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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
-------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13136
------------------------------
HOME PROPERTIES, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 16-1455126
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
850 CLINTON SQUARE
ROCHESTER, NEW YORK 14604
(Address of principal executive offices)
Registrant's telephone number, including area code: (585) 546-4900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class Which Registered
------------------- ----------------
Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
----- -----
The aggregate market value of the shares of common stock held by non-affiliates
(based upon the closing sale price on the New York Stock Exchange) on June 30,
2003, was approximately $996,685,273.
As of February 20, 2004, there were 32,474,539 shares of common stock, $.01 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the proxy statement to be issued in connection with the
Company's 2004 Annual Meeting of Stockholders is incorporated by reference into
Part III of this Report.
HOME PROPERTIES, INC.
---------------------
TABLE OF CONTENTS
-----------------
Page
----
PART I.
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 4A. Executive Officers 19
PART II.
Item 5. Market of the Registrant's Common Equity and Related Shareholder Matters 21
Item 6. Selected Financial and Operating Information 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 50
Item 9A. Controls and Procedures
PART III.
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions 55
Item 14. Principal Accounting Fees and Services 55
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 56
PART I
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, and rehabilitates apartment communities. The
Company's properties are regionally focused in the Northeastern,
Mid-Atlantic and Midwestern United States. It 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 66.7% partnership interest as of December 31, 2003 (62.6% at
December 31, 2002) (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,
2003, operated 197 communities with 48,080 apartment units. Of these,
40,946 units in 147 communities are owned outright (the "Owned
Properties"), 4,832 units in 44 communities are managed and partially owned
by the Company as general partner, and 2,302 units in 6 communities are
managed for other owners (collectively, the "Managed Properties").
The Owned Properties and the Managed Properties (collectively, the
"Properties") are concentrated in the following market areas:
Apts. Apts. Managed As Apts. Apt.
Market Area Owned General Partner Fee Managed Totals
----------- ----- --------------- ----------- ------
Suburban New York City 6,837 - 372 7,209
Suburban Washington, D.C. 6,455 - - 6,455
Baltimore, MD 6,233 82 1,422 7,737
Philadelphia, PA 5,917 - - 5,917
Detroit, MI 5,574 - - 5,574
Upstate New York 4,791 2,381 508 7,680
Chicago, IL 2,242 - - 2,242
Rochester, NY 1,904 1,254 508 3,666
Buffalo, NY 1,644 156 - 1,800
Syracuse, NY 1,243 971 - 2,214
Boston, MA 976 - - 976
Portland, ME 595 - - 595
Hamden, CT 498 - - 498
Dover, DE 432 - - 432
South Bend, IN 396 168 - 564
Albany, NY - 261 - 162
Columbus, OH - 868 - 868
Western PA - 1,072 - 1,072
------ ----- ----- ------
Total # of Units 40,946 4,832 2,302 48,080
====== ===== ===== ======
Total Number of Communities 147 44 6 197
The Company's mission is to maximize shareholder value by acquiring,
rehabilitating, and managing apartment communities while enhancing the
quality of life for its residents, improving the broader communities in
which the Company operates, providing employees with opportunities for
growth and accomplishment, and demonstrating personal integrity and
dedication at all times. Our primary, long-term vision is to be a dominant
owner and manager of market-rate apartments 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., Baltimore, Philadelphia, Detroit,
Chicago and Boston. We also expect to maintain or grow existing portfolios
in other markets as economic and/or market 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 significantly 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 down 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, 2003, it
owned a 68.4% 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, 2003 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 (31,460,132 or 62.2%
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 accompanying consolidated financial
statements include the accounts of the Management Companies. 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. 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, commercial 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. In the first quarter of 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 1,650 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 at prices below new
construction costs and repositioning those properties for long-term growth;
(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) reinforcing its decentralized company philosophy by encouraging
employees' personal improvement and by providing extensive training; (iv)
enhancing the quality of living for the Company's residents by improving
the quality of service and physical amenities available at each community
every year; (v) readily 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 name-brand recognition; and (vii) engaging in
aggressive cost controls and taking advantage of volume discounts, thus
benefiting from economies of scale while constantly improving the level of
customer service.
Acquisition and Sale Strategies
-------------------------------
The Company's core strategy is to grow primarily through acquisitions in
the suburbs of major metropolitan markets that have significant barriers to
new construction, easy access to the Company's headquarters, and enough
apartments available for acquisition to achieve a critical mass. Targeted
markets also possess other characteristics, including acquisition
opportunities below replacement costs, a mature housing stock and stable or
moderate job growth. The Company currently expects that its growth will be
focused within suburban sub-markets of select metropolitan areas within the
Northeast, Mid-Atlantic and Midwestern 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., Baltimore,
Philadelphia, Detroit, Chicago and Boston. 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 $250 million in its budget for 2004.
During 2003, the Company acquired two communities with a total of 730 units
for an aggregate consideration of approximately $93 million, or an average
of approximately $127,200 per apartment unit. The weighted average expected
first year capitalization rate for the acquired communities was 7.3%.
Capitalization rate ("cap rate") is defined as the rate of interest used to
convert the first year expected net operating income ("NOI") less a 3.0%
management fee into a single present value. NOI is defined by the Company
as rental income and property other income less operating and maintenance
expenses. The acquisitions were concentrated in Boston and Washington, D.C.
During 2003, the Company completed the sale of seven communities with a
total of 1,568 units for an aggregate consideration of approximately $59
million. 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
8.9% with the purchase of properties expected to produce an unleveraged IRR
of 10.2%. 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.
In January 2004, the Company acquired four communities as part of a
portfolio with a total of 534 units in the New Jersey region. The total
purchase price of $64.2 million, including closing costs, equates to
approximately $120,000 per apartment unit. Consideration for the properties
included $34 million in assumed debt (fair market value of $37 million),
$11.9 million in Operating Partnership Units (fair market value $12.1
million) and $18.3 million cash funded through the use of the Company's
line of credit. The expected first year cap rate for this portfolio is
6.2%.
In March, 2004, the Company acquired a 240-unit community in Frederick,
Maryland. The total purchase price of $29.4 million, including closing
costs, equates to approximately $123,000 per apartment unit. Management
expects a 7.4% weighted average expected first year cap rate on this
acquisition. Consideration for this property was funded through the use of
the Company's line of credit.
The Company will continue to contemplate the sale of certain of its
communities. The Company has identified three communities for potential
sale during 2004. The total estimated fair market value of these
communities is in excess of $50 million. The communities are spread over
different markets, are generally less efficient to operate due to their
remote locations, 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. One of these properties
was originally acquired through an UPREIT transaction. Therefore, the sale
will have to be matched with a suitable acquisition using a tax deferred
exchange. The Company has anticipated closing on sales of $50 million in
its budget for 2004.
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 50% 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, 2003, the Company's debt was approximately $1.4 billion and
the debt-to-total market capitalization ratio was 40.2% based on the
year-end closing price of the Company's stock of $40.39. The weighted
average interest rate on the Company's mortgage debt as of December 31,
2003 was 6.47% and the weighted average maturity was approximately eight
years. Debt maturities are staggered, ranging from July 2004, through June
2036. As of December 31, 2003, 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
1.15% over the one-month LIBOR rate. As of December 31, 2003, there was no
balance outstanding on the line of credit.
Management expects to continue to fund a portion of its continued growth by
taking advantage of its UPREIT structure and using UPREIT Units as currency
in acquisition transactions. No UPREIT Units were issued in connection with
the two property acquisitions during 2003. The Company did issue $4.8
million worth of UPREIT Units as consideration in acquiring land in
Pennsylvania. Also in 2003, the Company issued $2.4 million worth of UPREIT
Units as consideration for a 1031 exchange transaction where a second party
purchased the UPREIT Units of the Company in exchange for selling their
property to a third party. The Company issued approximately $12 million
worth of UPREIT Units as partial consideration in acquisition transactions
during 2002. During 2001, and 2000, $19 million and $59 million worth of
UPREIT Units were issued, respectively. 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 $30 million in 2003 under its Dividend Reinvestment
and Direct Stock Purchase Plan (the "Dividend Reinvestment Plan").
In 2002, the Company also announced a 2,000,000 share increase in
management's authorization to buy back the Company's outstanding common
stock. Shares 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. 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.
Corporate Governance Initiatives
--------------------------------
During 2003 and 2002, the Company's Board of Directors approved and
modified several new initiatives to further increase the transparency of
financial reporting and to strengthen corporate governance. Since its
inception, the Company has focused on its shareholders' best interests and
never adopted a shareholders "rights" plan (poison pill) or a staggered
Board.
In addition to the requirements set forth in the Sarbanes-Oxley Act (the
"2002 Act") and Corporate Governance Rules of the New York Stock Exchange
approved by the Securities and Exchange Commission on June 30, 2003, the
Company's Board of Directors approved the following policies:
o Beginning in 2003, stock options were issued pursuant to a new plan
approved by shareholders, as described in the proxy statement issued
in connection with the 2003 Annual Meeting of Stockholders of the
Company. The new plan includes a provision that options will not vest
automatically upon an employee's retirement but, instead, will
continue to vest as scheduled. Re-pricing of options are prohibited.
Directors and executive officers are required to hold stock issued in
connection with a stock option exercise for a minimum of one year and
are not permitted to receive cash on an option exercise except to pay
the withholding tax and exercise price.
o Beginning in 2003, the Company began expensing stock options by
adopting the provisions of SFAS 148 "Accounting for Stock Based
Compensation - An Amendment of SFAS 123." Under the transition
provisions of this Statement, the Company has elected the "Modified
Prospective Method" for recognizing stock-based compensation costs.
Under this method, the Company recognizes stock-based 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.
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 2003, that
generally require 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 two 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, although the timing
of certain transactions prevented the Company from meeting its announced
acquisition goals for 2003.
Market Environment
------------------
From the IPO through 2000, 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 has started to reverse, with only slight
job loss for the country and a 0.1% positive growth for the Company's
markets.
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 2003, Home Properties' markets represented 19% of the total
estimated existing U.S. multifamily housing stock, but only 8% of the
country's estimated net new supply of multifamily housing units.
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.
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%. In 2001 thru 2003, both the national and the
Company's markets have resulted in an estimated oversupply. The 2003 demand
(oversupply) for the Company's markets relative to estimated net new
multifamily supply still compares favorably to national averages.
The third to the last column in the Multifamily Supply and Demand table on
page 10 shows the net new multifamily supply as percent of existing
multifamily housing stock. In the Company's markets, net new supply only
represents 0.3% of the existing multifamily housing stock. This compares to
the national average net new multifamily supply estimates at 0.7% of the
multifamily housing stock.
The information on the Market Demographics table on page 9 was compiled by
the Company from the sources indicated on the table. The methods used
includes 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.
Market Demographics
December December 2003
Job Job Multifamily
Growth Growth 2003 Units as a % 2003
% of 2003 Trailing Trailing December Median of Total Multifamily
Owned Number of 12 Months 12 Months Unemployment Home Housing Units Housing
MSA Market Area Units Households % Change Actual Rate Value Stock (4) Stock (5)
--------------- ----- ---------- -------- ------ ---- ----- --------- ---------
Northern VA/DC 15.8% 1,954,108 1.4% 38,500 6.2% 194,010 31.0% 636,269
Baltimore, MD 15.2% 1,016,170 0.8% 9,500 4.6% 142,897 22.3% 243,446
Eastern PA (1) 14.4% 2,203,169 0.6% 15,900 4.8% 125,059 19.5% 458,702
Detroit, MI 13.6% 1,722,895 (0.9%) (18,900) 6.7% 162,160 18.1% 330,665
Downstate NY (3) 10.5% 1,581,344 0.6% 12,000 3.9% 243,960 18.6% 313,042
Northern NJ (2) 6.2% 2,129,593 0.7% 18,400 4.7% 207,652 24.8% 561,703
Chicago, IL 5.5% 3,047,396 (0.5%) (22,100) 6.3% 188,332 34.4% 1,104,641
Rochester, NY 4.7% 426,890 (0.9%) (5,000) 5.8% 98,421 19.9% 91,116
Buffalo, NY 4.0% 470,431 (0.4%) (2,300) 6.5% 93,759 18.0% 92,299
Syracuse, NY 3.0% 286,430 (0.2%) (600) 6.0% 85,659 19.2% 61,060
Boston, MA 2.4% 2,380,278 (1.7%) (34,400) 4.5% 202,675 32.3% 804,360
Portland, ME 1.4% 112,847 2.3% 3,700 2.6% 140,575 20.8% 26,617
Hamden, CT 1.2% 659,354 0.7% 1,800 4.4% 197,880 28.0% 195,199
Delaware 1.1% 229,294 0.8% 2,700 4.1% 143,945 19.8% 48,175
South Bend, IN 1.0% 101,894 1.5% 2,000 4.3% 101,449 16.5% 17,835
--- ------- --- ----- --- ------- ---- ------
Home Properties Markets 100.0% 18,322,093 0.1% 21,200 4.8% 173,106 25.6% 4,985,129
===== ========== === ====== === ======= ==== =========
United States 109,440,059 (0.0%) (55,000) 5.4% 128,296 21.9% 26,318,415
(1) Eastern Pennsylvania is defined for this report as Philadelphia, PA MSA &
Allentown-Bethlehem-Easton MSA.
(2) Northern New Jersey is defined for this report as
Middlesex-Somerset-Hunterdon MSA, Bergen-Passaic MSA, Monmouth-Ocean MSA, &
Newark MSA.
(3) Downstate New York is defined for this report as the Hudson Valley Region
of Dutchess Co MSA, Newburgh NY-PA MSA, Putnam & Ulster Counties; Long
Island, NY (Nassau-Suffolk MSA); Westchester County MSA; & Rockland County
MSA.
(4) Based on Claritas 2003 estimates calculated from the 2000 U.S. Census
figures.
Sources: Bureau of Labor Statistics (BLS); Claritas, Inc.; US Census Bureau
- Manufacturing & Construction Div.; New York State Department of Labor,
Div. Of Research and Statistics.
Data collected is data available as of February 13, 2004 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.
(5) 2003 Multifamily Housing Stock is from Claritas estimates based on the 2000
U.S. Census. In previous years' presentations, this column excluded
properties with four units or fewer. The published 2003 source information
did not allow for disclosure of the same information. This presentation
excludes properties with two units or fewer. Both the Home Properties
Markets total and United States total increased by 25-30% due to the
inclusion of properties with three to four units.
Multifamily Supply and Demand
Estimated Estimated
Estimated Net New Net New
Estimated Estimated 2003 Multifamily Multifamily
2003 Estimated 2003 New Supply as a Supply as a Expected
New 2003 Net New Multifamily % of New % of New Expected Excess
Supply of Multifamily Multifamily Household Multifamily Multifamily Excess Revenue
MSA Market Area Multifamily(6) Obsolescence (7) Supply (8) Demand (9) Demand Stock Demand (10) Growth (11)
- --------------- -------------- ---------------- ---------- ---------- ------ ----- ----------- -----------
Northern VA/DC 7,408 3,181 4,227 7,958 53.1% 0.7% 3,731 0.6%
Baltimore, MD 2,447 1,217 1,230 1,413 87.1% 0.5% 183 0.1%
Eastern PA (1) 4,405 2,294 2,111 2,064 102.3% 0.5% (47) (0.0%)
Detroit, MI 3,080 1,653 1,427 (2,286) (62.4%) 0.4% (3,713) (1.1%)
Downstate NY (3) 1,684 1,565 119 1,490 8.0% 0.0% 1,371 0.4%
Northern NJ (2) 4,015 2,809 1,206 3,045 39.6% 0.2% 1,839 0.3%
Chicago, IL 10,625 5,523 5,102 (5,070) (100.6%) 0.5% (10,172) (0.9%)
Rochester, NY 447 456 (9) (663) 1.2% (0.0%) (654) (0.7%)
Buffalo, NY 423 461 (38) (276) 14.0% (0.0%) (238) (0.3%)
Syracuse, NY 72 305 (233) (77) 303.2% (0.4%) 156 0.3%
Boston, MA 3,603 4,022 (419) (7,423) 5.6% (0.1%) (7,004) (0.9%)
Portland, ME 49 133 (84) 513 (16.3%) (0.3%) 597 2.2%
Hamden, CT 93 976 (883) 336 (262.6%) (0.5%) 1,219 0.6%
Delaware 925 241 684 356 192.3% 1.4% (328) (0.7%)
South Bend, IN 97 89 8 220 3.5% 0.0% 212 1.2%
------ ----- ----- ------ ------ --- ------- ----
Home Properties Markets 39,373 24,925 14,448 3,627 398.4% 0.3% (10,822) (0.2%)
====== ====== ====== ===== ===== === ======= ====
United States 319,239 131,592 187,647 (8,028) (2337.5%) 0.7% (195,675) (0.7%)
(1)-(5) see footnotes prior page
(6) Estimated 2003 New Supply of Multifamily = Multifamily permits (2003
figures U.S. Census Bureau, Mfg. & Constr. Div., 5+ permits only) adjusted
by the average % of permits resulting in a construction start (estimated at
95%).
(7) Estimated 2003 Multifamily Obsolescence = 0.5% of Estimated 2003
multifamily housing stock.
(8) Estimated 2003 Net New Multifamily Supply = Estimated 2003 New Supply of
Multifamily - Estimated 2003 multifamily obsolescence.
(9) 2003 New Multifamily Household Demand = Trailing 12 month job growth
(Nonfarm, not seasonally adjusted payroll employment figures)
(12/31/02-12/31/03) multiplied by the expected % of new household
formations resulting from new jobs (66.7%) and the % of multifamily
households in each market (based on Claritas estimates).
(10) Expected Excess Demand = Estimated 2003 New Multifamily Household Demand -
Estimated 2003 Net New Multifamily Supply.
(11) Expected Excess Revenue Growth = Expected Excess Demand divided by 2003
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. Properties
As of December 31, 2003, the Owned Properties consisted of 147 multifamily
residential communities containing 40,946 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, 2003, the Company experienced a compounded
annualized growth rate of 32% in the number of apartment units it owned. In
2003, Home Properties acquired 730 apartment units in two communities for a
total purchase price of approximately $93 million. Also in 2003, the
Company sold seven communities with a total of 1,568 units for total
consideration of $59.3 million. From January 1, 2004 through March 4, 2004,
the Company acquired five communities with a total of 774 units for a total
purchase price of $93.6 million.
The Owned Properties are generally located in established markets in
suburban neighborhoods and are well maintained and well leased. Average
economic occupancy at the Owned Properties was 93% for 2003. 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 46% for 2003,
which is significantly below the national average of 60.5% 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-42 to F-46).
The table on the following pages illustrates certain of the important
characteristics of the Owned Properties as of December 31, 2003.
