2,960 10,194 6,248 2,960 16,442 19,402 2,371 17,031 1999 Seminary Towers 29,442 5,480 19,348 10,751 5,480 30,099 35,579 4,631 30,948 1999 Shakespeare Park 2,397 492 3,433 397 492 3,830 4,322 563 3,759 1999 Sherry Lake 20,120 2,441 15,618 7,331 2,441 22,949 25,390 3,869 21,521 1998 Sherwood Consolidation 7,915 3,255 10,735 2,301 3,255 13,036 16,291 781 15,510 2002 South Bay 8,000 1,098 1,958 3,605 1,098 5,563 6,661 745 5,916 2000 Southern Meadows 19,484 9,040 31,874 3,794 9,040 35,668 44,708 3,365 41,343 2001 Southpointe Square 2,495 896 4,610 2,593 896 7,203 8,099 1,630 6,469 1997 Spanish Gardens 5,600 398 9,263 4,116 398 13,379 13,777 4,189 9,588 1994 Springwells Park 10,213 1,515 16,840 4,525 1,515 21,365 22,880 3,429 19,451 1999 Stephenson House 1,382 640 2,407 1,215 640 3,622 4,262 881 3,381 1997 Stone Ends 23,642 5,600 28,428 814 5,600 29,242 34,842 1,454 33,388 2003 Stratford Greens 15,680 12,565 33,779 3,827 12,565 37,606 50,171 2,772 47,399 2002 Sunset Gardens 8,802 696 4,663 3,598 696 8,261 8,957 2,050 6,907 1996 Tamarron 5,200 1,320 8,474 850 1,320 9,324 10,644 1,388 9,256 1999 Terry Apartments 650 3,439 665 650 4,104 4,754 469 4,285 2000 The Apts at Wellington Trace 3,060 23,904 2,453 3,060 26,357 29,417 536 28,881 2004 The Colony Apts. 7,830 34,121 8,886 7,830 43,007 50,837 6,325 44,512 1999 The Hamptons 55,634 5,749 50,647 359 5,749 51,006 56,755 558 56,197 2004 The Lakes 2,821 23,086 3,933 2,821 27,019 29,840 3,896 25,944 1999 The Landings 12,940 2,459 16,753 7,175 2,459 23,928 26,387 5,244 21,143 1996 The Manor Apts. (MD) 21,545 8,700 27,703 4,652 8,700 32,355 41,055 3,039 38,016 2001 The Manor Apts. (VA) 5,600 1,386 5,738 3,105 1,386 8,843 10,229 1,756 8,473 1999 The Meadows 3,381 208 2,776 1,216 1,650 208 5,642 5,850 2,753 3,097 1984 The New Colonies 21,255 1,680 21,350 9,535 1,680 30,885 32,565 6,593 25,972 1998 The Sycamores 4,625 15,725 976 4,625 16,701 21,326 925 20,401 2002 The Village at Marshfield 24,460 3,158 28,351 182 3,158 28,533 31,691 616 31,075 2004 Timbercroft 6,633 1,704 6,826 2,111 1,704 8,937 10,641 1,312 9,329 1999 Trexler Park 10,140 2,490 13,802 5,054 2,490 18,856 21,346 2,514 18,832 2000 Valley View 3,615 1,056 4,960 3,866 1,056 8,826 9,882 1,982 7,900 1997 Village Green 9,008 1,103 13,223 5,880 1,103 19,103 20,206 6,119 14,087 1994-1996 Village Square-MD 21,432 2,590 13,306 4,602 2,590 17,908 20,498 2,577 17,921 1999 Village Square-PA 3,842 768 3,582 3,081 768 6,663 7,431 1,550 5,881 1997 Vinings 1,772 12,214 68 1,772 12,282 14,054 135 13,919 2004 Virginia Village 9,115 5,160 21,918 5,175 5,160 27,093 32,253 2,950 29,303 2001 Wayne Village 14,255 1,925 12,895 5,183 1,925 18,078 20,003 3,710 16,293 1998 Wellington Lakes 7,604 1,600 4,868 2,578 1,600 7,446 9,046 773 8,273 2001 Wellington Woods 1,140 3,468 1,818 1,140 5,286 6,426 502 5,924 2001 West Springfield Terrace 2,440 31,758 1,037 2,440 32,795 35,235 1,852 33,383 2002 Westminster 6,619 861 5,763 2,856 861 8,619 9,480 2,371 7,109 1996 Westwood Village 17,008 7,260 22,757 6,912 7,260 29,669 36,929 2,290 34,639 2002 William Henry 23,312 4,666 22,220 8,210 4,666 30,430 35,096 4,016 31,080 2000 Windsor Realty 4,800 402 3,300 1,535 402 4,835 5,237 978 4,259 1998 Woodgate 3,183 480 3,797 2,193 480 5,990 6,470 1,441 5,029 1997 Woodholme Manor 3,800 1,232 4,599 2,671 1,232 7,270 8,502 819 7,683 2001 Woodland Garden 5,664 2,022 10,480 4,073 2,022 14,553 16,575 3,214 13,361 1997 Woodleaf 8,087 2,862 17,716 227 2,862 17,943 20,805 392 20,413 2004 Woodmont Village 2,880 5,699 1,526 2,880 7,225 10,105 540 9,565 2002 Yorkshire Village 1,535 1,200 2,016 476 1,200 2,492 3,692 200 3,492 2002 Corporate Assets 1,207 3,900 - 19,799 3,900 19,799 23,699 8,595 15,104 Various Affordable Limited Partnerships(c) 77,637 6,776 107,530 - - 6,776 107,530 114,306 35,594 78,711 ---------- -------- ---------- ------- -------- -------- ---------- ---------- -------- ---------- $1,644,722 $409,396 $2,075,933 $20,436 $653,731 $409,396 $2,750,100 $3,159,496 $441,514 $2,717,982 ========== ======== ========== ======= ======== ======== ========== ========== ======== ==========