Communities Wholly Owned
and Managed by Home Properties as of
December 31,
2003
2003 2002
(4) Avg Avg
(2) (3) 2003 2002 Mo. Mo,
Avg. 2003 2003 Avg. Avg. Rent Rent 12/31/2003
# Age Apt % % % % Rate Rate Total
Of In Year Size Mature Resident Occu- Occu- per per Cost
Regional Area Apts Years Acq (Sq Ft) Residents Turnover pancy pancy Apt Apt (000)
- ------------- ---- ----- --- ------- --------- -------- ----- ----- --- --- -----
Core Communities (1)
CTHamden Apple Hill Apartments 498 31 1998 789 4% 52% 93% 93% $1,026 $991 $30,883
DE HP of Newark 432 35 1999 856 3% 45% 91% 90% 736 707 25,998
IL-Chicago Blackhawk 371 42 2000 860 13% 50% 92% 93% 842 838 21,513
IL-Chicago Colonies Apartments 672 29 1998 656 12% 56% 90% 93% 707 681 31,999
IL-Chicago Colony Apartments 783 30 1999 704 8% 60% 93% 91% 830 850 49,508
IL-Chicago Courtyards 224 32 2001 673 13% 61% 94% 91% 776 810 14,890
IL-Chicago Cypress Place 192 33 2000 855 12% 48% 93% 94% 886 890 12,776
IN-South Bend Maple Lane 396 20 1999 950 27% 48% 89% 89% 667 655 20,726
MD-Baltimore Bonnie Ridge 966 37 1999 1,023 6% 52% 91% 93% 980 944 64,609
MD-Baltimore Canterbury Apartments 618 25 1999 933 16% 46% 94% 96% 767 729 28,622
MD-Baltimore Country Village Apartments 344 32 1998 868 43% 59% 92% 91% 749 737 18,453
MD-Baltimore Falcon Crest 396 34 1999 993 10% 51% 93% 92% 817 801 18,451
MD-Baltimore Fenland Field 234 33 2001 934 14% 41% 92% 94% 964 897 16,179
MD-Baltimore Gateway Village 132 14 1999 965 9% 59% 93% 95% 1055 985 8,539
MD-Baltimore Manor, The 435 34 2001 1,017 7% 37% 96% 95% 1,096 1044 39,586
MD-Baltimore Mill Towne Village Apartments 384 30 2001 812 16% 41% 89% 90% 728 669 23,954
MD-Baltimore Morningside Heights Apartments 1,050 38 1998 870 15% 44% 91% 89% 759 729 51,434
MD-Baltimore Owings Run 504 8 1999 1,142 19% 34% 88% 89% 967 964 39,464
MD-Baltimore Selford Townhomes 102 16 1999 1,115 16% 61% 93% 92% 1,071 1009 7,080
MD-Baltimore Shakespeare Park 82 20 1999 833 92% 12% 99% 99% 608 608 4,151
MD-Baltimore Timbercroft Townhomes 284 31 1999 990 39% 12% 99% 99% 685 654 10,096
MD-Baltimore Village Square 370 35 1999 1,045 15% 47% 96% 97% 928 862 19,127
MD-Baltimore Woodholme Manor 176 34 2001 825 17% 36% 93% 94% 653 594 7,869
ME-Portland Mill Co. Gardens 95 52 1998 550 14% 60% 96% 97% 670 632 2,886
ME-Portland Redbank Village 500 59 1998 836 5% 42% 92% 93% 743 702 22,219
MI-Detroit Canterbury Square 336 31 1997 789 3% 53% 90% 91% 752 751 17,613
MI-Detroit Carriage Hill Apartments 168 37 1998 783 3% 49% 93% 94% 781 769 8,535
MI-Detroit Carriage Park Apartments 256 36 1998 777 9% 45% 93% 94% 736 732 12,399
MI-Detroit Charter Square 494 32 1997 914 2% 51% 91% 90% 848 846 29,489
MI-Detroit Cherry Hill Club Apartments 164 31 1998 878 8% 53% 90% 93% 667 647 7,046
MI-Detroit Cherry Hill Village Apartments 224 37 1998 742 5% 47% 92% 91% 706 715 10,227
MI-Detroit Deerfield Woods 144 27 2000 800 41% 31% 93% 96% 814 788 7,332
MI-Detroit Fordham Green 146 27 1997 869 6% 50% 92% 94% 884 860 8,580
MI-Detroit Golfview Manor 44 44 1997 662 2% 48% 88% 97% 586 561 1024
MI-Detroit Greentrees Apartments 288 32 1997 863 18% 64% 89% 91% 659 661 12,692
MI-Detroit Hampton Court 182 31 2000 972 2% 59% 85% 90% 677 653 9,070
MI-Detroit Kingsley Apartments 328 33 1997 792 10% 52% 91% 90% 684 687 17,168
MI-Detroit Lakes Apartments 434 16 1999 948 7% 59% 88% 87% 891 901 29,254
MI-Detroit Macomb Manor 217 34 2000 867 45% 36% 94% 95% 687 676 9,957
MI-Detroit Oak Park Manor 298 48 1997 887 2% 46% 88% 92% 832 793 14,286
MI-Detroit Parkview Gardens 483 49 1997 731 7% 46% 87% 94% 645 620 12,586
MI-Detroit Scotsdale Apartments 376 28 1997 790 13% 39% 92% 93% 693 695 16,527
MI-Detroit Southpointe Square 224 32 1997 776 14% 54% 88% 90% 647 645 7,808
MI-Detroit Springwells Park 303 62 1999 1,014 9% 54% 87% 88% 983 999 22,422
MI-Detroit Stephenson House 128 36 1997 668 2% 62% 91% 90% 670 678 4,131
MI-Detroit Woodland Gardens 337 37 1997 719 6% 57% 91% 90% 733 762 16,306
NJ-Northern East Hill Gardens 33 45 1998 695 42% 33% 97% 96% 1,259 1204 2,683
NJ-Northern Lakeview Apartments 106 34 1998 492 26% 33% 97% 97% 1063 995 7,298
NJ-Northern Oak Manor Apartments 77 47 1998 775 27% 36% 96% 96% 1,564 1476 6,675
NJ-Northern Pleasant View Gardens Apartments 1,142 35 1998 745 6% 40% 92% 92% 968 933 67,414
NJ-Northern Pleasure Bay Apartments 270 32 1998 667 5% 29% 97% 97% 849 799 12,299
NJ-Northern Royal Gardens 550 35 1997 800 0% 33% 96% 97% 1007 956 29,789
NJ-Northern Wayne Village 275 38 1998 725 5% 35% 94% 96% 1,086 1023 19,212
NJ-Northern Windsor Realty 67 50 1998 675 16% 42% 96% 96% 1002 955 5,054
NY-Alb/
Hudson Valley Carriage Hill 140 30 1996 845 4% 57% 95% 95% 1,148 1074 6,967
NY-Alb/
Hudson Valley Cornwall Park 75 36 1996 1,320 19% 77% 92% 95% 1,618 1540 7,119
NY-Alb/
Hudson Valley Lakeshore Villas 152 28 1996 956 9% 53% 95% 95% 965 896 7,846
NY-Alb/
Hudson Valley Patricia Apartments 100 29 1998 770 4% 35% 94% 97% 1,220 1144 6,739
NY-Alb/
Hudson Valley Sunset Gardens 217 32 1996 662 9% 61% 97% 97% 831 772 8,519
NY-Buffalo Emerson Square 96 33 1997 650 38% 32% 97% 98% 645 624 3,453
NY-Buffalo Idylwood 720 33 1995 700 10% 55% 92% 90% 645 644 25,927
NY-Buffalo Paradise Lane at Raintree 324 31 1997 676 14% 45% 91% 91% 680 663 11,807
NY-Buffalo Raintree Island 504 31 1985 704 24% 46% 90% 92% 705 687 18,585
NY-Long Island Bayview/Colonial 160 36 2000 882 22% 45% 93% 95% 1063 994 13,173
NY-Long Island Coventry Village 94 28 1998 718 3% 34% 97% 98% 1,237 1168 5,204
NY-Long Island Devonshire Hills 297 35 2001 803 1% 70% 93% 90% 1,688 1642 51,061
NY-Long Island Eastwinds 96 37 2000 888 8% 39% 93% 92% 1044 999 7,908
NY-Long Island Lake Grove 368 33 1997 879 16% 49% 95% 97% 1,297 1218 29,676
NY-Long Island Maple Tree 84 52 2000 937 14% 26% 94% 96% 1,091 1031 6,425
NY-Long Island Mid-Island Estates 232 38 1997 690 22% 42% 97% 97% 1,096 1029 14,222
NY-Long Island Rider Apartments 24 42 2000 817 33% 17% 98% 98% 1,088 1015 1,851
NY-Long Island South Bay Manor 61 43 2000 849 10% 44% 96% 88% 1,357 1269 6,509
NY-Long Island Southern Meadows 452 32 2001 810 7% 38% 95% 96% 1,290 1231 43,387
NY-Long Island Terry Apartments 65 27 2000 722 32% 43% 93% 93% 1048 983 4,499
NY-Rochester 1600 East Avenue 164 44 1997 800 43% 27% 77% 69% 1,159 1349 14,437
NY-Rochester 1600 Elmwood 210 43 1983 891 7% 46% 92% 94% 910 879 13,259
NY-Rochester Brook Hill 192 31 1994 999 29% 42% 89% 89% 888 881 12,580
NY-Rochester Newcastle Apartments 197 28 1982 873 18% 46% 95% 88% 770 755 11,097
NY-Rochester Northgate Manor 224 40 1994 800 33% 33% 91% 88% 684 677 11,497
NY-Rochester Perinton Manor 224 33 1982 928 19% 47% 92% 92% 812 811 12,695
NY-Rochester Riverton Knolls 240 29 1983 911 10% 58% 88% 81% 837 855 14,251
NY-Rochester Spanish Gardens 220 29 1994 1,030 4% 39% 90% 87% 696 686 13,279
NY-Rochester The Meadows 113 32 1984 890 29% 44% 95% 95% 730 700 5,688
NY-Rochester Woodgate Place 120 30 1997 1,100 6% 45% 95% 93% 809 795 6,114
NY-Syracuse Fairview Heights 214 39 1965 798 0% 69% 94% 92% 915 874 11,919
NY-Syracuse Harborside Manor 281 30 1995 823 4% 49% 96% 94% 658 645 10,093
NY-Syracuse Pearl Street 60 32 1995 855 2% 40% 95% 92% 574 557 1,864
NY-Syracuse Village Green 448 17 1994 908 29% 41% 93% 86% 682 672 19,212
NY-Syracuse Westminster Place 240 31 1996 913 5% 52% 95% 95% 656 643 8,962
PA-Philadelphia Arbor Crossing 134 34 1999 667 29% 37% 91% 94% 770 741 6,487
PA-Philadelphia Beechwood Gardens 160 36 1998 775 13% 42% 97% 97% 754 725 5,995
PA-Philadelphia Cedar Glen Apartments 110 36 1998 726 17% 56% 91% 92% 615 584 4,394
PA-Philadelphia Chesterfield Apartments 247 30 1997 812 2% 57% 96% 96% 826 801 13,531
PA-Philadelphia Curren Terrace 318 32 1997 782 4% 43% 92% 91% 876 845 18,077
PA-Philadelphia Executive House 100 38 1997 696 2% 52% 94% 96% 876 864 6,470
PA-Philadelphia Glen Brook 177 40 1999 689 17% 34% 94% 94% 713 711 7,789
PA-Philadelphia Glen Manor 174 27 1997 667 2% 43% 92% 92% 726 699 7,386
PA-Philadelphia Hill Brook Place 274 35 1999 709 11% 44% 97% 96% 797 759 14,246
PA-Philadelphia Home Properties of Bryn Mawr 316 52 2000 900 7% 47% 92% 88% 1,015 1004 29,411
PA-Philadelphia Home Properties of Castle Club 158 36 2000 974 22% 35% 97% 98% 819 784 11,567
PA-Philadelphia Home Properties of Devon 629 40 2000 1,299 3% 50% 90% 89% 1059 1055 55,831
PA-Philadelphia Home Properties of Golf Club 399 34 2000 821 5% 62% 91% 89% 967 963 35,064
PA-Philadelphia Home Properties of Trexler Park 249 29 2000 1,000 13% 64% 89% 88% 990 950 20,706
PA-Philadelphia New Orleans Park 308 32 1997 693 16% 34% 94% 94% 761 739 16,616
PA-Philadelphia Racquet Club East Apartments 467 32 1998 850 27% 41% 96% 96% 916 885 29,529
PA-Philadelphia Racquet Club South 103 34 1999 821 18% 45% 96% 96% 804 777 5,681
PA-Philadelphia Ridley Brook 244 41 1999 731 23% 32% 97% 97% 779 755 12,038
PA-Philadelphia Sherry Lake Apartments 298 38 1998 811 3% 47% 95% 96% 1,060 1022 22,495
PA-Philadelphia The Landings 384 30 1996 987 25% 55% 94% 91% 941 910 25,859
PA-Philadelphia Valley View Apartments 177 30 1997 769 15% 75% 90% 91% 774 759 9,688
PA-Philadelphia Village Square 128 30 1997 795 22% 44% 93% 91% 854 833 7,178
PA-Philadelphia William Henry 363 32 2000 900 11% 38% 88% 88% 1,042 1017 34,545
VA-Suburban DC Braddock Lee Apartments 254 48 1998 758 12% 38% 96% 95% 1,079 1036 17,074
VA-Suburban DC East Meadow 150 32 2000 1,035 11% 55% 95% 93% 1,145 1169 13,607
VA-Suburban DC Elmwood Terrace 504 30 2000 1,038 14% 51% 94% 92% 789 763 23,258
VA-Suburban DC Manor, The 198 29 1999 844 20% 53% 92% 91% 902 893 9,790
VA-Suburban DC Orleans Village 851 35 2000 1,040 6% 43% 90% 91% 1,136 1133 77,573
VA-Suburban DC Park Shirlington Apartments 294 48 1998 758 9% 37% 93% 95% 1,122 1076 20,150
VA-Suburban DC Pavilion Apartments 432 35 1999 951 44% 41% 92% 90% 1,374 1321 49,643
VA-Suburban DC Seminary Hill 296 43 1999 884 6% 47% 91% 92% 1,115 1088 18,148
VA-Suburban DC Seminary Towers 548 39 1999 875 19% 43% 92% 91% 1,114 1094 34,281
VA-Suburban DC Tamarron Apartments 132 16 1999 1,097 22% 35% 96% 98% 1,086 1006 10,437
VA-Suburban DC Virginia Village 344 36 2001 1,028 6% 46% 94% 91% 1,144 1096 31,027
VA-Suburban DC Wellington Lakes 160 32 2001 675 1% 75% 86% 90% 758 708 8,456
VA-Suburban DC Welling Woods 114 31 2001 688 9% 67% 91% 95% 780 715 5,921
Core Communities Total/
Weighted Avg. 35,936 34 857 13% 47% 92% 92% $ 889 $ 864 $2,183,660
(1) "Core Communities" are the 35,936 apartment units owned by the Company
continuously.
(2) "Mature Residents" is the percentage of residents aged 55 years or older as
of December 31, 2003.
(3) "Resident Turnover" reflects, on an annual basis, the number of moveouts
divided by the total number of apartment units.
(4) "Average % Occupancy" is the average economic occupancy for the 12 months
ended December 31, 2002 and 2003. For communities acquired during 2002 and
2003, this is the average occupancy from the date of acquisition.
Communities Wholly Owned
and Managed by Home Properties as of
December 31, 2003
2003 2002
(4) Avg Avg
(2) (3) 2003 2002 Mo. Mo,
Avg. 2003 2003 Avg. Avg. Rent Rent 12/31/2003
# Age Apt % % % % Rate Rate Total
Of In Year Size Mature Resident Occu- Occu- per per Cost
Regional Area Apts Years Acq (Sq Ft) Residents Turnover pancy pancy Apt Apt (000)
- ------------- ---- ----- --- ------- --------- -------- ----- ----- --- --- -----
2002 Acquisition Communities
MA-Boston Gardencrest Apartments 696 55 2002 847 36% 31% 94% 96% $1,184 $1,060 $91,788
NY-Alb/
Hudson Valley Sherwood Consolidation 224 34 2002 813 16% 35% 97% 96% 876 794 15,221
NY-Long Island Cambridge Village Associates 82 36 2002 747 30% 20% 99% 97% 1237 1190 6,419
NY-Long Island Hawthorne Consolidation 434 35 2002 729 15% 40% 92% 85% 1,203 1,146 41,275
NY-Long Island Heritage Square 80 54 2002 703 30% 19% 98% 97% 1226 1169 7,358
NY-Long Island Holiday/Muncy Consolidation 143 24 2002 566 86% 19% 98% 98% 903 894 10,206
NY-Long Island Stratford Greens Associates 359 29 2002 725 10% 46% 95% 93% 1307 1222 48,571
NY-Long Island Westwood Village Apartments 242 34 2002 829 58% 36% 97% 96% 1801 1651 34,951
NY-Long Island Woodmont Village Apartments 96 35 2002 704 7% 42% 95% 95% 1143 1082 9,409
NY-Long Island Yorkshire Village Apartments 40 34 2002 779 30% 15% 98% 95% 1309 1259 3,581
VA-Suburban DC Brittany Place 591 35 2002 920 13% 56% 95% 97% 976 931 47,206
VA-Suburban DC Cider Mill 864 25 2002 834 11% 45% 95% 91% 997 989 83,495
VA-Suburban DC The Sycamores 185 25 2002 876 3% 68% 91% 93% 1,097 1142 20,706
VA-Suburban DC West Springfield Terrace 244 25 2002 1,019 23% 57% 89% 94% 1,226 1183 34,706
2002 Total/Weighted Average 4,280 34 823 22% 42% 94% 94% $1,140 $1,082 $454,892
2003 Acquisition Communities
MA-Boston Stone Ends Apartments 280 24 2003 797 9% 59% 94% NA $1,174 N/A $34,312
VA-Suburban DC Falkland Chase Apartments 450 66 2003 772 0% 50% 91% NA 1,098 N/A 58,778
2003 Total/Weighted Average 730 45 782 4% 53% 93% N/A $1,136 N/A $93,090
Owned Portfolio Total/
Weighted Avg 40,946 33 852 13% 46% 93% 92% $919 $887 $2,731,642
(1) "Core Communities" are the 35,936 apartment units owned by the Company
continuously throughout 2002 and 2003.
(2) "Mature Residents" is the percentage of residents aged 55 years or older as
of December 31, 2003.
(3) "Resident Turnover" reflects, on an annual basis, the number of moveouts;
divided by the total number of apartment units.
(4) "Average % Occupancy" is the average economic occupancy for the 12 months
ended December 31, 2002 and 2003. For communities acquired during 2002 and
2003, 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, in three phases.
During 2003, the Company was successful in selling its interest in entities
that own in the aggregate 84 properties containing 2,590 units. There still
remains interests in entities owning 39 properties, most of which are under
contract to sell in 2004. The net gain recorded from the 2003 sales was
$40,000. In addition, during 2003, the Company recorded $2.5 million in
impairment charges related to these assets held as general partner. A total
of $822,000 represents an impairment of monies loaned during 2003 to
certain affordable properties to fund operating shortfalls, which are not
anticipated to be recovered from projected sales proceeds. The balance of
the impairment charge, or $1.7 million, pertains to a charge taken in the
third quarter to reduce the book value of certain assets associated with
the remaining interest. This was triggered by the negotiation and signing
of a sale contract for these assets.
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 very selective basis.
Property Management
-------------------
As of December 31, 2003, the Managed Properties consist of: (i) 4,832
apartment units where Home Properties is the general partner of the entity
that owns the property; and (ii) 2,302 apartment units managed for others.
The 4,832 apartment units where the Company is the general partner are
projected to be sold during 2004 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 in connection with the management of one of the commercial
properties for a period not to exceed 36 months. If Home Leasing 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 $30,000.
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.
The table on the following pages details managed multifamily communities
broken down by market area.
Communities Managed Home Properties by Market Area
As of December 31, 2003
Communities Managed as General Partner
# of
Community Name City Apts.
- -------------- ---- -----
UPSTATE NEW YORK
Buffalo, NY Area
Linda Lane Apartments Cheektowaga 156
Rochester, NY Area
Abraham Lincoln Rochester 69
Ambassador Apartments Rochester 54
Chevy Place Rochester 77
College Greene Senior Apartments N. Chili 110
East Court Apartments Rochester 85
Evergreen Hills Macedon 232
Fort Hill Canandaigua 57
Geneva Garden Apartments Geneva 53
Huntington Park Apartments Rochester 75
Jefferson Park Fairport 69
Monica Place Rochester 21
Nichols Schoolhouse Apartments Nichols 13
Sandy Creek Albion 24
Springside Meadows Apartments West Henrietta 54
St. Bernard's Park Rochester 59
St. Bernard's Park II Rochester 88
St. Michael's Senior Housing Rochester 28
YWCA Rochester 86
Syracuse, NY Area
Candlelight Lane Apartments Liverpool 244
Church Street Apartments Port Byron 39
Ledges Evans Mills 100
Macartovin Utica 66
Meadowview I Central Square 60
Northcliffe Apartments Cortland 58
Pontiac Terrace Apartments Oswego 70
Schoolhouse Apartments Waterville 56
Schoolhouse Gardens Groton 28
Wedgewood Apartments Kirkville 70
Windsor Place Apartments N. Syracuse 180
ALBANY/HUDSON VALLEY NY AREA
Albert Carriere Apartments Rouses Point 56
Hillside Terrace Poughkeepsie 64
Peppertree Apartments Coxsackie 24
Peppertree Park Coxsackie 24
Terrace View Apartments Yonkers 48
Trinity Senior Apartments Yonkers 45
INDIANA
Dunedin Apartments South Bend 168
NORTHERN/CENTRAL OHIO
Briggs/Wedgewood Apartments Columbus 868
MARYLAND
Morningside Seniors Baltimore 82
PENNSYLVANIA
Green Meadow Apartments Pittsburgh 1,072
Total Apt. Units in Communities 4,832
Managed as General Partner
- --------------------------------------------------------------------------------
Communities Fee Managed
# of
Community Name City Apts.
- -------------- ---- -----
UPSTATE NEW YORK
Rochester, NY Area
Pines of Perinton Fairport 508
MARYLAND
Annapolis Roads Apartments Annapolis 282
Chesapeake Bay Apartments Annapolis 108
Dunfield Townhomes Baltimore 312
Fox Hall Baltimore 720
NEW JERSEY
Regency Club Apartments Jackson 372
Total Apt. Units in Communities 2,302
Fee Managed
Supplemental Property Information
---------------------------------
At December 31, 2003, 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 2003.
Item 3. Legal Proceedings
The Company is a party to certain legal proceedings. All such
proceedings, taken together, are not 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. Submission of Matters to Vote of Security Holders
None.
Item 4A. Executive Officers
The following table sets forth, as of February 27, 2004, the eight
executive officers of the Company, together with their respective
ages, positions and offices.
Name Age Position
---- --- --------
Edward J. Pettinella 52 President and Chief Executive Officer of Home Properties, HP
Management and HPRS
David P. Gardner 48 Executive Vice President and Chief Financial Officer of
Home Properties, HP Management and HPRS
Ann M. McCormick 47 Executive Vice President, General Counsel and Secretary of
Home Properties, HP Management and HPRS
Scott A. Doyle 42 Senior Vice President, Property Management of Home Properties, HP
Management and HPRS
Johanna A. Falk 39 Senior Vice President and Chief Administrative Officer of Home
Properties, HP Management and HPRS
Robert J. Luken 39 Senior Vice President, Chief Financial Analyst and Treasurer of
Home Properties, HP Management and HPRS
Janine M. Schue 41 Senior Vice President, Human Resources of Home Properties, HP
Management and HPRS
John E. Smith 53 Senior Vice President, Acquisitions and Dispositions of
Home Properties, HP Management and HPRS
Information regarding Edward Pettinella is set forth below under
"Board of Directors" in Item 10.
David P. Gardner has served as Executive Vice President of the Company
since January 2004, Chief Financial Officer of the Company since its
inception, and Vice President and Chief Financial Officer of HP
Management and HPRS since their inception. Since May 2002, he has
served HP Management and HPRS as Senior Vice President. 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. In January 2004, Mr. Gardner was
promoted to Executive Vice President. From 1977 until joining Home
Leasing, Mr. Gardner was an accountant at Cortland L. Brovitz & Co.
Mr. Gardner is a graduate of the Rochester Institute of Technology and
is a Certified Public Accountant.
Ann M. McCormick has served as Executive Vice President since 2004,
and Vice President and General Counsel and Secretary of the Company
and HP Management since their inception. She has also served as
Secretary and General Counsel of HPRS since 1998 and as Vice President
since 2000. Since May 2002, she has served HP Management and HPRS as
Senior Vice President. Mrs. McCormick joined Home Leasing in 1987 and
was named Vice President, Secretary and General Counsel in 1991. In
January 2004, Mrs. McCormick was promoted to Executive Vice President.
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.
Scott A. Doyle has served as Senior Vice President since 2000, and
Vice President of the Company since 1997. He has also served as Vice
President of HPRS since 2000. Since May 2002, he has served HP
Management and HPRS as Senior Vice President. 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 is a graduate of S.U.N.Y. at Plattsburgh, New York.
Johanna A. Falk has served as Senior Vice President since 2000, Chief
Administrative Officer since February 2003, and Vice President of the
Company since 1997. She has also served as Vice President of HPRS
since 2000. Since May 2002, she has served HP Management and HPRS as
Senior Vice President. 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 a Masters Degree in
Business Administration from the Wharton School of The University of
Pennsylvania.
Robert J. Luken has served as Senior Vice President since January
2004, Chief Financial Analyst since February 2002, Treasurer of the
Company since 2000 and as Vice President since 1997. Since 2001, he
had also served as Vice President and Controller of 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 January 2004, after joining the Company in October of 2001.
Since May 2002, Ms. Schue has also served as Vice President of HP
Management and HPRS. Prior to joining the Company, she was employed by
NetSetGo as Vice President of Human Resources and prior to that by
Wegmans Food Markets, Inc. as Director of Human Resources. Ms. Schue
is a graduate of and holds a Masters of Education from the State
University of New York at Albany.
John E. Smith joined Home Properties as Vice President of Acquisitions
and Dispositions in 1997 and was elected Senior Vice President in
2001. Since May 2002, he has served HP Management and HPRS as Senior
Vice President. Prior to joining the Company, 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 commercial real
estate courses in four states.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- --------------------------------------------------------------------------------
Matters
-------
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
---- --- ------------
2002
----
First Quarter $34.45 $31.40 $.60
Second Quarter $37.94 $33.79 $.60
Third Quarter $37.91 $31.25 $.60
Fourth Quarter $34.55 $28.28 $.61
2003
----
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
As of February 20, 2004, the Company had approximately 6,200
shareholders of record, 32,474,539 common shares (plus 16,031,422
UPREIT Units convertible into 16,031,422 common shares and Preferred
Stock convertible into 833,333 common shares) were outstanding, and
the closing price was $39.92. 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.
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).
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues:
Rental Income $413,920 $369,029 $326,416 $277,471 $200,285
17,427
Other Income 20,584 17,692 21,033 16,179
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES 434,504 386,456 344,108 298,504 216,464
---------- ---------- ---------- ---------- ----------
Expenses:
Operating and maintenance 188,523 160,628 143,095 124,909 87,202
General & administrative 22,607 12,649 10,542 6,485 10,696
Interest 85,110 75,482 64,209 54,823 37,752
Depreciation & amortization 78,702 65,078 60,799 48,781 34,603
Prepayment penalties 1,610 3,275 116 174
Impairment of assets held as General Partner 2,518 3,533 - - -
Loss on available-for-sale securities - - - - 2,123
Non-recurring acquisition expense - - - - 6,225
---------- ---------- ---------- ---------- ----------
TOTAL EXPENSES 379,070 320,645 278,761 234,998 178,775
---------- ---------- ---------- ---------- ----------
Income from operations 55,434 65,811 65,347 63,506 37,689
Equity in earnings (losses) of unconsolidated
affiliates ( 1,892) ( 17,493) 123 ( 1,747) 156
---------- ---------- ---------- ---------- ----------
Income before minority interest, discontinued
operations and extraordinary item 53,542 48,318 65,470 61,759 37,845
Minority interest 14,990 10,937 19,961 23,430 14,978
---------- ---------- ---------- ---------- ----------
Income from continuing operations 38,552 37,381 45,509 38,329 22,867
Discontinued operations, net of minority 7,760
interest 3,255 3,741 3,922 3,143
---------- ---------- ---------- ---------- ----------
Income before gain (loss) on disposition of
property and business 41,807 45,141 49,250 42,251 26,010
Gain (loss) on disposition of property and
business, net of minority interest ( 9) ( 202) 15,256 ( 795) 272
---------- ---------- ---------- ---------- ----------
Net Income 41,798 44,939 64,506 41,456 26,282
Preferred dividends ( 11,340) (14,744) (17,681) ( 12,178) ( 1,153)
Premium on Series B preferred stock repurchase - ( 5,025) - - -
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders $ 30,458 $ 25,170 $ 46,825 $ 29,278 $ 25,129
========== ========== ========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ .93 $ .67 $ 1.95 $ 1.23 $ 1.17
Discontinued operations .11 .30 .17 .19 .17
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders $ 1.04 $ .97 $ 2.12 $ 1.42 $ 1.34
========== ========== ========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $ .92 $ .66 $ 1.94 $ 1.22 $ 1.17
Discontinued operations .11 .30 .17 .19 .17
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders $ 1.03 $ .96 $ 2.11 $ 1.41 $ 1.34
========== ========== ========== ========== ==========
Cash dividends declared per common share $ 2.45 $ 2.41 $ 2.31 $ 2.16 $ 1.97
========== ========== ========== ========== ==========
Balance Sheet Data:
Real estate, before accumulated depreciation $2,752,992 $2,597,278 $2,135,078 $1,895,269 $1,480,753
Total assets 2,513,317 2,456,266 2,063,789 1,871,888 1,503,617
Total debt 1,380,696 1,335,807 992,858 832,783 669,701
Series B convertible cumulative preferred stock - - 48,733 48,733 48,733
Stockholders' equity 741,263 726,242 620,596 569,528 448,390
Other Data:
Net cash provided by operating activities $145,717 $143,887 $148,505 $127,218 $90,526
Net cash used in investing activities ($112,025) ($295,181) ($139,106) ($178,466) ($190,892)
Net cash provided by (used in) financing
activities ($37,371) $149,357 ($ 9,129) $56,955 $71,662
Funds from Operations (1) $132,803 $121,745 $136,604 $120,854 $80,784
Adjusted Funds From Operations(2) $111,020 $100,654 $120,994 $107,300 $70,359
Weighted average number of shares outstanding:
Basic 29,208,242 26,054,535 22,101,027 20,639,241 18,697,731
Diluted 29,575,660 26,335,316 22,227,521 20,755,721 18,800,907
Total communities owned at end of period 147 152 143 147 126
Total apartment units owned at end of period 40,946 41,776 39,007 39,041 33,807
(1) 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. The Company considers debt
extinguishment costs which are incurred as a result of repaying
property specific debt and non-cash real estate impairment
charges, as a component of the 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.
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. 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:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net income available to common
shareholders $ 30,458 $ 25,170 $ 46,825 $ 29,278 $25,129
Convertible Preferred dividends(a) 5,939 10,589 17,681 12,178 1,153
Depreciation from real property(c) 79,531 67,919 64,589 52,297 37,473
FAS 141 acquisition rent/intangibles 46 - - - -
Impairment on General Partner
Investment(d) 1,785 1,470 - - -
(Gain) loss from sale of property 260 202 ( 15,256) 795 ( 272)
Minority interest 14,990 10,937 19,961 23,430 14,978
Minority interest - discontinued
operations 360 1,289 2,688 2,876 2,149
Impairment of real property(e) 423 1,565 - - -
(Gain) loss from sale of
discontinued operations ( 2,599) ( 5,696) - - -
Prepayment penalties - 3,275 116 - 174
Loss from early extinguishment of
debt in connection with sale of
real estate 1,610 - - - -
-------- -------- -------- -------- -------
FFO as defined above $132,803 $116,720 $136,604 $120,854 $80,784
Premium paid on Series B
repurchased(b) - 5,025 - - -
-------- -------- -------- -------- -------
FFO as adjusted by the Company 132,803 121,745 136,604 120,854 80,784
Reserve(2) (21,783) (21,091) (15,610) (13,554) (10,425)
-------- -------- -------- -------- -------
Adjusted Funds From Operations $111,020 $100,654 $120,994 $107,300 $70,359
======== ======== ======== ======== =======
Weighted average common
shares/units outstanding:
Basic 45,276.7 42,062.1 37,980.0 35,998.3 31,513.8
======== ======== ======== ======== =======
Diluted(a) 47,873.8 46,466.4 45,063.6 41,128.4 32,044.9
======== ======== ======== ======== =======
(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 the diluted weighted average common
shares/units outstanding.
(b) FFO for 2002 includes adding back the premium on the Series B
preferred stock repurchase of $5,025.
(c) Includes amounts passed through from unconsolidated investments.
(d) FFO for 2002 includes adding back the loss associated with the
Company's investment in limited partnerships held as a general
partner. The investment in the limited partnership is considered real
estate for purposes of FFO.
(e) FFO for 2002 and 2003 includes adding back the impairment charges
taken on disposed properties in each of the respective years which is
included in income from operations of disposed properties.
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.
(2) 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 2003 and 2002 ($400 used for 2001
and $375 used for 1998-2000) per apartment unit.
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 the Northeastern, Mid-Atlantic and Midwestern
United States. As of December 31, 2003, the Company operated 197
apartment communities with 48,080 apartments. Of this total, the
Company owned 147 communities, consisting of 40,946 apartments,
managed as general partner 44 partnerships that owned 4,832
apartments, and fee managed 2,302 apartments for affiliates and third
parties.
Executive Summary
-----------------
The Company continued to operate during 2003 in a difficult economic
environment. The recession, which started in 2001, continued through
2002 resulting in job losses in many parts of the country. 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. As
referenced in our Market Demographics table on page 9 of this report,
job growth for our markets improved slightly in 2003 with 0.1% growth
over 2002. As there is usually a lag between job growth and household
formation, this slight recovery did not create increased demand for
our apartments.
We ended 2002 at only 92.0% occupancy for Core Properties and, with no
increased demand and a weak winter leasing season, we experienced our
worst quarter ever as measured by occupancy, with Core Properties
occupancy of 90.7% during the first quarter of 2003.
During 2002, the Company's strategy was to maximize rental rate growth
by being aggressive with rent increases even if it resulted in a
reduction in occupancy. With leading indicators suggesting that the
economy had bottomed out and was positioned for a recovery, the
Company decided in 2003 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.
Although occupancies at Core Properties for 2003 increased only
slightly by 20 basis points, from 92.1% to 92.3%, the Company was well
positioned by the end of 2003. Occupancies in the fourth quarter of
2003 averaged 93.1%, compared to 92.0% a year ago. The Company uses a
measurement referred to as Available to Rent, or ATR. This is a
leading indicator to assess future occupancy rates by reference to
units which will be available for rent, based upon leases signed or
termination notices received relating to future move in/move out
dates. At the end of January, 2004, our ATR was 6.6%, which compares
favorably to January, 2003, when ATR was 9.1%.
Ending the year with higher occupancies, as well as positive
comparison for ATR, led to the Company's 2004 guidance suggesting 2004
Core Properties (apartment units owned throughout 2003 and 2004)
rental growth of 3.8%. 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 0.6% for the year, mostly due to
positive comparisons to the first two quarters of 2003 which were very
weak. Finally, the pricing power resulting from improved occupancies
support the belief that we will slow down concession activity , adding
0.7% to net rental income.
Expenses for 2004 Core Properties are projected to increase 5.5%. See
below under "Results of Operations" for more details on expense
comparisons.
These revenue and expense projections result in 2004 Core Properties
net operating income ("NOI") growth of 2.6% at the mid-point of 2004
guidance. Markets where the Company expects above average NOI growth
include: Washington, D.C. (+6.3%); Hudson Valley (+6.0%); Long Island
(+4.3%); Northern New Jersey (+3.5%); and Boston (+3.2%). Baltimore is
expected to be closer to the average at +2.7% NOI growth. Markets with
below average NOI growth expectations include: Philadelphia (+1.4%);
Upstate New York (Rochester, Buffalo and Syracuse at +0.5%); Detroit
(+0.3%); and Chicago (-4.4%). Certain historical demographic
information for these markets may be found in the table on page 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 2004 with a range of $2.84 to
$2.94 per share.
The Company has anticipated closing on acquisitions of $250 million in
its budget for 2004. 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. To facilitate acquisition activity in the
current market, the Board decided in February 2004 to give management
the flexibility to 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 2004 acquisition goal of $250 million is achievable based on the
current acquisition pipeline and the Board's decision to increase
leverage.
During 2004, the Company anticipates increasing leverage to a level of
approximately 45% of debt-to-total market capitalization in order to
meet the above-described acquisition goals. In addition, with only 2%
of its debt bearing interest at variable rates at December 31, 2003,
the Company plans on increasing exposure to variable rate debt. This
will be achieved mostly through the use of the existing line of
credit, approaching a level of just under 10% of outstanding
indebtedness bearing interest at variable rates. Finally, although not
contemplated based on the announced level of acquisitions of $250
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, 2003 to year ended December 31,
2002.
The Company owned 125 communities with 35,936 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 3.0% and a net operating income
decrease of 1.1% over the 2002 year-end period. Property level
operating expenses increased 8.9%. Average economic occupancy for the
2003 Core Properties increased from 92.1% to 92.3%, with average
monthly rental rates increasing 2.8% to $888 per apartment unit.
A summary of the 2003 Core Property net operating income is as
follows:
2003 2002 $ Change % Change
---- ---- -------- --------
Rent $353,674,000 $343,274,000 $10,400,000 3.0%
Property Other Income 14,330,000 13,640,000 690,000 5.1%
------------ ------------ ----------- ----
Total Revenue 368,004,000 356,914,000 11,090,000 3.1%
Operating and Maintenance (164,940,000) (151,488,000) (13,452,000) (8.9%)
------------ ------------ ----------- ----
Net Operating Income $203,064,000 $205,426,000 $(2,362,000) (1.1%)
============ ============ =========== ====
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 continuing operations for
the Company as a whole is as follows:
2003 2002 $ Change % Change
---- ---- -------- --------
Rent $413,920,000 $369,029,000 $44,891,000 12.2%
Property Other Income 20,584,000 17,427,000 3,157,000 18.1%
------------ ------------ ----------- ---
Total Revenue 434,504,000 386,456,000 48,048,000 12.4%
Operating and Maintenance (188,523,000) (160,628,000) (27,895,000) (17.4)%
------------ ------------ ----------- ---
Net Operating Income $245,981,000 $225,828,000 $20,153,000 8.9%
============ ============ =========== ===
During 2003, the Company also disposed of seven properties with a
total of 1,568 units, which had partial results for 2003 (the "2003
Disposed Communities"). The results of these disposed properties have
been reflected in discontinued operations.
For the year ended December 31, 2003, income from continuing
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
$10,377,000 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 $27,895,000, an
increase in general and administrative expense of $9,958,000, an
increase in interest expense of $9,628,000, and an increase in
depreciation and amortization of $13,624,000. These changes were
partially offset by a decrease of $2,680,000 in all other expense
items, an increase in rental income of $44,891,000, and an increase in
all other income of $3,157,000. Each of the expense items is described
in more detail below.
Of the $44,891,000 increase in rental income, $29,520,000 is
attributable to the 2002 Acquisition Communities and $4,971,000 is
attributable to the 2003 Acquisition Communities. The balance of
$10,400,000 relates to a 3.0% 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
92.3%.
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. An additional component of
the 3.0% increase in weighted average rent results from the
significant upgrading and repositioning efforts discussed under
"Capital Improvements" below. The Company seeks a minimum 12% internal
rate of return for these revenue-enhancing upgrades.
In the current economic environment, it is very difficult to project
rental rate and occupancy results. The Company has provided guidance
for 2004, which, at the mid-point of the range, anticipates same store
revenue growth of 3.8%, including above-average rental increases from
the continued efforts to upgrade the properties. Occupancy levels are
expected to remain consistent with the end of the fourth quarter of
2003, producing an expected average for 2004 Core Properties of 93.2%.
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 $1,486,000. Of this increase, $619,000 is
attributable to the 2002 Acquisition Communities, $177,000 is
attributable to the 2003 Acquisition Communities, and $690,000
represents a 5.1% increase attributable to the 2003 Core Properties.
The increase represents a higher level of corporate leases in 2003
which produce a higher level of ancillary income.