(a) Represents the excess of fair value over the historical cost of partnership interests as a result of the application of purchase accounting for the acquisition of non-controlled interests.
(b) The aggregate cost for Federal Income Tax purposes was approximately $2,568,593.
(c) The net real-estate related to the affordable limited partnerships is presented on the Consolidated Balance sheet as held for sale.
(d) The $1,207,000 in Corporate Asset Encumbrances consists of two notes payable
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2004 (IN THOUSANDS)
Depreciation and amortization of the Company's investments in buildings and improvements reflected in the consolidated statements of operations are calculated over the estimated useful lives of the assets as follows:
Buildings and improvements 5-40 years Resident improvements Life of related lease
The changes in total real estate assets for the three years ended December 31, 2004, are as follows:
2004 2003 2002 ---- ---- ----
Balance, beginning of year $2,752,992 $2,597,278 $2,135,078 Management Companies - 5,846 - New property acquisition 256,208 96,801 433,043 Additions 102,700 106,346 115,692 Increase in real estate associated with the conversion of UPREIT Units 11,864 5,600 2,200 Assets held for sale associated with consolidated affordable limited partnerships 78,711 - - Disposals, retirements and impairments ( 78,574) ( 58,879) ( 88,735) ---------- ---------- ---------- Balance, end of year $3,123,901 $2,752,992 $2,597,278 ========== ========== ==========
The changes in accumulated depreciation for the three years ended December 31, 2004, are as follows:
2004 2003 2002
Balance, beginning of year $330,062 $257,284 $201,564 Management Companies - 2,287 - Depreciation for the year 90,787 79,187 67,610 Disposals and retirements ( 14,930) ( 8,696) ( 11,890) ---------- ---------- ---------- Balance, end of year $405,919 $330,062 $257,284 ========== ========== ==========
HOME PROPERTIES, INC. FORM 10-K For Fiscal Year Ended December 31, 2004 Exhibit Index
Exhibit Number Exhibit Location ------ ------- --------
2.1 Agreement among Home Properties of New York, Inc. and Philip Incorporated by reference to the Form J. Solondz, Daniel Solondz and Julia Weinstein Relating to 8- K filed by Home Properties of New Royal Gardens I, together with Amendment No. 1 York, Inc. dated 6/6/97 (the "6/6/97 8-K")
2.2 Agreement among Home Properties of New York, Inc and Philip Incorporated by reference to the Solondz and Daniel Solondz relating to Royal Gardens II, 6/6/97 8-K together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Home Incorporated by reference to the Form Properties of New York between Home Properties of New York, 8-K filed by Home Properties of New L.P. and Berger/Lewiston Associates Limited Partnership; York, Inc. dated 10/7/97 Stephenson-Madison Heights Company Limited Partnership; Kingsley- Moravian Company Limited Partnership; Woodland Garden Apartments Limited Partnership; B&L Realty Investments Limited Partnership; Southpointe Square Apartments Limited Partnership; Greentrees Apartments Limited Partnership; Big Beaver-Rochester Properties Limited Partnership; Century Realty Investment Company Limited Partnership
2.24 Contribution Agreement dated March 2, 1998 among Home Incorporated by reference to the Form Properties of New York, L.P., Braddock Lee Limited 8-K filed by Home Properties of New Partnership and Tower Construction Group, LLC York, Inc., dated 3/24/98 (the "3/24/98 8-K")
2.25 Contribution Agreement dated March 2, 1998 among Home Incorporated by reference to the Properties of New York, L.P., Park Shirlington Limited 3/24/98 8-K Partnership and Tower Construction Group, LLC
2.27 Form of Contribution Agreement among Home Properties of New Incorporated by reference to the Form York, L.P. and Strawberry Hill Apartment Company LLLP, 8-K filed by Home Properties of New Country Village Limited Partnership, Morningside Six, LLLP, York, Inc. on 5/22/98 (the "5/22/98 Morningside North Limited Partnership and Morningside Heights 8-K") Apartment Company Limited Partnership with schedule setting forth material details in which documents differ from form
2.29 Form of Contribution Agreement dated June 7, 1999, relating Incorporated by reference to the Form to the CRC Portfolio with schedule setting forth material 8-K filed by Home Properties of New details in which documents differ from form York, Inc. on 7/2/99 (the "7/2/99 8-K")
2.30 Form of Contribution Agreement relating to the Mid-Atlantic Incorporated by reference to the Form Portfolio with schedule setting forth material details in 8-K filed by Home Properties of New which documents differ from form York, Inc. on 7/30/99
2.31 Contribution Agreement among Home Properties of New York, Incorporated by reference to the Form L.P., Leonard Klorfine, Ridley Brook Associates and the 8-K filed by Home Properties of New Greenacres Associates York, Inc. on 10/5/99 (the "10/5/99 8-K")
2.33 Contribution Agreement among Home Properties of New York, Incorporated by reference to the Form L.P., Gateside-Bryn Mawr Company, L.P., Willgold Company, 8-K filed by Home Properties of New Gateside-Trexler Company, Gateside-Five Points Company, York, Inc. on 4/5/00 Stafford Arms, Gateside-Queensgate Company, Gateside Malvern Company, King Road Associates and Cottonwood Associates
2.34 Contribution Agreement between Old Friends Limited Incorporated by reference to the Form Partnership and Home Properties of New York, L.P. and Home 8-K/A filed by Home Properties of New Properties of New York, Inc., along with Amendments Number 1 York, Inc. on 12/5/00 (the "12/5/00 and 2 thereto 8-K")
2.35 Contribution Agreement between Deerfield Woods Venture Incorporated by reference to the Limited Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.36 Contribution Agreement between Macomb Apartments Limited Incorporated by reference to the Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.37 Contribution Agreement between Home Properties of New York, Incorporated by reference to the L.P. and Elmwood Venture Limited Partnership 12/5/00 8-K/A
2.38 Sale Purchase and Escrow Agreement between Bank of America as Incorporated by reference to the Trustee and Home Properties of New York, L.P. 12/5/00 8-K/A
2.39 Contribution Agreement between Home Properties of New York, Incorporated by reference to the L.P., Home Properties of New York, Inc. and S&S Realty, a New 12/5/00 8-K/A York General Partnership (South Bay)
2.40 Contribution Agreement between Hampton Glen Apartments Incorporated by reference to the Limited Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.41 Contribution Agreement between Home Properties of New York, Incorporated by reference to the L.P. and Axtell Road Limited Partnership 12/5/00 8-K/A
2.42 Contribution Agreement between Elk Grove Terrace II and III, Incorporated by reference to the Form L.P., Elk Grove Terrace, L.P. and Home Properties of New 8-K filed by Home Properties of New York, L.P. York, Inc. on 1/10/01
3.1 Articles of Amendment and Restatement of Articles of Incorporated by reference to Home Incorporation of Home Properties of New York, Inc. Properties of New York, Registration Statement on Form S-11, File No. 33-78862 (the "S-11 Registration Statement")
3.2 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to the Home Home Properties of New York, Inc. Properties of New York, Inc. Registration Statement on Form S-3 File No. 333-52601 filed May 14, 1998 (the "5/14/98 S-3")
3.3 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to 7/2/99 8-K Home Properties of New York, Inc.