Interest and dividend income decreased in 2003 by $778,000, 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 $27,895,000 increase in operating and maintenance expenses,
$12,846,000 is attributable to the 2002 Acquisition Communities,
$1,597,000 is attributable to the 2003 Acquisition Communities. The
balance for the 2003 Core Properties, a $13,452,000 increase in
operating expenses or 8.9%, 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 $ 6,697 $ 6,371 $ (326) -5.1%
Gas 15,901 15,079 (822) -5.5%
Water and Sewer 8,812 8,804 (8) -0.1%
Repairs & Maintenance 26,117 23,759 (2,358) -9.9%
Personnel Expense 37,910 34,130 (3,780) -11.1%
Site Level Incentive
Compensation 1,088 683 (405) -59.3%
Advertising 6,514 5,802 (712) -12.3%
Legal and Professional 1,300 1,258 (42) -3.3%
Office and Telephone 5,150 4,706 (444) -9.4%
Property Insurance 5,700 3,148 (2,552) -81.1%
Real Estate Taxes 35,491 35,222 (269) -0.8%
Snow 1,606 827 (779) -94.2%
Trash 2,597 2,604 7 0.3%
Property Management G&A 10,057 9,095 (962) -10.6%
-------- -------- -------- ---
Total $164,940 $151,488 $(13,452) -8.9%
======== ======== ======== ===
The natural gas variance of 5.5% 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 a year ago. As of
December 31, 2003, the Company had fixed-price contracts covering 99%
of its natural gas exposure for the 2003/2004 heating season. The
Company has fixed-price contracts covering 71% of its natural gas
exposure for calendar year 2004. Risk is further diversified by
staggering contract term expirations. For the 2003/2004 heating
season, the Company's negotiated average price per decatherm is
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 Company has provided guidance for 2004 which anticipates a
12.3% increase in natural gas heating costs. This is based on the
thirty-year average for the number of degrees days for 2004, increased
to reflect a much colder than normal January 2004.
The increase in repairs and maintenance of 9.9% 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. The Company has provided guidance for 2004 which anticipates
a more normalized 4.3% increase in repairs and maintenance.
Personnel expense was up 11.1% 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 11.1% 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 11.1% increase. The balance represents a 4.6% increase in
wages. For 2004 guidance, personnel costs are anticipated to increase
5.1%, with more controlled increases in workers compensation and
health insurance expected.
Advertising costs were up 12.3%, consistent with the efforts to
attract traffic and increase occupancy.
Property insurance costs were up 81.1% 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. See comparison of year ended December 31,
2002, to December 31, 2001, for further information. With the legal
settlements behind us, the Company expects property insurance to
increase 7.7% for 2004.
Snow removal costs were up 94.2%. The first quarter of 2003 produced
significant snowfalls compared to historical norms. Most of the
$779,000 increase in snow removal costs occurred during the first
quarter. Snow removal costs are anticipated to return to normal levels
in 2004 with a 12.1% decrease from 2003 levels projected.
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 44.8% and 42.4% for 2003 and 2002, respectively.
This 2.4% increase resulted from the 3.0% increase in total rental and
property other income achieved through ongoing efforts to upgrade and
reposition properties for maximum potential being offset by the 8.9%
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. G&A is expected to increase 2.0% for 2004
for normal recurring expenses. The Company expects reduced management
activity after the disposition of the affordable general partner
interests and commercial departments will reduce G&A costs, with
increases from the remaining G&A netting to the 2.0% growth
expectation from 2003 to 2004. It should be noted that these
comparisons exclude the one-time retirement charge from restricted
stock granted in 2003 to the Leenhoutses, which will only add to G&A
cost comparison savings in 2004.
Interest expense increased in 2003 by $9,628,000 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 and additional mortgage debt and
refinanced mortgage debt incurred in connection with acquisitions in
2002. The 2002 Acquisition Communities, costing in excess of
$430,000,000, were financed with $153,600,000 of assumed debt and by
issuance of interests in the Operating Partnership. During 2003, the
Company closed on additional mortgage debt of $80,100,000 and
refinanced $24,000,000 in existing mortgage debt resulting in new
borrowings of approximately $46,000,000. During the first and second
quarters of 2002 the Company also closed on additional mortgage debt
through Freddie Mac totaling $102,000,000. During the fourth quarter
of 2002, the Company refinanced $101,000,000 in existing mortgage debt
resulting in new borrowings of approximately $237,000,000. 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.
Depreciation and amortization expense increased $13,624,000 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
2003 and 2002 of $81,860,000 and $99,966,000, respectively, net of the
Disposition Communities.
Prepayment penalties 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.
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, is 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.
During 2004, the Company plans to pursue the sale of its general
partner interests in one additional property (two partnerships) with
1,072 units. It does not currently have a contract for this sale but
anticipates 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 $5.6 million) and to fund
operating deficits. 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. The Company
does not anticipate that occupancy levels or other aspects of the
operational outlook will improve in the foreseeable future under the
regulation restrictions. The Company funded operating deficits of $1.3
million in 2003 and expects 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, is a
negative $725,000. The value has been reduced below zero as a function
of losses passed through to the Company as general partner all of
which, or more, have been funded in cash by the Company. Since the
Company does not have any agreements in process with respect to a
disposition of the property, the Company cannot accurately estimate a
price at which the property may be disposed of, and it is likely that
the Company will 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 $4,053,000 due primarily to the effect of
the increase in income allocated to the OP Unitholders, which is
primarily attributable to the combination of losses associated with
the assets associated with the limited partnerships where the Company
is a general partner that were present in 2002 and did not recur
during 2003.
Included in discontinued operations for the year ended December 31,
2002 are the operating results, net of minority interest, of twelve
apartment communities disposed of in 2002 and seven apartment
communities disposed of in 2003. The decrease in the income from
operations component of discontinued operations principally relates to
the less than 12 months of operations included in 2002 compared to 12
months in the prior year.
Net income decreased $3,141,000 primarily due to the increases in
Operating and Maintenance, General and Administrative, Interest and
Depreciation expense outlined above offset in part by the results of
the 2003 Acquisition Communities, the 2002 Acquisition Communities,
and 2003 Core Properties.
Comparison of year ended December 31, 2002 to year ended December 31,
2001.
The Company owned 114 communities with 32,896 apartment units
throughout 2001 and 2002 where comparable operating results are
available for the years presented (the "2002 Core Properties"). For
the year ending December 31, 2002, the 2002 Core Properties showed an
increase in rental revenues of 4.2% and a net operating income
increase of 3.4% over the 2001 year-end period. Property level
operating expenses increased 5.6%. Average economic occupancy for the
2002 Core Properties decreased from 93.6% to 92.0%, with average
monthly rental rates increasing 5.8% to $843 per apartment unit.
A summary of the 2002 Core Property net operating income is as
follows:
2002 2001 $ Change % Change
---- ---- -------- --------
Rent $311,893,000 $299,312,000 $12,581,000 4.2%
Property Other Income 12,649,000 11,714,000 935,000 8.0%
------------ ------------ ----------- ---
Total Revenue 324,542,000 311,026,000 13,516,000 4.3%
Operating and Maintenance ( 139,586,000) (132,148,000) ( 7,438,000) (5.6%)
------------ ------------ ----------- ---
Net Operating Income $184,956,000 $178,878,000 $ 6,078,000 3.4%
============ ============ =========== ===
During 2002, the Company acquired a total of 4,492 apartment units in
21 newly-acquired communities (the "2002 Acquisition Communities"). In
addition, the Company experienced a full year results for the 2,820
apartment units in 10 apartment communities (the "2001 Acquisition
Communities") acquired during 2001. The inclusion of these acquired
communities generally accounted for the significant changes in
operating results for the year ended December 31, 2002.
A summary of the net operating income from continuing operations for
the Company as a whole is as follows:
2002 2001 $ Change % Change
---- ---- -------- --------
Rent $369,029,000 $326,416,000 $42,613,000 13.1%
Property Other Income 17,427,000 17,692,000 ( 265,000) (1.5%)
------------ ------------ ---------- ----
Total Revenue 386,456,000 344,108,000 42,348,000 12.3%
Operating and Maintenance (160,628,000) (143,095,000) (17,533,000) (12.3)%
------------ ------------ ---------- ----
Net Operating Income $225,828,000 $201,013,000 $24,815,000 12.3%
============ ============ =========== ====
During 2002, the Company disposed of 12 properties with a total of
1,724 units, which had partial results included for 2002 (the "2002
Disposed Communities"). During 2003, the Company also disposed of
seven properties with a total of 1,568 units. The results of these
disposed properties have been reflected in discontinued operations.
For the year ended December 31, 2002, income from operations (income
before gain on disposition of property and business, equity in
earnings (losses) of unconsolidated affiliates, minority interest,
discontinued operations and extraordinary item) increased by $464,000
when compared to the year ended December 31, 2001. The increase was
primarily attributable to the following factors: an increase in rental
income of $42,613,000 and a decrease in all other income of $265,000.
These changes were offset by an increase in operating and maintenance
expense of $17,533,000, an increase in general and administrative
expense of $2,107,000, an increase in interest expense of $11,273,000,
an increase in depreciation and amortization of $4,279,000 and
increase in prepayment penalties associated with the early
extinguishment of debt of $3,159,000 and the charge for impairment of
assets held as General Partner of $3,533,000.
Of the $42,613,000 increase in rental income, $25,752,000 is
attributable to the 2002 Acquisition Communities and $17,350,000 is
attributable to the 2001 Acquisition Communities, offset in part by a
$13,070,000 reduction of income attributable to the 2001 Disposed
Communities. The balance of $12,581,000 relates to a 4.2% increase
from the 2002 Core Properties due primarily to an increase of 5.8% in
weighted average rental rates, offset by a decrease in average
economic occupancy from 93.6% to 92.0%.
In addition to normal inflationary rent increases, the Company was
successful in achieving above-normal increases at specific properties
where rents were below the level of the average rent charged by our
direct competition. An additional component of the 5.8% increase in
weighted average rent results from the significant upgrading and
repositioning efforts discussed below under "Capital Improvements" .
The decrease in average economic occupancy can be attributed to the
decline in general economic conditions during 2002. Same-store
occupancies averaged approximately 95% for a number of years prior to
2001. During the second quarter of 2001, the Detroit regional market
experienced softness that was partially related to announced lay-offs
in the auto industry. A reduction in job growth leads to fewer
household formations, which creates a reduction in demand for rental
housing. During the third and fourth quarters of 2001, it became
obvious that the recession was affecting all of our regions, as well
as our competitors. Occupancy levels dipped to a low of 91.6% for the
month of December 2001. From that low point in December 2001,
occupancy levels increased slightly for all of 2002, averaging 92.2%.
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 2002 by $1,563,000. Of this increase, $588,000 is
attributable to the 2001 Acquisition Communities, $494,000 is
attributable to the 2002 Acquisition Communities and $935,000
represents an 8.0% increase attributable to the 2002 Core Properties.
These increases were offset in part by decreases attributable to the
2001 Disposed Communities of $454,000. Interest and dividend income
decreased in 2002 by $1,590,000, due to decreased levels of financing
to affiliates and a lower interest rate environment.
Other income, which primarily reflects management and other real
estate service fees recognized directly by the Company, decreased
$238,000 due to decreased levels of management fees from properties
directly managed by the Company. These decreased levels of management
fees are directly attributable to the decrease in property revenue and
occupancy at the managed properties as a result of the weak economy.
Of the $17,533,000 increase in operating and maintenance expenses,
$7,233,000 is attributable to the 2001 Acquisition Communities,
$9,446,000 is attributable to the 2002 Acquisition Communities and a
reduction of $6,584,000 is attributable to the 2001 Disposed
Communities. The balance for the 2002 Core Properties, a $7,438,000
increase in operating expenses or 5.6%, is primarily a result of
increases in real estate taxes, personnel expense, property insurance,
and repairs and maintenance costs, offset in part by decreases in
natural gas utilities and snow removal costs. The insurance expense
for the year reflects the impact of a legal settlement related to the
portion of the policy year from January 1, 2002, to October 31, 2002,
and reduced the expense by $2.7 million.
Natural gas costs for the Core Properties were down 10.3% for the
twelve months, due to an unusually mild winter in 2002 compared to
2001 where we expensed a combination of extraordinary increases in
natural gas prices as well as lower temperatures experienced in 2001.
Management believed it was in the Company's best interest to take
advantage of lower natural gas prices and to negotiate fixed price
contracts starting in the Spring of 2001. As of December 31, 2002, the
Company had fixed-price contracts covering 90% of its natural gas
exposure for the 2002/2003 heating season. The Company had fixed-price
contracts covering 75% of its natural gas exposure for the 2003/2004
heating season and further diversified its arrangement by staggering
contract term expirations to reduce its risk at renewals. For the
2002/2003 heating season, the Company's negotiated average price per
decatherm is approximately $4.38 compared to an estimated cost of a
twelve month fixed price contract in early 2003 of $6.37 per
decatherm.
The operating expense ratio (the ratio of operating and maintenance
expense compared to rental and property other income) for the 2002
Core Properties was 43.0% and 42.5% for 2002 and 2001, respectively.
This 0.5% increase resulted from the 4.2% increase in total rental and
property other income achieved through ongoing efforts to upgrade and
reposition properties for maximum potential being offset by the 5.6%
increase in operating and maintenance expense.
General and administrative expenses increased in 2002 by $2,107,000 or
20% from $10,542,000 in 2001 to $12,649,000 in 2002. The increases
principally reflect increased efforts in serving residents and
employees through new and expanded initiatives across the Company's
increased geographic markets, including a help desk, call center, and
an education department. Bonus expense increased $838,000 in 2002, net
of amounts allocated to properties and the Management Companies. In
addition, the Company incurred $882,000 in a legal settlement. During
2002, the Company reclassified certain property related operating
expenses from the "general and administrative" line to "operating and
maintenance". This reclassification was made as the Company determined
that certain expenditures were more appropriately allocated to the
properties' operations. The general and administrative expenses for
2001 reflect this same reclassification. The percentage of general and
administrative expenses compared to total revenue was 3.3% for 2002
compared to 3.1% for 2001.
Interest expense increased in 2002 by $11,273,000 as a result of
additional borrowings relating to the acquisition of the 2002
Acquisition Communities and a full year of interest expense for the
2001 Acquisition Communities. The 2001 Acquisition Communities,
costing in excess of $212,000,000, were financed with $68,000,000 of
assumed debt in addition to the use of UPREIT Units. The 2002
Acquisition Communities, costing in excess of $430,000,000, were
financed with $153,600,000 of assumed debt, in addition to the use of
UPREIT Units. During the first and second quarters of 2002 the Company
also closed on additional mortgage debt through Freddie Mac totaling
$102,000,000. During the fourth quarter of 2002, the Company
refinanced $101,000,000 in existing mortgage debt resulting in new
borrowings of approximately $237,000,000. In addition, amortization
from deferred charges relating to the financing of properties totaled
$1,014,000 and $632,000, and was included in interest expense for 2002
and 2001, respectively.
Depreciation and amortization expense increased $4,279,000 due to the
depreciation on the 2002 Acquisition Communities, the 2001 Acquisition
Communities, the additions to the Core Properties, net of the
Disposition Communities. The increase is net of the effect of the
change in accounting estimate made by management effective January 1,
2002, related to the extension of certain depreciable lives of real
estate and related assets. The change reduced depreciation expense for
the year by approximately $10,000,000 (before allocation to minority
interest). Specifically, the Company changed the useful lives of all
buildings to 40 years regardless of the date of construction.
Previously, the buildings were depreciated over 30-40 years based on
the year of construction. In addition, for major kitchen and bathroom
upgrades, the Company determined that a 20-year life was more
appropriate rather than its previous life of 10 years. The Company
believes that the change in useful lives is more reflective of the
economic lives of the tangible assets and is also more comparable to
its peer group.
Prepayment penalties increased in 2002 by $3,159,000 over 2001. This
was due to prepayment penalties incurred on the Company's refinancings
which took place during the fourth quarter of 2002.
The Company 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. After assessing its
alternatives in the affordable housing market, the Company concluded
that it would not expand its affordable housing portfolio and that its
strategic focus should be on the direct ownership and management of
market rate properties. The Company determined that its existing
affordable property limited partnerships required a disproportionate
management effort and expense to manage, not justified by the
portfolio's overall contribution to profit.
The Company's assets related to the affordable property limited
partnerships were comprised of management contracts, loans, advances
and receivables and general partnership interests. In December 2002,
an aggregate impairment charge of $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.
The impairment charge was comprised of the following: (i) intangible
assets (i.e. management contracts) were written down $985,000 to their
estimated fair market value, (ii) loans, advances and other
receivables, which had previously been based upon their estimated
collectibility but following the Company's decision to sell, were
required to be reflected at their estimated fair market value
resulting in a writedown by an aggregate of $12,363,000, and (iii) the
general partnership equity interests were written down by $899,000
reflecting a determination that such investments have suffered an
other than temporary impairment.
Impairment of assets held as general partner $ 2,448,000
Equity in earnings (losses) of unconsolidated affiliates 11,799,000
----------
$14,247,000
===========
In addition, prior to the decision to sell the affordable housing
portfolio in December 2002, the results of operations were impacted by
losses incurred by certain of the affordable property limited
partnerships as a direct result of the weak economy and resulting
decrease in occupancy levels. Loans, advances and other receivables of
$3,606,000 ($514,000 by the Company and $3,092,000 by the equity
affiliates) 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 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, the Company recorded an "other than
temporary" impairment of $571,000 in assets held as general partner,
$546,000 relating to the expiration in December 2002, of an option to
acquire one of its equity interests. The resultant charges that would
have been recognized regardless of the Company's decision to sell the
assets is reflected in the statement of operations within the line
items as follows:
Impairment of assets held as general partner $ 735,000
Equity in earnings (losses) of unconsolidated affiliates 3,092,000
---------
$3,827,000
==========
The summary of the impairment and other charges related to the assets
associated with the affordable property limited partnerships
referenced above reflected in the Company's 2002 results of operations
is as follows :
Sale Impairment Other Charges Totals
------------------------------- ------------------------------ --------------------------------
Assets Company1 Affiliates2 Total Company1 Affiliates2 Total Company1 Affiliates Combined
------ -------- ----------- ----- -------- ----------- ----- -------- ---------- --------
(in thousands)
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"
Equity in earnings (losses) of unconsolidated affiliates decreased
$17,616,000 from income of $123,000 in 2001 to a loss of $17,493,000
in 2002. A decrease of $2,725,000 arose from the reduction in the net
contribution from property management and other activities of the
Management Companies after allocating certain overhead and interest
expense. The general and administrative overhead charges, which
increased approximately $600,000, represents an allocation of direct
and indirect costs incurred by the Company estimated by management to
be associated with the activities of the Management Companies. In
addition, prior to the decision to sell, charges of $3,092,000 were
recorded arising from operating losses and other charges directly
associated with the performance of the partnerships where the Company
is the general partner and the Management Companies had outstanding
loans, advances and other receivables. An impairment charge of
$11,799,000 was recorded in order to reduce the assets to their
estimated fair value arising from the Company's decision to sell its
affordable housing portfolio (see table above).
Minority interest decreased $9,024,000 from 2001 to 2002 due to the
decrease in income allocated to holders of interests in the Operating
Partnership primarily attributable to the losses associated with the
assets associated with the limited partnerships where the Company is a
general partner.
Included in discontinued operations for the year ended December 31,
2002 are the operating results, net of minority interest, of twelve
apartment community dispositions which occurred in 2002 and seven
apartment community dispositions which occurred in 2003. The decrease
in the income from operations component of discontinued operations
principally relates to the fewer than 12 months of operations included
in 2002 compared to 12 months in the prior year.
During 2002, the Company reported a loss on disposition of property
and business, net of minority interest, of $202,000 relating primarily
to additional expenses incurred in the first quarter of 2002 for sales
which closed in the fourth quarter of 2001. These costs represented a
change in estimates of expenses from those accrued at the time of the
sale.