3.4 Amended and Restated Articles Supplementary of Series A Incorporated by reference to the Home Senior Convertible Preferred Stock of Home Properties of New Properties of New York, Inc. York, Inc. Registration Statement on Form S-3, File No. 333-93761, filed 12/29/99 (the "12/29/99 S-3")
3.5 Series B Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Home Supplementary to the Amended and Restated Articles of Properties of New York, Inc. Incorporation of Home Properties of New York, Inc. Registration Statement on Form S-3, File No. 333-92023, filed 12/3/99
3.6 Series C Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form Supplementary to the Amended and Restated Articles of 8-K filed by Home filed by Home Incorporation of Home Properties of New York, Inc. Properties of New York, Inc. on 5/22/00 (the "5/22/00 8-K")
3.7 Series D Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form Supplementary to the Amended and Restated Articles of 8-K filed by Home Properties of New Incorporation of Home Properties of New York, Inc. York, Inc. on 6/12/00 (the "6/12/00 8-K")
3.8 Series E Convertible Cumulative Preferred Stock Articles Incorporated by reference to the Form Supplementary to the Amended and Restated Articles of 8-K filed by Home Properties of New Incorporation of Home Properties of New York, Inc. York, Inc. on 12/22/00 (the "12/22/00 8-K)
3.9 Amended and Restated By-Laws of Home Properties of New York, Incorporated by reference to the Form Inc. (Revised 12/30/96) 8-K filed by Home Properties of New York, Inc. dated December 23, 1996 (the "12/23/96 8- K")
3.10 Series F Cumulative Redeemable Preferred Stock Articles Incorporated by reference to the Form Supplementary to the Amended and Restated Articles of 8-A12B filed by Home Properties of New Incorporation of Home Properties of New York, Inc. York, Inc. on March 20, 2002
3.11 Articles of Amendment of the Articles of Incorporation of Incorporated by reference to the Form Home Properties of New York, Inc. 10-Q filed by Home Properties, Inc. for the quarter ended 3/31/2004 (the "3/31/2004 10-Q")
3.12 Amendment Number One to Home Properties of New York, Inc. Incorporated by reference to the Amended and Restated By-laws 3/31/2004 10-Q
4.1 Form of certificate representing Shares of Common Stock Incorporated by reference to the Form 10- K filed by Home Properties of New York, Inc. for the period ended 12/31/94 (the "12/31/94 10-K")
4.2 Agreement of Home Properties of New York, Inc. to file Incorporated by reference to the instruments defining the rights of holders of long-term debt 12/31/94 10-K of it or its subsidiaries with the Commission upon request
4.7 Spreader, Consolidation, Modification and Extension Agreement Incorporated by reference to the Form between Home Properties of New York, L.P. and John Hancock 10-K filed by Home Properties New Mutual Life Insurance Company, dated as of October 26, 1995, York, Inc. for the period ended relating to indebtedness in the principal amount of 12/31/95 (the "12/31/95 10-K") $20,500,000
4.8 Amended and Restated Stock Benefit Plan of Home Properties of Incorporated by reference to the New York, Inc. 6/6/97 8-K
4.9 Amended and Restated Dividend Reinvestment, Stock Purchase, Incorporated by reference to the Form Resident Stock Purchase and Employee Stock Purchase Plan 8-K filed by Home Properties of New York, Inc., dated 12/23/97
4.10 Amendment No. One to Amended and Restated Dividend Incorporated by reference to the Home Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York, Inc. Employee Stock Purchase Plan Registration Statement on Form S-3, File No. 333-49781, filed on 4/9/98 (the "4/9/98 S-3")
4.11 Amendment No. Two to Amended and Restated Dividend Incorporated by reference to the Home Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York Inc. Employee Stock Purchase Plan Registration Statement on Form S-3, File No. 333-58799, filed on 7/9/98 (the "7/9/98 S-3")