Net income decreased $19,567,000 from 2001 to 2002, or 30%, primarily
attributable to the combination of the losses recorded by the equity
affiliates related to the impairment and other charges described above
and the significant gains on disposition of real estate during 2001
offset in part by the results of operations of the 2002 Acquisition
Communities, and the 2001 Acquisition Communities, net of the 2001
Disposition Communities.
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 $250 million in 2004,
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, 2003, the Company owned
22 properties, with 3,363 apartment units, which were unencumbered by
debt.
A source of liquidity in 2004 is expected to be from the sale of
properties. From its IPO through 2000, the Company had sold only a few
small properties. During 2003, the Company sold seven communities for
a total sales price of $59.3 million. During 2002, the Company sold 12
communities for a total sales price of $87.1. The Company was able to
sell these properties at an average capitalization rate of 8.9% and
reinvest in the acquisition of properties with more growth potential
at an expected first year cap rate of 7.9%. While the capitalization
rate from dispositions was 100 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 2004, 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,
2003, the Company continued to have available securities under the
registration statement in the aggregate amount of $144,392,000.
In December 1999, the Class A limited partnership interests held by
the State of Michigan Retirement Systems (originally issued in
December 1996 for $35 million) were converted to Series A Convertible
Cumulative Preferred shares ("Series A Preferred Shares") which
retained the same material rights and preferences that were associated
with the limited partnership interests. On November 28, 2001, the
Series A Preferred Shares were converted to common shares. The
conversion had no effect on reported results of operations.
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.
The issuance of UPREIT Units for property acquisitions continues to be
a source of capital for the Company. 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 million, with the balance funded by the assumption of debt
and cash. During 2001, 520 apartment units in two separate
transactions were acquired for a total cost of $33,000,000, using
UPREIT Units valued at approximately $19,000,000 with the balance paid
in cash or assumed debt.
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. 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.
The Company has a Dividend Reinvestment Plan (DRIP). The DRIP provides
the stockholders of the Company an opportunity to automatically invest
their cash dividends in common stock at a discount of 2% from the
market price. In addition, eligible participants may make monthly
payments or other voluntary cash investments in shares of common
stock, typically purchased at discounts, which have varied between 2%
and 3%. The maximum monthly investment without prior Company approval
is currently $1,000. During 2002, $27,400,000 of common stock was
issued under this plan, with an additional $30,300,000 of common stock
issued in 2003.
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, management has the
flexibility to issue waivers to DRIP participants to provide for
investments in excess of the $1,000 maximum monthly investment. In
February 2002, the Company announced such waivers will be considered
beginning with the March 2002 optional cash purchase, since management
had believed at that time that the stock is trading at or above its
estimate of net asset value. During 2002, the Company granted 53
waivers for purchases aggregating a total of $3,900,000. No such
waivers were granted during 2003.
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, 2003 the Company had
no balance outstanding on the line of credit. Borrowings under the
line of credit bear interest at 1.15% 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 line of credit expires on
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 the fourth quarter
of 2002, the funds from operations payout ratio was 94% when measured
for the calendar year. Due to the impairment charges recorded in the
fourth quarter, the Company did not meet the required ratio.
Appropriate waivers were granted by the participating banks. During
the fourth quarter of 2003, the funds from operations payout ratio was
90.7% when measured for the calendar year. Due to the charges related
to the grant of restricted stock to the Leenhoutses, the Company did
not meet the required ratio. Appropriate waivers have been granted by
the participating banks.
As of December 31, 2003, the weighted average rate of interest on the
Company's mortgage debt was 6.38% and the weighted average maturity of
such indebtedness was approximately eight years. Mortgage debt of $1.4
billion was outstanding with 98% 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
$143,887,000 for the year ended December 31, 2002, to $145,717,000 for
the year ended December 31, 2003. The increase was principally due to
changes in Other Assets.
Net cash used in investing activities decreased from $295,181,000 in
2002 to $112,025,000 in 2003. The decrease was principally due to the
lower level of properties purchased in 2003 which decreased to
$92,970,000 in 2003 from $433,043,000 in 2002. Other changes included
a decrease of $30,413,000 in proceeds from the sale of properties, a
decrease in property additions of $9,346,000, and an increase of
$3,835,000 from the proceeds from the sale of affordable properties.
The Company's net cash used in financing activities decreased from
providing $149,357,000 in 2002 to using $37,371,000 in 2003. In 2003,
proceeds from the sale of common stock totaled $59,788,000. Debt
proceeds, used to fund property acquisitions and additions, decreased
from $186,868,000 in 2002 to $54,907,000 in 2003. A major source of
financing in 2002 was $82,796,000 of proceeds from the sales of the
preferred and common stock, net of the repurchase of the Series B
preferred stock.
On February 2, 2004, the Board of Directors approved a dividend of
$.62 per share for the period from October 1, 2003 to December 31,
2003. This is the equivalent of an annual distribution of $2.48 per
share. The dividend is payable February 27, 2004 to shareholders of
record on February 17, 2004.
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.
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 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 (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 year ended December 31,
2003 are nineteen apartment community dispositions (seven and twelve
in 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, 2003 included herein.
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.
Off-Balance Sheet Investments
-----------------------------
The Company has investments in and advances to approximately 44
limited partnerships where the Company acts as the managing general
partner. The Company accounts for these investments on the equity
method of accounting, recording its share of the net income or loss
based upon the terms of the partnership agreement. To the extent that
it is determined that the limited partners cannot absorb their share
of the losses, if any, the general partner will record the limited
partners share of such losses. In addition, to the extent the Company
has outstanding loans or advances and the limited partner has no
remaining capital account, the Company will absorb such losses.
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 23 partnerships totaling approximately
$48,000,000. 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 10 years. In addition, acting as the general partner in
certain partnerships, the Company is obligated to advance funds to
meet partnership operating deficits. Should operating deficits
continue to occur, the Company would determine on an individual
partnership basis if it is in the best interest of the Company to
continue to fund these deficits.
The Company believes the properties operations conform to the
applicable requirements as set forth above and do not anticipate any
payment on the low income housing tax credit guarantees described
above.
In December 2002, the Company, including its equity affiliates,
determined that it would market for sale virtually all of the assets
associated with its interest in various affordable housing limited
partnerships. Such assets include the equity interest in the
affordable housing partnerships, loans, advances and management
contracts. The Company, including its equity affiliates, as described
in Note 3 to the Notes to Consolidated Financial Statements, recorded
impairment charges aggregating $14.2 million in the fourth quarter of
2002. Such charges principally relate to reducing recorded amounts of
the previously mentioned assets to their estimated fair values. In
addition, in 2002, the Company recorded charges aggregating
$3.8 million principally arising from the operating losses and other
charges directly associated with the performance of these affordable
properties due to the weak economy, which negatively affected the
properties' revenue and occupancy.
The Company is selling the assets in three phases. The status of the
phases are 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,
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, is 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.
During 2004, the Company is pursuing the sale of its general partner
interests in one additional affordable property (two partnerships)
with 1,072 units. It does not currently have a contract for this sale
but anticipates a possible closing in the third quarter of 2004. The
Company has guarantees to the partnerships for tax credits (totaling
$5.6 million) and to fund operating deficits. The property is
currently experiencing high vacancy. The regulatory agreement under
which the property operates requires a percentage of residents to meet
certain income qualifications. The Company has had difficulty renting
those regulatory units. The Company does not anticipate that the
operational outlook will improve prior to a sale. The Company funded
operating deficits amounting to $1.3 million in 2003 and expects to
continue to fund future operating deficits. The prior operating
advances are not an indicator of future cash requirements, and in
accordance with GAAP, the Company will record an impairment charge as
those 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 is a negative $725,000. The value
has been reduced below zero as a function of losses passed through to
the Company as general partner. Although the Company cannot accurately
estimate a price at this time, it is likely that the Company will have
to pay a third party to purchase its interest in this asset.
For 2003, 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 to reduce the value
of the assets held for sale in Phase III to fair market value. The
balance, or $1.8 million, represents impairments of cash advances
reflected in both "Equity in earnings (losses) of unconsolidated
affiliates" ($1.0 million) and "Impairment of assets held as general
partner" ($822,000). During the fourth quarter of 2002, the
anticipated losses in connection with the sale of these assets had
been reflected in the $14.2 million impairment.
These partnerships are funded with non-recourse financing. The
Company's proportionate share of non-recourse financing, based on its
legal ownership, was only $1,487,000 out of a total of $142,717,000 at
December 31, 2003. The Company has guaranteed a total of $594,000 of
debt associated with two of these partnerships. In addition, the
Company, including the Management Companies, has provided loans and
advances to certain of the partnerships aggregating $6,748,000, net of
impairment and other charges of $10,514,000 at December 31, 2003.
Prior to the Company's decision to sell these assets, the Company,
after recording its share of the underlying investments income or
loss, assessed the financial status and cash flow of each of the
partnerships at each balance sheet date in order to assess
recoverability of its investment in and advances to these affiliates.
Once the decision to dispose of such assets was made in December 2002,
the Company estimated the fair value of such loans and advances from a
potential buyer's perspective using estimated cash flows discounted at
a risk adjusted return.
Summarized balance sheet information relating to these partnerships is
as follows (amounts are in thousands):
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
======== ========
In January 2003, the FASB issued Interpretation No. 46 - 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"). In December 2003, the FASB reissued FIN 46R
with certain modifications and clarifications. Management is certain
that each of the limited partnerships in which it holds the general
partnership interest would be considered a VIE and the Company would
consolidate all or a certain number of the limited partnerships assets
and liabilities, all of which are summarized above.
Acquisitions and Dispositions
-----------------------------
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 internal rate of return
(IRR) during the Company's ownership for the properties sold was 9.5%.
In January 2004, the Company acquired four communities as part of a
portfolio with a total of 534 units in the New Jersey region. The
total purchase price of $64,200,000, including closing costs, equates
to approximately $120,000 per unit. Consideration for the properties
included $34,000,000 in assumed debt (fair market value of
$37,000,000), $11,9000,000 in Operating Partnership Units (fair market
value $12,1000,000), and $18,300,000 cash funded through the use of
the Company's line of credit. The expected first year cap rate for
this community is 6.2% (before a reserve for capital expenditures).
In March, 2004, the Company acquired a 240-unit community in
Frederick, Maryland. The total purchase price of $29,400,000,
including closing costs, equates to approximately $123,000 per
apartment unit. Management expects a 7.4% weighted average expected
first year capitalization rate on this acquisition. Consideration for
this property was funded through the use of the Company's line of
credit.
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 no amount outstanding at
December 31, 2003. The $1.4 billion in mortgage notes payable have
varying maturities ranging from 1 to 32 years. The principal payments
on the mortgage notes payable for the years subsequent to December 31,
2003, 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, 2003, 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."
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 2004. 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 2004 2005 2006 2007 2008 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt $1,380,696 $16,641 $14,984 $70,576 $172,324 $173,782 $ 932,389
Ground lease 1,190 70 70 70 70 70 840
Operating lease 7,421 1,333 1,314 1,015 973 975 1,811
Purchase obligations 17,631 14,908 1,580 839 246 56 2
---------- ------- ------- ------- -------- -------- ----------
Total* $1,406,938 $32,952 $17,948 $72,500 $173,613 $174,883 $ 935,042
========== ======= ======= ======= ======== ======== ==========
* 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 has the following guarantees or commitments relating to
its equity method partnership investments: a) guarantee for a total of
$594,000 of debt associated with two of the partnerships, b) guarantee
of the low income housing tax credits to the limited partners for a
period of either five or ten years in 23 partnerships totaling
approximately $48,000,000, and c) obligation to advance funds to meet
partnership operating deficits for certain partnerships. 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.
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 table below is a list of the items that management considers
recurring, non-revenue enhancing capital and maintenance expenditures
for a standard garden style apartment. Included are the per unit
replacement cost and the useful life that management estimates the
Company incurs on an annual basis.
Maintenance
Capitalized Expense Total
Capitalized Expenditure Cost per Cost per
Cost per Useful Per Unit Unit Unit
Category Unit Life(1) Per Year(2) Per Year(3) Per Year
-------- ---- ------- ----------- ----------- --------
Appliances $1,000 18 $ 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 2003, 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)
2003 2002
----------------------------------------------------------------------------- --------------------------
Recurring Non-Recurring Total Capital Total Capital
Cap Ex Per Unit(a) Cap Ex Per Unit(a) Improvements Per Unit(a) Improvements Per Unit(a)
------ ----------- ------------- ----------- ------------ ----------- ------------ -----------
New Buildings $ - $ - $1,859 $ 46 $ 1,859 $ 46 $ 3,833 $ 101
Major building improvements 3,696 91 17,689 436 21,385 527 20,567 542
Roof replacements 1,412 35 2,986 74 4,398 109 3,975 105
Site improvements 1,353 33 6,620 163 7,973 196 11,668 308
Apartment upgrades 2,666 66 32,228 794 34,894 860 35,983 949
Appliances 2,215 55 2,685 66 4,900 121 4,651 123
Carpeting/Flooring 6,953 171 5,334 131 12,287 302 11,331 299
HVAC/Mechanicals 2,048 50 11,491 283 13,539 333 12,633 333
Miscellaneous 910 24 2,573 63 3,483 87 3,661 95
------- ---- ------- ------ -------- ------ ---------- --------
Totals $21,253 $525 $83,465 $2,056 $104,718 $2,581 $ 108,302 $ 2,855
======= ==== ======= ====== ======== ====== ========== ========
(a) Calculated using the weighted average number of units outstanding,
including 35,936 core units, 2002 acquisition units of 4,280 and 2003
acquisition units of 386 for the year-ended December 31, 2003 and
35,936 core units and 2002 acquisition units of 1,994 for the
year-ended December 31, 2002.
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)
2003 2002
----------------------------------------------------------------------- --------------------------
Recurring Non-recurring Total Capital Total Capital
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
------ -------- ------ -------- ------------ -------- ------------ --------
Core Communities $ 18,810 525 $ 63,050 $ 1,755 $ 81,860 $ 2,280 $ 99,966 $ 2,782
2003 Acquisition Communities 202 525 103 267 305 792 - -
2002 Acquisition Communities 2,241 525 20,312 4,746 22,553 5,271 8,336 4,181
-------- ----- --------- ------- ---------- ------- -------- -------
Sub-total 21,253 525 83,465 2,056 104,718 2,581 108,302 2,855
2003 Disposed Communities 448 525 304 354 752 879 2,592 1,653
2002 Disposed Communities - - - - - - 1,163 1,624
Corporate office expenditures (1) - - - - 876 - 3,635 -
-------- ----- --------- ------- ---------- ------- -------- -------
$ 21,701 $ 525 $ 83,769 $ 2,021 $ 106,346 $ 2,546 $115,692 $ 2,786
======== ===== ========= ======= ========== ======= ======== =======
(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 2002 and 2003, 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 June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." The provisions of this statement are required to
be applied to all goodwill and other intangible assets. SFAS No. 142
became effective beginning January 1, 2002. The Company adopted this
pronouncement for the year ended December 31, 2002, and it did not
have a material impact on the Company's results on operations,
financial position or liquidity.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an entity to record a
liability for an obligation associated with the retirement of an asset
at the time the liability is incurred by capitalizing the cost as part
of the carrying value of the related asset and depreciating it over
the remaining useful life of that asset. The standard was effective
beginning January 1, 2003. The Company adopted this pronouncement for
the year ended December 31, 2003, and it did not have a material
impact on the Company's results on operations, financial position or
liquidity.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which addresses how and
when to measure the impairment on long-lived assets and how to account
for long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The
Company adopted SFAS No. 144 as of January 1, 2002. See Notes 2 and 15
for a discussion of the impact on the Company from the adoption of
SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145-- "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" which eliminates the requirement to report
gains and losses from extinguishment of debt as extraordinary unless
they meet the criteria of APB Opinion 30. This statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The new standard became effective for the Company
for the year ending December 31, 2003. Upon adoption, the Company
reclassified its previously reported early debt extinguishment charges
presented as an extraordinary item to inclusion within income from
operations. The Company adopted this pronouncement for the year ended
December 31, 2003, and it did not have a material impact on the
Company's results on operations, financial position or liquidity.
In June 2002, the FASB issued SFAS No. 146 - "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires
the recognition of a liability for costs associated with an exit or
disposal activity to be recorded at fair value when incurred. The
company's commitment to a plan, by itself does not create a present
obligation that meets the definition of a liability. The new standard
became effective for exit and disposal activities initiated after
December 31, 2002. The Company adopted this pronouncement for the year
ended December 31, 2003, and it did not have a material impact on the
Company's results on operations, financial position or liquidity.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") -
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including indirect guarantees of other (an interpretation of FASB No.
5, FASB No. 57, and FASB No. 107 and rescission of FASB Interpretation
No. 34). This interpretation elaborates on the disclosures to be made
by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
the guarantee. The disclosure requirements of this interpretation are
effective for financial statements of periods ending after December
15, 2002. The initial recognition and initial measurement provisions
of this interpretation were applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company
adopted this pronouncement for the year ended December 31, 2002, and
it did not have a material impact on the Company's results on
operations, financial position or liquidity.
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of
SFAS No. 123. This statement provides alternative methods of
transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation as
well as changing certain disclosure provisions. This statement also
amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about these effects in interim financial information.
Effective January 1, 2003, the Company adopted the fair value based
method of accounting for stock options in accordance with SFAS No.
123. In connection with the transition methods available, the Company
applied the Modified Prospective Method in adopting this
pronouncement. See footnote #2 to the financial statements for the
financial statement impact.
In January 2003, the FASB issued Interpretation No. 46 -
"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"). 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. The consolidation
requirements of this interpretation apply immediately to variable
interest entities created after January 31, 2003. In December 2003,
the FASB reissued FIN 46R with certain modifications and
clarifications. FIN 46R does not apply to VIE's created after February
1, 2003. The Company had no VIE's created subsequent to February 1,
2003. Management is certain that each of the limited partnerships in
which it holds the general partnership interest as of December 31,
2003 would be considered a VIE. The Company is determining where it is
the primary beneficiary, and as a result the Company may consolidate
all or a certain number of the limited partnership's assets and
liabilities.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement is effective for contracts entered into or modified after
June 30, 2003. The provisions of FAS 149 are not expected to have a
material impact on the Company's financial statements.
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. On October 29, 2003 the FASB
indefinitely deferred the provisions of paragraphs 9 and 10 of SFAS
150 as they apply to mandatorily redeemable noncontrolling interests.
This deferral applies to minority interest ownerships in limited
partnerships which are mandatorily redeemable upon termination of the
partnership and therefore is potentially applicable to the affordable
portfolio. This statement only applies to the Company if the limited
partnerships are consolidated under FIN 46R. If consolidated, the
Company will disclose the estimated buyback of minority interest.
Currently, the limited partnerships are not consolidated, and no
disclosure is necessary.
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.
In 2002 and continuing into 2003 many regions of the United States
have experienced varying degrees of economic recession and certain
recessionary trends, such as the cost of obtaining sufficient property
and liability insurance coverage, short-term interest rates, and a
temporary reduction in occupancy. 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.
Contingency
-----------
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk. At
December 31, 2003 and 2002, approximately 98% of the Company's debt
bore interest at fixed rates with a weighted average maturity of
approximately 8 years, and a weighted average interest rate of
approximately 6.47% and 6.50%, respectively, including the $25.2
million of debt for both years 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 2 years and 1 year,
respectively, and a weighted average interest rate of 2.32% and 2.83%,
respectively, at December 31, 2003 and 2002. 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, 2003 and 2002, the interest rate risk on $25.2 million
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 $25.2 million in variable rate mortgages to fixed rates
of 5.91%.