4.12 Amended and Restated Dividend Reinvestment, Stock Purchase, Incorporated by reference to Home Resident Stock Purchase and Employee Stock Purchase Plan Properties of New York, Inc. Form 10-Q for the Quarter ended 6/30/98 (the "6/30/98 10-Q")
4.13 Amendment No. Three to Amended and Restated Dividend Incorporated by reference to the Home Reinvestment, Stock Purchase, Resident Stock Purchase and Properties of New York, Inc. Employee Stock Purchase Plan Registration Statement on Form S-3, Registration No. 333-67733, filed on 11/23/98 (the "11/23/98 S-3")
4.14 Directors' Stock Grant Plan Incorporated by reference to the 5/22/98 8-K
4.16 Home Properties of New York, Inc., Home Properties of New Incorporated by reference to the York, L.P. Executive Retention Plan 7/2/99 8-K
4.17 Home Properties of New York, Inc. Deferred Bonus Plan Incorporated by reference to the 7/2/99 8-K
4.18 Fourth Amended and Restated Dividend Reinvestment, Stock Incorporated by reference to the Purchase, Resident Stock Purchase and Employee Stock Purchase Registration Statement on Form S-3, Plan File No. 333-94815 filed on 1/18/2000
4.19 Directors Deferred Compensation Plan Incorporated by reference to the Home Properties of New York, Inc. Form 10-K for the period ended 12/31/99 (the "12/31/99 10-K")
4.23 Home Properties of New York, Inc. Amendment Number One to the Incorporated by reference to the Form Amended and Restated Stock Benefit Plan 10-Q of Home Properties of New York, Inc. for the quarter ended 3/31/00 (the "3/31/00 10-Q")
4.24 Fifth Amended and Restated Dividend Reinvestment, Stock Incorporated by reference to the Purchase, Resident Stock Purchase and Employee Stock Purchase Registration Statement on Form S-3, Plan file No. 333-54160, filed 1/23/01
4.25 Sixth Amended and Restated Dividend Reinvestment and Direct Incorporated by reference to the Form Stock Purchase Plan 10-K filed by Home Properties of New York, Inc., for the annual period ended 12/31/00 (the "12/31/00 10-K")
4.26 Home Properties of New York, Inc. Amendment Number Two to the Incorporated by reference to the Form Amended and Restated Stock Benefit Plan 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/01 (the "12/31/01 10-K")
4.27 Amendment No. One to Home Properties of New York, Inc. Incorporated by reference to the Deferred Bonus Plan 12/31/01 10-K
4.28 Amended and Restated Director Deferred Compensation Plan Incorporated by reference to Form 10-K of Home Properties of New York, Inc. filed for the annual period ended 12/31/02 (the "12/31/02 10-K")
4.29 Amendment No. Two to Deferred Bonus Plan Incorporated by reference to the 12/31/02 10-K
4.30 Amendment Number One to Sixth Amended and Restated Dividend Filed herewith Reinvestment and Direct Stock Purchase Plan
10.1 Second Amended and Restated Agreement Limited Partnership of Incorporated by reference to the Form Home Properties of New York, L.P. 8-K filed by Home Properties of New York, Inc. dated 9/26/97 (the "9/26/97 8-K")
10.2 Amendments No. One through Eight to the Second Amended and Incorporated by reference to Form 10-K Restated Agreement of Limited Partnership of Home Properties of Home Properties of New York, Inc. of New York, L.P. for the period ended 12/31/97 (the "12/31/97 10-K")
10.3 Articles of Incorporation of Home Properties Management, Inc. Incorporated by reference to the S-11 Registration Statement
10.4 By-Laws of Home Properties Management, Inc. Incorporated by reference to S-11 Registration Statement
10.5 Articles of Incorporation of Conifer Realty Corporation Incorporated by reference to 12/31/95 10-K
10.6 Articles of Amendment to the Articles of Incorporation of Incorporated by reference to the Conifer Realty Corporation Changing the name to Home 12/31/00 10-K Properties Resident Services, Inc.