At December 31, 2003 and 2002, the fair value of the Company's fixed
rate debt, including the $25.2 million in debt for both years which
was swapped to a fixed rate, amounted to a liability of $1.5 billion
and $1.4 billion compared to its carrying amount of $1.4 billion and
$1.3 billion, respectively. The Company estimates that a 100 basis
point decrease in market interest rates at December 31, 2003 would not
change the fair value of the Company's fixed rate debt.
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, 2003, the Company had no
other material exposure to market risk.
Additional disclosure about market risk is incorporated herein by
reference to the discussion under the heading "Results of Operations"
in Item 7: Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed under Item
15(a) and filed as part of this report on the pages indicated.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
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 Company's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
The Chief Executive Officer and Chief Financial Officer as of the end
of the period covered by this report, evaluated the effectiveness of
the disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
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 the evaluation, or
that occurred during the fourth quarter of the year ended December 31,
2003, 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. Accordingly, no corrective actions have been
taken.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
---------
The Board of Directors (the "Board") currently consists of twelve
members, but is expected to consist of ten members following the 2004
Shareholders' Meeting since the two oldest members of the Board,
Burton S. August, Sr. and Albert H. Small, have decided not to stand
for re-election. The terms for all of the directors of Home Properties
expire at the 2004 Shareholders' Meeting.
The information sets forth, as of February 27, 2004, 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
---------------- --- ----------------
Burton S. August, Sr. 88 1994
William Balderston, III 76 1994
Alan L. Gosule 63 1996
Leonard F. Helbig, III 58 1994
Roger W. Kober 70 1994
Nelson B. Leenhouts 68 1993
Norman Leenhouts 68 1993
Edward J. Pettinella 52 2001
Albert H. Small 78 1999
Clifford W. Smith, Jr. 57 1994
Paul L. Smith 68 1994
Amy L. Tait 45 1993
Burton S. August, Sr. has been a director of the Company since August
1994 and has decided not to stand for re-election at the 2004
Shareholders' Meeting. Mr. August was a director from 1979 until 2003
of Monro Muffler Brake, Inc., a publicly traded company where he also
served as Vice President from 1969 until he retired in 1980. Mr.
August is Honorary Chairman of the Board of Trustees of Rochester
Institute of Technology, a member of the Executive Committee of the
United Way of New York State, a director of Hillside Children's Center
Foundation, a cabinet member of the Al Sigl Center, a member of the
Finance Committee of the United Way of Greater Rochester and the
Investment Committee of the Strong Museum, and a Trustee of the
Otetiana Council Boy Scouts of America.
William Balderston, III has been a director of the Company since
August 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 also a Trustee of the Genesee Country Village Museum, as
well as a member of the Board of the Genesee Valley Conservancy. Mr.
Balderston is a graduate of Dartmouth College.
Alan L. Gosule, has been a director of the Company since December
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 Boards of Directors of MFA Mortgage Investments,
Inc. and Colonnade Partners. 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. Clifford Chance US LLP acted as counsel to
PricewaterhouseCoopers LLP in its capacity as advisor to the State
Treasurer of the State of Michigan in connection with its investment
of retirement funds in Home Properties, Inc. (the "Operating
Partnership"). Mr. Gosule was the nominee of the State Treasurer under
the terms of the investment agreements relating to that transaction.
Those retirement funds divested their interest in Home Properties in
2001 and no longer have the right to nominate a board member. Mr.
Gosule, however, is expected to continue to serve as a nominee of the
Board of Directors.
Leonard F. Helbig, III has been a director of the Company since August
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 August 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 also 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
National Multi Housing Council. 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 director of Rochester Downtown Development Corporation and is
a member of the Board of Trustees of the University of Rochester and
Roberts Wesleyan College. 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 the United Way of Greater Rochester, The Lifetime
Healthcare Companies, State University at Geneseo, Geneseo Foundation,
Syracuse University School of Business and the YMCA of Greater
Rochester. Mr. Pettinella is a graduate of the State University at
Geneseo and holds an MBA Degree in finance from Syracuse University.
Albert H. Small has been a director of the Company since July 1999 and
has decided not to stand for re-election at the 2004 Shareholders'
Meeting. Mr. Small, who has been active in the construction industry
for 50 years, is President of Southern Engineering Corporation. Mr.
Small is a member of the Urban Land Institute, National Association of
Home Builders and currently serves on the Board of Directors of the
National Symphony Orchestra, National Advisory Board Music Associates
of Aspen, Department of State Diplomatic Rooms Endowment Fund, James
Madison Council of the Library of Congress, Tudor Place Foundation,
The Life Guard of Mount Vernon, Historical Society of Washington, D.C.
and the National Archives Foundation. Mr. Small is a graduate of the
University of Virginia. In connection with the acquisition of a
portfolio of properties located in the suburban markets surrounding
Washington, D.C., Mr. Small and others received approximately
4,086,000 of operating partnership units in the Operating Partnership.
Mr. Small was the nominee of the former owners of that portfolio under
the terms of the acquisition documents. Those former owners no longer
have the right to nominate a board member. Mr. Small is expected to
continue to serve as a nominee of the Board of Directors.
Clifford W. Smith, Jr. has been a director of the Company since August
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 August 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.
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, the Al Sigl Center, and the Center for
Governmental Research. 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, 2003, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners
were satisfied.
Audit Committee, Audit Committee Independence and Financial Expert
------------------------------------------------------------------
The information required by this item is incorporated herein by
reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on
May 4, 2004 under "Audit Committee." The proxy statement will be filed
within 120 days after the end of the Company's fiscal year.
Stockholder Nominations to Board
--------------------------------
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on
May 4, 2004 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, 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 five business
days the nature of the waiver in satisfaction of its disclosure
requirement under Item 10 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 and Governance and
Nominating Committees. The Guidelines and charters are available on
the Company's Web site, www.homeproperties.com, and by request
addressed to the Corporate Secretary at Home Properties, Inc., 850
Clinton Square, Rochester, New York 14604.
Item 11. Executive Compensation
- --------------------------------
The information required by this Item is incorporated herein by
reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of the Stockholders of the Company to be held
on May 4, 2004 under "Executive Compensation." The proxy statement
will be filed within 120 days after the end of the Company's fiscal
year.
Item 12. Securities Ownership of Certain Beneficial Owners and Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required by this Item, including Equity Compensation
Plan Information, is incorporated herein by reference to the Company's
proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 4, 2004 under "Security
Ownership of Certain Beneficial Owners and Management" and under
"Equity Compensation Plan Information." The proxy statement will be
filed within 120 days after the end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on
May 4, 2004 under "Certain Relationships and Transactions." The proxy
statement will be filed within 120 days after the end of the Company's
fiscal year.
Item 14. Principal Accounting Fees and Services
- ------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on
May 4, 2004 under "Report of the Audit Committee" and "Principal
Accounting Fees and Services." The proxy statement will be filed
within 120 days after the end of the Company's fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(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 Auditors F-2
Consolidated Balance Sheets
as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
Schedule III:
Real Estate and Accumulated Depreciation F-42
3. Exhibits
Exhibit
Number Exhibit
- ------ -------
2.1 Agreement among Home Properties of New York, Inc. and Philip J. Solondz, Daniel Solondz and Julia
Weinstein Relating to Royal Gardens I, together with Amendment No. 1
2.2 Agreement among Home Properties of New York, Inc and Philip Solondz and Daniel Solondz relating to
Royal Gardens II, together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Home Properties of New York between Home
Properties of New York, L.P. and Berger/Lewiston Associates Limited Partnership; Stephenson-Madison
Heights Company Limited Partnership; Kingsley- Moravian Company Limited Partnership; Woodland Garden
Apartments Limited Partnership; B&L Realty Investments Limited Partnership; Southpointe Square
Apartments Limited Partnership; Greentrees Apartments Limited Partnership; Big Beaver-Rochester
Properties Limited Partnership; Century Realty Investment Company Limited Partnership
2.24 Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Braddock Lee
Limited Partnership and Tower Construction Group, LLC
2.25 Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Park Shirlington
Limited Partnership and Tower Construction Group, LLC
2.27 Form of Contribution Agreement among Home Properties of New York, L.P. and Strawberry Hill Apartment
Company LLLP, Country Village Limited Partnership, Morningside Six, LLLP, Morningside North Limited
Partnership and Morningside Heights Apartment Company Limited Partnership with schedule setting forth
material details in which documents differ from form
2.29 Form of Contribution Agreement dated June 7, 1999, relating to the CRC Portfolio with schedule setting
forth material details in which documents differ from form
2.30 Form of Contribution Agreement relating to the Mid-Atlantic Portfolio with schedule setting forth
material details in which documents differ from form
2.31 Contribution Agreement among Home Properties of New York, L.P., Leonard Klorfine, Ridley Brook
Associates and the Greenacres Associates
2.33 Contribution Agreement among Home Properties of New York, L.P., Gateside-Bryn Mawr Company, L.P.,
Willgold Company, Gateside-Trexler Company, Gateside-Five Points Company, Stafford Arms,
Gateside-Queensgate Company, Gateside Malvern Company, King Road Associates and Cottonwood Associates
2.34 Form of 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 Form of Contribution Agreement between Deerfield Woods Venture Limited Partnership and Home Properties
of New York, L.P.
2.36 Form of Contribution Agreement between Macomb Apartments Limited Partnership and Home Properties of
New York, L.P.
2.37 Form of Contribution Agreement between Home Properties of New York, L.P. and Elmwood Venture Limited
Partnership
2.38 Form of Sale Purchase and Escrow Agreement between Bank of America as Trustee and Home Properties of
New York, L.P.
2.39 Form of 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 Form of Contribution Agreement between Hampton Glen Apartments Limited Partnership and Home Properties
of New York, L.P.
2.41 Form of Contribution Agreement between Home Properties of New York, L.P. and Axtell Road Limited
Partnership
2.42 Form of 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.
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
4.15 Director, Officer and Employee Stock Purchase and Loan 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 Deferral Compensation Plan
4.29 Amendment No. Two to Deferred Bonus Plan
10.1 Second Amended and Restated Agreement Limited Partnership of Home Properties of New York, L.P.
10.2 Amendments No. One through Eight to the Second Amended and Restated Agreement of Limited Partnership
of Home Properties of New York, L.P.
10.3 Articles of Incorporation of Home Properties Management, Inc.
10.4 By-Laws of Home Properties Management, Inc.
10.5 Articles of Incorporation of Conifer Realty Corporation
10.6 Articles of Amendment to the Articles of Incorporation of Conifer Realty Corporation Changing the name
to Home Properties Resident Services, Inc.
10.7 By-Laws of Conifer Realty Corporation (now, Home Properties Resident Services, Inc.)
10.8 Home Properties Trust Declaration of Trust, dated September 19, 1997
10.13 Indemnification Agreement between Home Properties of New York, Inc. and certain officers and directors
10.14 Indemnification Agreement between Home Properties of New York, Inc. and Richard J. Crossed
10.15 Indemnification Agreement between Home Properties of New York, Inc. and Alan L. Gosule
10.17 Agreement of Operating Sublease, dated October 1, 1986, among KAM, Inc., Morris Massry and Raintree
Island Associates, as amended by Letter Agreement Supplementing Operating Sublease dated October 1,
1986
10.18 Form of Term Promissory Note payable to Home Properties of New York, by officers and directors in
association with the Executive and Director Stock Purchase and Loan Program
10.19 Form of Pledge Security Agreement executed by officers and directors in connection with Executive and
Director Stock Purchase and Loan Program
10.20 Schedule of Participants, loan amounts and shares issued in connection with the Executive and Director
Stock Purchase and Loan Program
10.21 Subordination Agreement between Home Properties of New York, Inc. and The Chase Manhattan Bank
relating to the Executive and Director Stock Purchase and Loan Program
10.26 Amendment No. Nine to the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership
10.27 Master Credit Facility Agreement by and among Home Properties of New York, Inc., Home Properties of
New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership
doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp., dated as of August
28, 1998
10.28 First Amendment to Master Credit Facility Agreement, dated as of December 11, 1998 among Home
Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home
Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and
WMF Washington Mortgage Corp. and Fannie Mae
10.29 Second Amendment to Master Credit Facility Agreement, dated as of August 30, 1999 among Home
Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home
Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and
WMF Washington Mortgage Corp. and Fannie Mae
10.30 Amendments Nos. Ten through Seventeen to the Second Amended and Restated Limited Partnership Agreement
10.31 Amendments Nos. Eighteen through Twenty- Five to the Second Amended and Restated Limited Partnership
Agreement
10.32 Credit Agreement, dated 8/23/99 between Home Properties of New York, L.P., the Lenders, Party hereto
and Manufacturers and Traders Trust Company as Administrative Agent
10.33 Amendment No. Twenty-Seven to the Second Amended and Restated Limited Partnership Agreement
10.34 Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to the Second Amended and Restated Limited
Partnership Agreement
10.35 Registration Rights Agreement between Home Properties of New York, Inc. and GE Capital Equity
Investment, Inc., dated 9/29/99
10.36 Amendment to Partnership Interest Purchase Agreement and Exchange Agreement
10.37 2000 Stock Benefit Plan
10.39 Purchase Agreement between Home Properties of New York, Inc. and The Equitable Life Assurance Society
of the United States
10.41 Home Properties of New York, L.P. Amendment Number One to Executive Retention Plan
10.42 Amendments No. Thirty-One and Thirty-Two to the Second Amended and Restated Limited Partnership
Agreement
10.47 Employment Agreement between Home Properties of New York, L.P., Home Properties of New York Inc. and
Edward J. Pettinella, and Amendment No. One, thereto
10.49 Amendment No. Thirty Three to the Second Amended and Restated Limited Partnership Agreement
10.50 Amendment No. Thirty Five to the Second Amended and Restated Limited Partnership Agreement
10.51 Amendment No. Forty Two to the Second Amended and Restated Limited Partnership Agreement
10.52 Amendments Nos. Thirty Four, Thirty Six through Forty One, Forty Three and Forty Four to the Second
Amended and Restated Limited Partnership Agreement
10.53 Purchase and Sale Agreement among Home Properties of New York, L.P., Conifer Realty Corporation and
Conifer Realty LLC, and Amendments Nos. One and Two thereto.
10.57 Amendment Nos. Forty-Five through Fifty-One to the Second Amendment and Restated Limited Partnership
Agreement
10.58 Home Properties of New York, Inc. Amendment No. One to 2000 Stock Benefit Plan
10.59 Home Properties of New York, Inc. Amendment No. Two to 2000 Stock Benefit Plan
10.60 Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended and Restated Limited Partnership Agreement
10.61 Amendment Nos. Fifty-Six to Fifty-Eight to the Second Amended and Restated Limited Partnership
Agreement
10.62 Amendment No. Two to Credit Agreement
10.63 Purchase and Sale Agreement, dated as of January 1, 2004 among Home Properties of New York, L.P., Home
Properties Management, Inc. and Home Leasing, LLC, dated January 1, 2004
10.64 Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Amended and Restated Limited Partnership
Agreement
10.65 Home Properties of New York, Inc. Amendment No. Three to 2000 Stock Benefit Plan
10.66 Employment Agreement, dated as of October 28, 2003 between Home Properties, L.P., Home Properties,
Inc., and Nelson B. Leenhouts
10.67 Employment Agreement, dated as of October 28, 2003 between Home Properties, L.P., Home Properties,
Inc. and Norman B. Leenhouts
10.68 Home Properties of New York, Inc. 2003 Stock Benefit Plan
10.69 Amendment Number Two to Home Properties of New York, Inc. and Home Properties of New York, L.P.
Executive Retention Plan
11 Computation of Per Share Earnings Schedule
14.1 Home Properties of New York, Inc. Code of Ethics for Senior Finance Officers
14.2 Home Properties of New York, Inc. Code of Business Conduct and Ethics
21 List of Subsidiaries of Home Properties of New York, 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, 2003.
(b) Reports on Form 8-K
- Form 8-K was furnished on October 31, 2003, as amended by Form
8-K/A furnished on November 5, 2003, with respect to Item 12
Results of Operations and Financial Conditions, furnishing
disclosures regarding the Registrant's press release, dated
October 31, 2003, relating to third quarter 2003 results. The
Form 8-K/A furnished the supplemental information to the
Registrant's press release.
- Form 8-K was filed on October 29, 2003, with respect to Item 5
disclosures regarding the Registrant's press release, dated
October 29, 2003, announcing the appointment of Edward J.
Pettinella as President and Chief Executive Officer of the
Registrant effective January 1, 2004. The Registrant also
reported that the Board of Directors granted each of Nelson and
Norman Leenhouts restricted stock awards having an approximate
value of $2.5 million each. Finally, the Registrant reported that
it had agreed in principle that, on January 1, 2004, the
commercial property management division of the Registrant will be
sold to Home Leasing LLC.
- Form 8-K was furnished on February 6, 2004, as amended by Form
8-K/A furnished on February 11, 2004, with respect to Item 12
Results of Operations and Financial Conditions, furnishing
disclosures regarding the Registrant's press release, dated
February 6, 2004, relating to fourth quarter 2003 results. The
Form 8-K/A furnished the supplemental information to the
Registrant's press release.
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 10, 2004
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 10, 2004
Edward J. Pettinella
/s/ David P. Gardner Executive Vice President, Chief Financial March 10, 2004
David P. Gardner Officer (Principal Financial and
Accounting Officer)
/s/ Robert J. Luken Senior Vice President, Chief Financial Analyst March 10, 2004
Robert J. Luken and Treasurer
/s/ Joseph M. Stafford Vice President and Controller March 10, 2004
Joseph M. Stafford
/s/ Norman P. Leenhouts Director, Co-Chairman of the Board of Directors March 10, 2004
Norman P. Leenhouts
/s/ Nelson B. Leenhouts Director, Co-Chairman of the Board of Directors March 10, 2004
Nelson B. Leenhouts
/s/ Burton S. August, Sr. Director March 10, 2004
Burton S. August, Sr.
/s/ William Balderston, III Director March 10, 2004
William Balderston, III
/s/ Alan L. Gosule Director March 10, 2004
Alan L. Gosule
/s/ Leonard F. Helbig, III Director March 10, 2004
Leonard F. Helbig, III
/s/ Roger W. Kober Director March 10, 2004
Roger W. Kober
/s/ Albert H. Small Director March 10, 2004
Albert H. Small
/s/ Clifford W. Smith, Jr. Director March 10, 2004
Clifford W. Smith, Jr.
/s/ Paul L. Smith Director March 10, 2004
Paul L. Smith
/s/ Amy L. Tait Director March 10, 2004
Amy L. Tait
HOME PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets
as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
Schedule III:
Real Estate and Accumulated Depreciation F-42
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Report of Independent Auditors
To the Board of Directors and Shareholders of
Home Properties, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) and (2) present fairly, in all material respects,
the financial position of Home Properties, Inc. and its subsidiaries at December
31, 2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003 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 schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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.