10.7 By-Laws of Conifer Realty Corporation (now Home Properties Incorporated by reference to the Resident Services, Inc.) 12/31/95 10-K
10.8 Home Properties Trust Declaration of Trust, dated September Incorporated by reference to the Form 19, 1997 8-K filed by Home Properties of New York, Inc. dated 9/26/97 (the "9/26/97 10-K")
10.13 Indemnification Agreement between Home Properties of New Incorporated by reference to the Form York, Inc. and certain officers and directors 10-Q filed by Home Properties of New York, Inc. for the quarter ended 6/30/94 (the "6/30/94 10-Q")
10.15 Indemnification Agreement between Home Properties of New Incorporated by reference to the Form York, Inc. and Alan L. Gosule 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/96 (the 12/31/96 10-K")
10.17 Agreement of Operating Sublease, dated October 1, 1986, among Incorporated by reference to the S-11 KAM, Inc., Morris Massry and Raintree Island Associates, as Registration Statement amended by Letter Agreement Supplementing Operating Sublease dated October 1, 1986
10.26 Amendment No. Nine to the Second Amended and Restated Incorporated by reference to 5/14/98 Agreement of Limited Partnership of the Operating Partnership S-3
10.27 Master Credit Facility Agreement by and among Home Properties Incorporated by reference to the Home of New York, Inc., Home Properties of New York, L.P., Home Properties of New York, Inc. Form 10-Q Properties WMF I LLC and Home Properties of New York, L.P. for the quarter ended 9/30/98 (the and P-K Partnership doing business as Patricia Court and "9/30/98 10-Q") Karen Court and WMF Washington Mortgage Corp., dated as of August 28, 1998
10.28 First Amendment to Master Credit Facility Agreement, dated as Incorporated by reference to the Form of December 11, 1998 among Home Properties of New York, Inc., 10-K filed by Home Properties of New Home Properties of New York, L.P., Home Properties WMF I LLC York, Inc. for the annual period ended and Home Properties of New York, L.P. and P-K Partnership 12/31/98 ( the "12/31/98 10-K") doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae
10.29 Second Amendment to Master Credit Facility Agreement, dated Incorporated by reference to the as of August 30, 1999 among Home Properties of New York, 12/31/99 10-K Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae
10.30 Amendments Nos. Ten through Seventeen to the Second Amended Incorporated by reference to the and Restated Limited Partnership Agreement 12/31/98 10-K
10.31 Amendments Nos. Eighteen through Twenty- Five to the Second Incorporated by reference to the Home Amended and Restated Limited Partnership Agreement Properties of New York, Inc. Form 10-Q for the quarter ended 9/30/99 (the "9/30/99 10-Q")
10.32 Credit Agreement, dated 8/23/99 between Home Properties of Incorporated by reference to the New York, L.P., certain Lenders and Manufacturers and Traders 9/30/99 10-Q Trust Company as Administrative Agent
10.33 Amendment No. Twenty-Seven to the Second Amended and Restated Incorporated by reference to the Limited Partnership Agreement 12/29/99 S-3
10.34 Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to Incorporated by reference to the the Second Amended and Restated Limited Partnership Agreement 12/31/99 10-K
10.37 2000 Stock Benefit Plan Incorporated by reference to the 12/31/99 10-K
10.39 Purchase Agreement between Home Properties of New York, Inc. Incorporated by reference to the and The Equitable Life Assurance Society of the United States 6/12/00 8-K
10.41 Home Properties of New York, L.P. Amendment Number One to Incorporated by reference to the Executive Retention Plan 3/31/00 10-Q
10.42 Amendments No. Thirty-One and Thirty-Two to the Second Incorporated by reference to the Amended and Restated Limited Partnership Agreement 3/31/00 10-Q
10.49 Amendment No. Thirty Three to the Second Amended and Restated Incorporated by reference to the Limited Partnership Agreement 12/31/00 10-K
10.50 Amendment No. Thirty Five to the Second Amended and Restated Incorporated by reference to the Limited Partnership Agreement 12/31/00 10-K
10.51 Amendment No. Forty Two to the Second Amended and Restated Incorporated by reference to the Limited Partnership Agreement 12/31/00 10-K
10.52 Amendments Nos. Thirty Four, Thirty Six through Forty One, Incorporated by reference to the Forty Three and Forty Four to the Second Amended and Restated 12/31/00 10-K Limited Partnership Agreement
10.57 Amendment Nos. Forty-Five through Fifty-One to the Second Incorporated by reference to the Amendment and Restated Limited Partnership Agreement 12/31/01 10-K
10.58 Home Properties of New York, Inc. Amendment No. One to 2000 Incorporated by reference to the Stock Benefit Plan 12/31/01 10-K
10.59 Home Properties of New York, Inc. Amendment No. Two to 2000 Incorporated by reference to the Stock Benefit Plan 12/31/01 10-K
10.60 Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended Incorporated by reference to the Form and Restated Limited Partnership Agreement 10-Q filed by Home Properties of New York, Inc. for the quarter ended 9/30/02 (the "9/30/02 10-Q")
10.61 Amendment Nos. Fifty-Six to Fifty-Eight to the Second Incorporated by reference to the Form Amended and Restated Limited Partnership Agreement 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/02 (the "12/31/02 10-K")
10.62 Amendment No. Two to Credit Agreement Incorporated by reference to the 9/30/02 10Q
10.63 Purchase and Sale Agreement, dated as of January 1, 2004 Incorporated by reference to the Form among Home Properties of New York, L.P., Home Properties 10-K filed by Home Properties, Inc. Management, Inc. and Home Leasing, LLC, dated January 1, 2004 for the period ended 12/31/2003 (the "12/31/2003 10-K")
10.64 Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Incorporated by reference to Amended and Restated Limited Partnership Agreement 12/31/2003 10-K
10.65 Home Properties of New York, Inc. Amendment No. Three to Incorporated by reference to 2000 Stock Benefit Plan 12/31/2003 10-K
10.66 Employment Agreement, dated as of October 28, 2003 between Incorporated by reference to the Form Home Properties, L.P., Home Properties, Inc., and Nelson B. 8-K filed by Home Properties of New Leenhouts York, Inc. on 10/29/03 (the "10/29/03 8-K")
10.67 Employment Agreement, dated as of October 28, 2003 between Incorporated by reference to the Home Properties, L.P., Home Properties, Inc. and Norman B. 10/29/03 8-K Leenhouts
10.68 Home Properties of New York, Inc. 2003 Stock Benefit Plan Incorporated by reference to Schedule 14A filed by Home Properties of New York, Inc. on March 28, 2003
10.69 Amendment Number Two to Home Properties of New York, Inc. Incorporated by reference to and Home Properties of New York, L.P. Executive Retention 12/31/2003 10-K Plan
10.70 Employment Agreement, dated as of May 17, 2004, between Home File herewith Properties, L.P., Home Properties, Inc. and Edward J. Pettinella
10.71 Amendment Nos. Sixty-Eight through Seventy-Three to the File herewith Second Amended and Restated Limited Partnership Agreement
10.72 Summary of Non-Employee Director Compensation Effective File herewith January 1, 2005
10.73 Summary of Named Executive Compensation Effective January 1, File herewith
10.74 Amendment No. Three to Credit Agreement, dated April 1, 2004, File herewith between Home Properties, L.P., certain Lenders, and Manufacturers and Traders Trust Company as Administrative Agent
10.75 Amended and Restated Incentive Compensation Plan File herewith
10.76 LIBOR Grid Note, dated November 23, 2004 from Home File herewith Properties, L.P. to Manufacturers and Traders Trust Company
10.77 Mutual Release, dated January 24, 2005, given by Home Incorporated by reference to the Form Properties, L.P. and Home Properties, Inc. and Boston Capital 8-K filed by Home Properties , Inc. Tax Credit Fund XIV, a Limited Partnership, Boston Capital dated January 24, 2005 Tax Credit Fund XV, a Limited Partnership, and BCCC, Inc. relating to certain obligations pertaining to Green Meadows and related Letter Agreement.
11 Computation of Per Share Earnings Schedule Filed herewith
14.1 Home Properties , Inc. Code of Ethics for Senior Finance Incorporated by reference to Officers 12/31/2003 10-K
14.2 Home Properties, Inc. Code of Business Conduct and Ethics Incorporated by reference to 12/31/2003 10-K
21 List of Subsidiaries of Home Properties, Inc. Filed herewith
23 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Section 302 Certification of Chief Executive Officer Furnished herewith
31.2 Section 302 Certification of Chief Financial Officer Furnished herewith
32.1 Section 906 Certification of Chief Executive Officer Filed herewith
32.2 Section 906 Certification of Chief Financial Officer Filed herewith
99 Additional Exhibits - Debt Summary Schedule Filed herewith