As discussed in Notes 2 and 15 to the consolidated financial statements, in
2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2004
HOME PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 and 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
---- ----
ASSETS
Real estate:
Land $ 387,655 $ 376,998
Buildings, improvements and equipment 2,365,337 2,220,280
---------- ----------
2,752,992 2,597,278
Less: accumulated depreciation (330,062) (257,284)
---------- ----------
Real estate, net 2,422,930 2,339,994
Cash and cash equivalents 5,103 8,782
Cash in escrows 39,660 45,735
Accounts receivable 4,437 7,576
Prepaid expenses 18,184 19,046
Investment in and advances to affiliates 5,253 19,475
Deferred charges 9,057 9,093
Other assets 8,693 6,565
---------- ----------
Total assets $2,513,317 $2,456,266
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,380,696 $1,300,807
Line of credit - 35,000
Accounts payable 13,178 19,880
Accrued interest payable 7,013 6,612
Accrued expenses and other liabilities 18,959 12,412
Security deposits 21,664 22,252
---------- ----------
Total liabilities 1,441,510 1,396,963
---------- ----------
Commitments and contingencies
Minority interest 330,544 333,061
---------- ----------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares
issued and outstanding at December 31, 2003 and 2002, respectively 60,000 60,000
Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares
authorized; 250,000 and 1,086,800 shares issued and outstanding at
December 31, 2003 and 2001, respectively 25,000 107,680
Common stock, $.01 par value; 80,000,000 shares authorized; 31,966,240 and
27,027,003 shares issued and outstanding at December 31, 2003 and 2002,
respectively 320 270
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 785,710 649,489
Accumulated other comprehensive (loss) ( 542) ( 972)
Distributions in excess of accumulated earnings (128,910) (89,452)
Officer and director notes for stock purchases ( 315) ( 773)
---------- ----------
Total stockholders' equity 741,263 726,242
---------- ----------
Total liabilities and stockholders' equity $2,513,317 $2,456,266
========== ==========
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, 2003, 2002, AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002 2001
---- ---- ----
Revenues:
Rental income $413,920 $369,029 $326,416
Property other income 15,698 14,212 12,649
Interest and dividend income 460 1,238 2,828
Other income 4,426 1,977 2,215
---------- ---------- ----------
Total Revenues 434,504 386,456 344,108
---------- ---------- ----------
Expenses:
Operating and maintenance 188,523 160,628 143,095
General and administrative 22,607 12,649 10,542
Interest 85,110 75,482 64,209
Depreciation and amortization 78,702 65,078 60,799
Prepayment penalties 1,610 3,275 116
Impairment of assets held as General Partner 2,518 3,533 -
---------- ---------- ----------
Total Expenses 379,070 320,645 278,761
---------- ---------- ----------
Income from operations 55,434 65,811 65,347
Equity in earnings (losses) of unconsolidated affiliates ( 1,892) ( 17,493) 123
---------- ---------- ----------
Income before minority interest, discontinued operations and
extraordinary item 53,542 48,318 65,470
Minority interest 14,990 10,937 19,961
---------- ---------- ----------
Income from continuing operations 38,552 37,381 45,509
---------- ---------- ----------
Discontinued operations
Income from operations, net of $361, $1,289, $2,688 in 2003,
2002 and 2001 allocated to minority interest, respectively 656 2,064 3,741
Gain on disposition of property, net of $1,359 and $3,459 in
2003 and 2002 allocated to minority interest 2,599 5,696 -
---------- ---------- ----------
Discontinued operations 3,255 7,760 3,741
---------- ---------- ----------
Income before gain (loss) on sale of property 41,807 45,141 49,250
Gain (loss) on sale of property, net of ($4), ($154), and
$10,985 in 2003, 2002, and 2001 allocated to minority
interest ( 9) ( 202) 15,256
---------- ---------- ----------
Net income 41,798 44,939 64,506
Preferred dividends ( 11,340) ( 14,744) ( 17,681)
Premium on Series B preferred stock repurchase - ( 5,025) -
---------- ---------- ----------
Net income available to common shareholders $ 30,458 $ 25,170 $ 46,825
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ .93 $ .67 $1.95
Discontinued operations .11 .30 .17
---------- ---------- ----------
Net income available to common shareholders $1.04 $ .97 $2.12
========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $ .92 $ .66 $1.94
Discontinued operations .11 .30 .17
---------- ---------- ----------
Net income available to common shareholders $1.03 $ .96 $2.11
========== ========== ==========
Weighted average number of shares outstanding:
Basic 29,208,242 26,054,535 22,101,027
========== ========== ==========
Diluted 29,575,660 26,335,316 22,227,521
========== ========== ==========
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, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Officer/
Preferred Distributions Accumulated Director
Stock at Common Stock Additional in Excess of Other Notes for
Liquidation --------------- Paid-In Accumulated Comprehensive Stock
Preference Shares Amount Capital Earnings Income Purchase
---------- ------ ------ ------- -------- ------ --------
Balance, January 1, 2001 $149,000 21,565,681 $216 $483,453 ($ 53,517) - ($9,624)
Issuance of common stock, net 1,448,815 14 38,920
Conversion of preferred stock for
common stock (35,000) 1,666,667 17 34,983
Payments on notes for stock purchase 1,812
Interest receivable on notes for stock purchase 195
Net income 64,506
Change in fair value of hedge instruments,
net of minority interest ($ 532)
Conversion of UPREIT Units for stock 83,692 1 1,909
Purchase and retirement of treasury stock (754,000) ( 8) ( 20,613)
Adjustment of minority interest 33,621
Preferred dividends ( 17,681)
Dividends paid ($2.31 per share) ( 51,076)
------- ---------- ---- -------- --------- ----- --------
Balance, December 31, 2001 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 1,689,840 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 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)
======= ========== ==== ======== ========= ===== ========
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, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
---- ---- ----
Net income $41,798 $44,939 $64,506
------- ------- -------
Other comprehensive income (loss):
Cumulative effect of accounting change (Note 11) - - ( 339)
Change in fair value of hedged instruments 430 440) ( 193)
------- ------- -------
Other comprehensive loss, net of minority interest 430 440) ( 532)
------- ------- -------
Net comprehensive income $42,228 $44,499 $63,974
======= ======= =======
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, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 41,798 $ 44,939 $ 64,506
-------- -------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in (earnings) losses of unconsolidated affiliates 1,892 17,493 ( 123)
Income allocated to minority interest 16,706 15,531 33,634
Depreciation and amortization 80,915 68,799 65,521
Impairment of assets held as General Partner 2,518 3,533 -
Impairment of real property 423 1,565 -
Gain on disposition of property and business ( 3,945) ( 8,799) ( 26,241)
Prepayment penalties 1,610 3,275 116
Changes in assets and liabilities:
Other assets 3,644 ( 3,160) 1,564
Accounts payable and accrued liabilities 156 711 9,528
-------- -------- --------
Total adjustments 103,919 98,948 83,999
-------- -------- --------
Net cash provided by operating activities 145,717 143,887 148,505
-------- -------- --------
Cash flows used in investing activities:
Purchase of properties and other assets, net of mortgage
notes assumed and UPREIT Units issued (66,760) (267,940) (126,385)
Additions to properties (106,346) (115,692) (130,468)
Advances to affiliates (3,410) ( 11,748) ( 15,257)
Payments on advances to affiliates 6,990 16,120 17,558
Proceeds from sale of affordable properties, net 3,835 - -
Proceeds from sale of properties and business, net 53,666 84,079 115,446
-------- -------- --------
Net cash used in investing activities (112,025) (295,181) (139,106)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net - 58,098 -
Proceeds from sale of common stock, net 59,788 54,090 38,936
Repurchase of Series B preferred stock - ( 29,392) -
Purchase of treasury stock - - ( 20,621)
Purchase of UPREIT Units - - ( 11,899)
Proceeds from mortgage notes payable 130,259 346,525 132,397
Payments of mortgage notes payable ( 75,352) (159,657) ( 72,629)
Prepayment penalties ( 1,610) ( 3,275) ( 116)
Proceeds from line of credit 186,000 281,000 171,500
Payments on line of credit (221,000) (278,500) (139,000)
Payments of deferred loan costs ( 1,498) ( 4,866) ( 2,086)
Withdrawals from (additions to) cash escrows, net 6,075 ( 6,505) ( 2,554)
Repayment of officer and director loans 458 6,844 2,007
Dividends and distributions paid (120,491) (115,005) (105,064)
-------- -------- --------
Net cash provided by (used in) financing activities ( 37,371) 149,357 ( 9,129)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ( 3,679) ( 1,937) 270
Cash and cash equivalents:
Beginning of year 8,782 10,719 10,449
-------- -------- --------
End of year $ 5,103 $ 8,782 $ 10,719
======== ======== ========
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 and Midwestern United States. The Company
conducts its business through Home Properties of New York, L.P. (the
"Operating Partnership"), a New York limited partnership. As of December
31, 2003, the Company operated 197 apartment communities with 48,080
apartments. Of this total, the Company owned 147 communities, consisting of
40,946 apartments, managed as general partner 44 partnerships that owned
4,832 apartments, and fee managed 2,302 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 66.7% (62.6% at December 31, 2002) partnership 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 33.3% (37.4% at December 31, 2002) 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.
The Company accounts for its investment as managing general partner ("GP")
in unconsolidated affordable housing limited partnerships ("LP") using the
equity method of accounting. As managing GP of the LP, the Company has the
ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective
partnership agreements, participation in policy-making processes, and the
employment of its management personnel. However, the Company does not have
a controlling interest in the respective LPs. The limited partners have
significant rights, such as the right to replace the general partner (for
cause) and the right to approve the sale or refinancing of the assets of
the respective partnership in accordance with the partnership agreement.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 ORGANIZATION AND BASIS OF PRESENTATION (Continued)
The Company records its allocable share of the respective partnership's
income or loss based on the terms of the entity's partnership 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. In
addition to the extent the Company has outstanding loans or advances and
the limited partner has no remaining capital account, the Company will
absorb such losses.
Reclassifications
-----------------
Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements to conform to the 2003 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 costs are capitalized until construction is
substantially complete. There was $920, $960, and $520 of interest
capitalized in 2003, 2002 and 2001, respectively. Salaries and related
costs capitalized for the years ended December 31, 2003, 2002 and 2001 were
$1,158, $1,446, and $1,341, 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
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)
-----------------------
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.
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.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate (Continued)
-----------------------
The 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 $78,473, $64,941 and $60,593 from continuing operations and
$714, $2,669 and $4,091 from discontinued operations for the years ended
December 31, 2003, 2002 and 2001, 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.
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 $3,212 and
$2,451, as of December 31, 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)
Intangible Assets
-----------------
Intangible assets of $2,510 and $3,562 at December 31, 2003 and 2002,
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 $893 and $801 as of December 31, 2003 and 2002,
respectively. Amortization expense was $92, $135, and $204 for the years
ended December 31, 2003, 2002 and 2001, 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 2003, in
connection with the sale of the assets associated with the general
partnership interests in certain affordable housing limited partnerships,
the Company sold $1,284 of intangible assets. 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.
Property management fees are recognized when earned based on a contractual
percentage of net monthly cash collected on rental income.
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.
Advertising
-----------
Advertising expenses are charged to operations during the year in which
they were incurred. Advertising expenses incurred and charged to operations
were approximately $7,128, $5,980, and $5,240 from continuing operations,
and $100, $261, and $484 from discontinued operations, for the years ended
December 31, 2003, 2002 and 2001, 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)
Insurance Settlement
--------------------
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, 2003, 2002 and 2001, 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 $432
million and $401 million at December 31, 2003 and 2002, respectively.
The following table reconciles net income to taxable income for the years
ended December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Net income $41,798 $44,939 $64,506
Add back: Net loss of taxable REIT Subsidiaries
included in net income above 2,534 10,627 -
------- ------- -------
Deduct: Net income of taxable REIT subsidiaries
included in net income above - - ( 20)
------- ------- -------
Net income from REIT operations 44,332 55,566 64,486
Add: Book depreciation and amortization 55,570 39,214 38,034
Less: Tax depreciation and amortization ( 63,110) ( 44,307) (39,193)
Book/tax difference on gains/losses from capital
transactions 2,754 ( 4,237) ( 4,729)
Other book/tax differences, net 4,895 ( 6,171) ( 1,596)
------- ------- -------
Adjusted taxable income subject to 90% REIT dividend
requirement $44,441 $40,065 $57,002
======= ======= =======
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 $8,394 and $6,721 as of December 31, 2003 and 2002,
respectively (the 2002 amount was included in the unconsolidated Management
Companies). 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 $8,185 and $6,515 for the years ended
December 31, 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)
Earnings Per Share (Continued)
------------------------------
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.
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, 2003, 2002 and 2001, is
as follows:
2003 2002 2001
---- ---- ----
Income from continuing operations $38,552 $37,381 $45,509
Add: Gain (loss) on sale of property, net of minority
interest ( 9) ( 202) 15,256
Less: Preferred dividends ( 11,340) ( 14,744) ( 17,681)
Less: Premium on Series B preferred stock repurchase - ( 5,025) -
---------- ---------- ----------
Basic and Diluted - Income from continuing operations
applicable to common shareholders $27,203 $17,410 $43,084
========== ========== ==========
Basic weighted average number of shares
outstanding 29,208,242 26,054,535 22,101,027
Effect of dilutive stock options 367,418 280,781 126,494
---------- ---------- ----------
Diluted weighted average number of shares
outstanding 29,575,660 26,335,316 22,227,521
========== ========== ==========
Basic earnings per share data:
Income from continuing operations $ .93 $ .67 $ 1.95
Discontinued operations .11 .30 .17
---------- ---------- ----------
Net income available to common shareholders $ 1.04 $ .97 $ 2.12
========== ========== ==========
Diluted earnings per share data:
Income from continuing operations $ .92 $ .66 $ 1.94
Discontinued operations .11 .30 .17
---------- ---------- ----------
Net income available to common shareholders $ 1.03 $ .96 $ 2.11
========== ========== ==========
Unexercised stock options to purchase 641,550, 669,090, and 1,732,656
(including warrants to purchase 525,000 shares issued with the Series C and
E Preferred Stock issuances for 2001) 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, 2002 and 2001,
respectively. For the year ended December 31, 2003, the 2,019,674 common
stock equivalents on an as-converted basis of the Series C, D and E
Convertible Cumulative Preferred Stock has an antidilutive effect and is
not included in the computation of diluted EPS. For the years ended
December 31, 2002 and 2001, there were 4,123,533 and 7,112,381,
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.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock Based Employee Compensation
---------------------------------
Effective January 1, 2003, the Company adopted the fair value based method
of accounting for stock options in accordance with SFAS No. 123. The
Company applied the modified-prospective approach in adopting SFAS No. 123
in conformity with the transition provisions of SFAS No. 148 - Accounting
for Stock-Based Compensation - Transition and Disclosure, an Amendment of
SFAS No. 123. Under this approach, the Company recognizes stock-based
employee compensation cost from the beginning of the fiscal year in which
the recognition provisions are first applied as if the fair value based
accounting method in this Statement had been used to account for all
employee awards granted, modified, or settled in fiscal years beginning
after December 15, 1994. For 2003, total compensation costs recognized by
the Company on its stock options and restricted stock, including $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 $6,341. 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 exceeds 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:
2002 2001
---- ----
Net income, as reported $44,939 $64,506
Total stock compensation cost recognized 241 96
Total stock compensation cost if SFAS 123 had been adopted (1,143) (930)
Minority interest for net stock compensation cost 343 349
--- ------- -------
Proforma net income if SFAS 123 had been adopted $44,380 $64,021
======= =======
Per share data:
Basic - as reported $ 0.97 $ 2.12
======= =======
Basic - proforma $ 0.94 $ 2.10
======= =======
Diluted - as reported $ 0.96 $ 2.11
======= =======
Diluted - proforma $ 0.93 $ 2.08
======= =======
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 2003, 2002 and 2001:
dividend yields ranging from 8.07% to 9.40%; expected volatility of 19.00%;
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 4.29% to 6.87%.
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
-----------------------------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The provisions of this statement are required to be applied to all
goodwill and other intangible assets. SFAS No. 142 became effective
beginning January 1, 2002. The Company adopted this pronouncement for the
year ended December 31, 2002, and it did not have a material impact on the
Company's results on operations, financial position or liquidity.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an entity to record a
liability for an obligation associated with the retirement of an asset at
the time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. The standard was effective beginning January 1,
2003. The Company adopted this pronouncement for the year ended December
31, 2003, and it did not have a material impact on the Company's results on
operations, financial position or liquidity.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which addresses how and when
to measure the impairment on long-lived assets and how to account for
long-lived assets that an entity plans to dispose of either through sale,
abandonment, exchange, or distribution to owners. The Company adopted SFAS
No. 144 as of January 1, 2002. See Notes 2 and 15 for a discussion of the
impact on the Company from the adoption of SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145-- "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" which eliminates the requirement to report gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria of APB Opinion 30. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The new
standard became effective for the Company for the year ending December 31,
2003. Upon adoption, the Company reclassified its previously reported early
debt extinguishment charges, which had been presented as an extraordinary
item to inclusion within income from operations. The Company adopted this
pronouncement for the year ended December 31, 2003, and it did not have a
material impact on the Company's results on operations, financial position
or liquidity.
In June 2002, the FASB issued SFAS No. 146 - "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires the
recognition of a liability for costs associated with an exit or disposal
activity to be recorded at fair value when incurred. The company's
commitment to a plan, by itself, does not create a present obligation that
meets the definition of a liability. The new standard became effective for
exit and disposal activities initiated after December 31, 2002. The Company
adopted this pronouncement for the year ended December 31, 2003, and it did
not have a material impact on the Company's results on operations,
financial position or liquidity.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") -
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including indirect guarantees of other (an interpretation of FASB No. 5,
FASB No. 57, and FASB No. 107 and rescission of FASB interpretation No.
34). This interpretation elaborates on the disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
disclosure requirements of this Interpretation were effective for financial
statements of periods ending after December 15, 2002. The initial
recognition and initial measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company adopted this pronouncement for the year
ended December 31, 2003, and it did not have a material impact on the
Company's results on 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 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of SFAS No. 123.
This statement provides alternative methods of transition for an entity
that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation as well as changing certain disclosure
provisions. This statement also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about these effects in interim
financial information. Effective January 1, 2003, the Company adopted the
fair value based method of accounting for stock options in accordance with
SFAS No. 123. See the Company's policy on Stock Based Compensation included
within this footnote and Note 9 for a discussion of the impact on the
Company from the adoption of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46 - "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"). 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. The consolidation requirements of this
interpretation apply immediately to variable interest entities created
after January 31, 2003. In December 2003, the FASB reissued FIN 46R with
certain modifications and clarifications. FIN 46R does not apply to VIE's
created after February 1, 2003. The Company had no VIE's created subsequent
to February 1, 2003. Therefore it is effective on March 31, 2004 for the
Company. Management is certain that each of the limited partnerships in
which it holds the general partnership interest as of December 31, 2003
would be considered a VIE. The Company is determining where it is the
primary beneficiary, and as a result the Company may consolidate all or a
certain number of the limited partnership's assets and liabilities.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003. The provisions of
FAS 149 are not expected to have a material impact on the Company's
financial statements.
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. On October 29, 2003 the
FASB indefinitely deferred the provisions of paragraphs 9 and 10 of SFAS
150 as they apply to mandatorily redeemable noncontrolling interests. This
deferral applies to minority interest ownerships in limited partnerships
which are mandatorily redeemable upon termination of the partnership and
therefore is potentially applicable to the affordable portfolio. This
statement only applies to the Company if the limited partnerships are
consolidated under FIN 46R. If consolidated, the Company will disclose the
estimated buyback of minority interest. Currently, the limited partnerships
are not consolidated and no disclosure is necessary.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has investments in and advances to approximately 44 limited
partnerships where the Company acts as the managing general partner. In
addition, there are investments in other affiliated entities (see Note 4).
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 three years ended December 31, 2003 2002,
and 2001.
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 2001
---- ---- ----
Operations:
Gross revenues $ 43,586 $47,468 $46,972
Operating expenses ( 30,275) ( 29,994) ( 29,704)
Mortgage interest expense ( 11,266) ( 11,914) ( 11,529)
Depreciation and amortization ( 14,872) ( 13,503) ( 13,606)
--------- --------- --------
Net loss ($ 12,827) ($ 7,943) ($ 7,867)
========= ========= ========
Company's share [included in equity in earnings (losses)
of unconsolidated affiliates]* ($ 921) ($ 1,171) $ 62
========= ========= =======
* 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.
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
======= =======
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 INVESTMENT IN AND ADVANCES TO AFFILIATES (Continued)
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 $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:
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3 INVESTMENT IN AND ADVANCES TO AFFILIATES (Continued)
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 Affiliates 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"
In January 2003, the FASB issued Interpretation No. 46 - 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").
In December 2003, the FASB reissued FIN 46R with certain modifications and
clarifications. Management is certain that the application of FIN 46 will
result in a determination that the limited partnerships in which it holds
an equity investment (as GP) are VIE's and that it is the primary
beneficiary. This would require the Company to consolidate all of the
limited partnerships assets and liabilities. The interpretation becomes
effective in the first quarter of 2004. The summarized financial
information for all such limited partnerships is presented in the table
above.
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 2001
---- ---- ----
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) $ 62
-------- -------- -----
Company direct EITF 99-10 advance losses (Note 3) ( 971) - -
-------- -------- -----
Equity in earnings (losses) of unconsolidated Management
Companies (footnote 4) ( 16,322) 61 -
-------- -------- -----
($ 1,892) ($17,493) $ 123
-------- -------- -----
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 and 2001, is summarized as
follows:
2002 2001
---- ----
Management fees $ 2,864 $ 3,397
Interest income 867 1,627
General and administrative ( 3,850) ( 3,244)
Interest expense ( 734) ( 1,390)
Other expenses ( 767) ( 330)
Impairment and other charges ( 14,891)
-------- --------
-
Net income (loss) ($16,511) $ 60
======== ========
Equity in earnings (losses) of unconsolidated affiliates ($16,322) $ 61
======== ========
Equity in earnings (losses) of unconsolidated affiliates,
after minority interest ($10,188) $ 36
======== ========
Total assets $18,468 $ 38,602
======== ========
Total liabilities $12,741 $ 16,296
======== ========
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).
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4 MANAGEMENT COMPANIES (Continued)
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.
5 MORTGAGE NOTES PAYABLE
The Company's mortgage notes payable are summarized as follows:
2003 2002
---- ----
Fixed rate mortgage notes payable $1,350,056 $1,279,752
Variable rate mortgage notes payable 30,640 21,055
---------- ----------
Total mortgage notes payable $1,380,696 $1,300,807
========== ==========
Mortgage notes payable are collateralized by certain apartment communities
and mature at various dates from July 2004, through June 2036. The weighted
average interest rate of the Company's variable rate notes and credit
facility was 2.32% and 2.83% at December 31, 2003 and 2002, respectively.
The weighted average interest rate of the Company's fixed rate notes was
6.47% and 6.50% at December 31, 2003 and 2002, respectively.
Principal payments on the mortgage notes payable for years subsequent to
December 31, 2003 are as follows:
2004 $ 16,641
2005 14,984
2006 70,576
2007 172,324
2008 173,782
Thereafter 932,389
-------
$1,380,696
==========
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 $1,463,499 and $1,383,655, at December
31, 2003 and 2002, respectively.
Prepayment penalties of approximately $1,610, $3,275, and $116 were
incurred for the years ended December 31, 2003, 2002 and 2001,
respectively. For 2003 the prepayment penalties were incurred in connection
with the sale of property, whereas in 2002 and 2001 the Company incurred
such penalties on certain debt restructurings. During 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. The 2001 repayments on eight debt instruments totaled $51,969 and
were refinanced by eleven new borrowings in excess of $131,370. HOME
PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6 LINE OF CREDIT
As of December 31, 2003, the Company had an unsecured line of credit of
$115 million with no balance outstanding. 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 1.15% over the one-month LIBOR
rate. Accordingly, increases in interest rates will increase the Company's
interest expense on any outstanding balances and as a result would effect
the Company's results of operations and financial condition. The line of
credit expires on September 1, 2005. The LIBOR interest rate was 1.15% at
December 31, 2003. 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.
During the fourth quarter of 2003 and 2002, the funds from operations
payout ratio was 91% and 94%, respectively, when measured for the calendar
years. 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. Waivers have been granted by the participating banks for each of the
charges incurred in 2003 and 2002 as indicated above.
7 MINORITY INTEREST
Minority interest in the Company relates to the interest in the Operating
Partnership 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.
The changes in minority interest for the three years ended December 31 are
as follows:
2003 2002 2001
---- ---- ----
Balance, beginning of year $333,061 $341,854 $371,544
Issuance of UPREIT Units associated with
property acquisitions 4,806 11,522 19,133
Issuance of UPREIT units associated with 1031
exchange transaction 2,400 - -
Adjustment between minority interest and
stockholders' equity 20,006 7,208 ( 33,621)
Exchange of UPREIT Units for Common Shares ( 7,432) ( 4,411) ( 1,910)
Repurchase of UPREIT Units - - ( 10,233)
Net income 16,706 15,531 33,634
Accumulated other comprehensive loss 232 ( 260) ( 388)
Distributions ( 39,235) ( 38,383) ( 36,305)
-------- -------- --------
Balance, end of year $330,544 $333,061 $341,854
======== ======== ========
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock
---------------
On December 22, 1999, the holder of the Class A limited partnership
interests converted its ownership to 9% Series A convertible cumulative
preferred stock ("Series A Preferred Shares"), liquidation preference of
$21.00 per Common Share, total shares outstanding of 1,666,667. The
conversion to preferred stock occurred at the Company's request and permits
the Operating Partnership to continue to use favorable tax depreciation
methods. The Series A Preferred Shares were convertible at any time by the
holder on a one-for-one basis into Common Shares. On November 28, 2001, the
Series A Preferred Shares were converted to common shares. The conversion
had no effect on reported results of operations.
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 are 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 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. The Company had determined that the Series B Preferred
Shares contained certain contingent provisions that could cause such shares
to be redeemable at the option of the holder and has presented this class
of preferred stock outside of stockholders' equity. 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 are
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.
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)
---------------------------
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 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.
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, 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
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
------------------------
in the stock repurchase program. During 2003 and 2002, there were no shares
or UPREIT Units 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.
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, Stock Purchase, Resident Stock
Purchase and Employee Stock Purchase Plan (the "DRIP" ). The DRIP provides
the stockholders, employees and residents of the Company an opportunity to
automatically invest their cash dividends at a discount of 2% from the
market price. In addition, eligible participants may make monthly or other
voluntary cash investments, also typically at a discount, which has varied
between 2% and 3% from the market price, in shares of common stock. In
response to a perceived dilution from issuing new shares at or below the
underlying net asset value, effective April 10, 2001, the DRIP was amended
to reduce the share purchase discount from the current market price from 3%
to 2%. The maximum amount that can be invested without the Company's prior
permission was also reduced from $5,000 to $1,000. A total of $30 million,
$27 million, and $32 million was raised through this program during 2003,
2002 and 2001, 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 allows the Company to loan, on a recourse basis, the
participants up to 100% of the purchase price (50% for non-employee
directors).
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8 PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
Officer/Director Notes for Stock Purchases and Stock Purchase and Loan Plan
---------------------------------------------------------------------------
(Continued)
-----------
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.
At December 31, 2003, there are outstanding loans aggregating $315 under
the officer and director share purchase program. 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.
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 $2.45 distribution per common share (CUSIP 437306103) and a
$2.25 distribution per 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, 2003, 2002 and 2001, 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
------ ------------------------------------------------
20%
Ordinary Long-Term Unrecaptured
Declaration Record Payable Distributions Taxable Return of Capital Sec. 1250
Dates Dates Dates Per Share Dividend Capital Gain Gain
----- ----- ----- --------- -------- ------- ---- ----
2/3/2003 2/18/2003 2/27/2003 $0.61 55.62% 38.12% 0.00% 6.21%
5/6/2003 5/19/2003 5/30/2003 $0.61 55.62% 38.12% 0.00% 6.21%
8/5/2003 8/18/2003 8/28/2003 $0.61 55.62% 38.12% 0.00% 6.21%
10/28/2003 11/14/2003 11/25/2003 $0.62 55.62% 38.12% 0.00% 6.21%
----- ----- ----- ---- ----
TOTALS $2.45 55.62% 38.12% 0.00% 6.21%
===== ===== ===== ==== ====
The appropriate amount of each common share for 2002 and 2001 is as
follows:
Distribution Type
------------------------------------------------
20%
Ordinary Long-Term Unrecaptured
Distributions Taxable Return of Capital Sec. 1250
Year Per Share Dividend Capital Gain Gain
---- --------- -------- ------- ---- ----
2002 $2.41 62.28% 37.17% 0.00% 0.55%
2001 $2.31 78.50% 6.80% 5.30% 9.40%
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 (Continued)
---------------------
Series F Preferred Distribution Type
------------------ ------------------------------------------------
20%
Ordinary Long-Term Unrecaptured
Declaration Record Payable Distributions Taxable Return of Capital Sec. 1250
Dates Dates Dates Per Share Dividend Capital Gain Gain
----- ----- ----- --------- -------- ------- ---- ----
2/3/2003 2/18/2003 2/28/2003 $0.56250 89.87% 0.00% 0.00% 10.04%
5/6/2003 5/19/2003 6/2/2003 $0.56250 89.87% 0.00% 0.00% 10.04%
8/5/2003 8/18/2003 9/2/2003 $0.56250 89.87% 0.00% 0.00% 10.04%
10/28/2003 11/14/2003 12/1/2003 $0.56250 89.87% 0.00% 0.00% 10.04%
-------- ----- ---- ---- -----
TOTALS $2.25000 89.87% 0.00% 0.00% 10.04%
======== ===== ==== ==== =====
The appropriate amount of each common share for 2002 is as follows:
Distribution Type
------------------------------------------------
20%
Ordinary Long-Term Unrecaptured
Distributions Taxable Return of Capital Sec. 1250
Year Per Share Dividend Capital Gain Gain
---- --------- -------- ------- ---- ----
2002 $1.55 99.11% 0.00% 0.00% 0.89%
Total Shares/Units Outstanding
------------------------------
At December 31, 2003, 31,966,240 common shares, 833,333 convertible
preferred shares (assuming a conversion of the Preferred Shares to Common
Shares) and 15,974,707 UPREIT Units were outstanding for a total of
48,774,280 common share equivalents.
In addition, 2,400,000 shares of Series F cumulative redeemable preferred
shares were outstanding as of December 31, 2003.
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 Company has reserved 1,596,000 shares for
issuance 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. At December 31, 2003, 391,473 and 346 common shares were available
for future grant of options or awards under the Plan for officers and
employees and non-employee directors, respectively.
On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan (the
"2000 Plan"). Plan participants have been expanded to include directors,
officers, regional managers and on-site property
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
managers. The 2000 Plan limits the number of shares issuable under the plan
to 2,755,000, of which 205,000 are to be available for issuance to the
non-employee directors. At December 31, 2003, 714,848 and 40,040 common
shares were available for future grant of options or awards under the 2000
plan for officers and employees and non-employee directors, respectively.
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, 2003, 652,650
and 137,000 common shares were available for future grant of options or
awards under the 2003 plan for officers and employees and non-employee
directors, respectively.
Details of stock option activity during 2003, 2002 and 2001 are as follows:
Weighted Average
Number Exercise Price
of Options Per Option
---------- ----------
Options outstanding at January 1, 2001 1,796,665 $26.34
(519,434 shares exercisable)
Granted, 2001 857,430 $29.60
Exercised, 2001 ( 187,698) $22.59
Cancelled, 2001 ( 361,295) $28.78
---------
Options outstanding at December 31, 2001 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)
The following table summarizes information about options outstanding at
December 31, 2003:
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
------- ----------- ---- ---------- ----- ----------- ----------
1994 5,000 1 N/A $19.000 5,000 $19.00
1996 14,782 2 $1.20 19.866 14,782 $19.00-$20.50
1997 51,473 4 $1.55 26.455 51,473 $23.69-$26.50
1998 25,810 5 $1.32 25.125 25,810 $25.125
1999 246,459 5 $1.57 27.023 181,915 $25.688-$27.125
2000 412,762 7 $1.88 31.215 253,651 $28.313-$31.375
2001 646,765 8 $1.64 29.499 368,368 $27.01-$31.60
2002 584,532 9 $1.95 34.790 169,796 $32.20-$34.65
2003 641,550 10 $2.39 36.796 - $36.28-$36.85
------- -- ------ ------- ---------------
Totals 2,629,133 8 $32.346 1,070,995 $19.00-$36.85
========= == ======= ========= ====== ======
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9 STOCK BENEFIT PLAN (Continued)
In 2003 and 2002, the Company granted 196,920 and 22,550 shares of
restricted stock. The restricted stock outstanding at December 31, 2003,
was 234,870 shares. The restricted stock of 105,000 granted to key
employees of the Company 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 as it was
part of their retirement award and was fully earned to date. The restricted
shares were granted at a weighted average price of $27.14 to $37.75 per
share, respectively. Total compensation cost recorded for the years ended
December 31, 2003, 2002 and 2001 for the restricted share grants was
$5,537, $241 and $96, 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 connection with the adoption of SFAS 148, the Company recognized $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 which have been owned
more than one full calendar year. Therefore, the Core Properties represent
communities owned as of January 1, 2002. Non-core properties consist of
apartment communities acquired during 2002 and 2003, 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, 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, 2003, 2002 and
2001.
2003 2002 2001
---- ---- ----
Revenues
Apartments owned
Core properties $ 353,674 $ 356,914 $ 311,026
Non-core properties 75,944 26,327 28,039
Reconciling items 4,886 3,215 5,043
--------- --------- ---------
Total Revenue $ 434,504 $ 386,456 $ 344,108
========= ========= =========
Profit (loss)
Funds from operations:
Apartments owned
Core properties $ 203,064 $ 205,426 $ 178,878
Non-core properties 38,031 17,187 17,092
Reconciling items 4,886 3,215 5,043
--------- --------- ---------
Segment contribution to FFO 245,981 225,828 201,013
General & administrative expenses ( 22,607) ( 12,649) ( 10,542)
Interest expense ( 85,110) ( 75,482) ( 64,209)
Depreciation of unconsolidated affiliates 2,441 1,346 338
Non-real estate depreciation/amortization ( 2,327) ( 1,174) ( 639)
FAS 141 acquisition rent /intangibles 46 - -
Redeemable preferred dividend ( 5,400) ( 4,155) -
Equity in earnings (losses) of unconsolidated
affiliates ( 1,892) ( 17,493) 123
Impairment of assets held as General Partner ( 2,518) ( 3,533) -
Impairment of affordable assets not in FFO 2,034 1,470 -
Income from discontinued operations before
minority interest depreciation and loss on
disposition of property 2,155 7,587 10,520
--------- --------- ---------
Funds from Operations 132,803 121,745 136,604
Depreciation - apartments owned ( 77,089) ( 66,573) ( 64,251)
Depreciation of unconsolidated affiliates ( 2,441) ( 1,346) ( 338)
FAS 141 acquisition rent /intangibles ( 46)
Prepayment penalties - ( 3,275) ( 116)
Loss from early extinguishment of debt in
connection with sale of real estate ( 1,610) - -
Impairment of real property ( 423) ( 1,565) -
Redeemable preferred dividend 5,400 4,155 -
Impairment of affordable assets not in FFO ( 2,034) ( 1,470) -
Minority interest in earnings ( 14,990) ( 10,937) ( 19,961)
Income from discontinued operations before
minority interest and loss on disposition of
property ( 1,018) ( 3,353) ( 6,429)
--------- --------- ---------
Income from continuing operations $ 38,552 $ 37,381 $ 45,509
======== ======== ========
Assets
Apartments owned
Core properties $1,924,763 $1,905,028
Non-core properties 543,698 493,996
Reconciling items 44,856 57,242
--------- ---------
Total Assets $2,513,317 $2,456,266
========== ==========
Real Estate Capital Expenditures
New property acquisitions $ 96,801 $433,043
Additions to properties
Core properties 81,860 99,966
Non-core properties 24,486 15,726
Increase in real estate associated with the
purchase of UPREIT Units 5,600 2,200
--------- ---------
Total Real Estate Capital Expenditures $208,747 $550,935
========== ==========
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 three 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
--------------- ------------------- ---------------------- -------------
$17,600,000 5.91% LIBOR + 1.60% June 24, 2004
$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, 2003, the aggregate fair value of the Company's interest
rate swaps was $956, 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, 2003, 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 $578, 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 $3,679, $5,783, and $8,174 for the years ended
December 31, 2003, 2002 and 2001, respectively. The Company had accounts
receivable outstanding due from affiliated entities of $162 and $1,357 at
December 31, 2003 and 2002, respectively.
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 2001 and 2002, amounts of $350 and $312, respectively, became
payable to the Company under the terms of the agreement. This amount was
classified in other "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 $872 and $884 for the years ended 2004 and
2005, 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 $1,609, $1,296, and $956 for the years
ended December 31, 2003, 2002 and 2001, respectively.
From time to time, the Company advances funds as needed to the Management
Companies which totaled $12,372 at December 31, 2002, respectively, and
bear interest at 1% over prime (4.25% at December 31, 2002). Effective
January 1, 2003, the Management Companies are wholly-owned consolidated
subsidiaries of the Company.
At December 31, 2003, there are outstanding loans aggregating $315 under
the officer and director share purchase program. 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
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 $219, $210, and $211, including contingent rents of $149,
$140, and $141, for the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003, 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 $1,010, $638, and $893 for the years
ended December 31, 2003, 2002 and 2001, 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 $1,729, $2,764, and $725 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Contingencies
-------------
The Company is party to certain legal proceedings. All such proceedings,
taken together, are not expected to have a material adverse effect on the
Company. 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.
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 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
(48% of the owned portfolio) for a period of 5 to 15 years except through a
tax deferred Internal Revenue Code Section 1031 like-kind exchange.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued)
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. 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
2003 2003 2003 2003
------- -------- ------- -------
EBITDA
Total revenues $111,458 $111,200 $109,713 $106,955
Net operating income from discontinued operations 80 460 - 196
Operating and maintenance (48,698) (46,472) (46,040) (49,772)
General and administrative ( 8,236) ( 4,670) ( 4,582) ( 5,119)
Impairment of assets held as General Partner ( 110) ( 1,888) ( 93) ( 427)
Equity in earnings (losses) of unconsolidated
affiliates ( 395) ( 313) ( 444) ( 740)
-------- -------- -------- --------
$ 54,099 $ 58,317 $ 58,554 $ 51,093
Fixed Charges
Interest expense $ 21,595 $ 21,456 $ 21,634 $ 21,300
Interest expense on discontinued operations 79 116 - 33
Preferred dividends 1,984 2,646 3,192 3,518
Capitalized interest 230 230 230 230
-------- -------- -------- --------
$ 23,888 $ 24,448 $ 25,056 $ 25,081
Times Coverage ratio: 2.26 2.39 2.34 2.04
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13 COMMITMENTS AND CONTINGENCIES (Continued)
Guarantees
----------
The Company has guaranteed a total of $594 of debt associated with two
entities where the Company is the general partner. All other mortgage notes
payable of affiliates are non-recourse debt to the limited partnerships and
the Company. In addition, 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 23
partnerships totaling approximately $48,000. As of December 31, 2003, 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.
14 PROPERTY ACQUISITIONS
For the years ended December 31, 2003, 2002 and 2001, 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
--------- ---- -------- ----------- -------- ----------- --------
Woodholme Manor Baltimore 03/30/01 1969 176 $ 5,805 $ 33
Virginia Village Northern VA 05/31/01 1967 344 $ 27,044 $ 79
Mill Towne Village Baltimore 05/31/01 1973 384 $ 17,558 $ 46
Southern Meadows Long Island 06/29/01 1971 452 $ 40,866 $ 90
Devonshire Hills Long Island 07/16/01 1968 297 $ 47,049 $158
Fenland Field Baltimore 08/01/01 1970 234 $ 14,540 $ 62
Courtyard Village Chicago 08/29/01 1971 224 $ 12,887 $ 58
Manor Baltimore 08/31/01 1969 435 $ 36,384 $ 84
2 Property Portfolio Northern VA 10/24/01 1971-72 274 $ 11,076 $ 40
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
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2003, as discussed below, were
reclassified as such in the accompanying Consolidated Statements of
Operations for each of the three years ended December 31, 2003.
Included in discontinued operations for the three years ended December 31,
2003 are the operating results, net of minority interest, of nineteen
apartment community dispositions (seven sold in 2003 and twelve sold in
2002). 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.
The operating results of discontinued operations are summarized as follows
for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Revenues:
Rental Income $6,135 $16,274 $22,498
Property other income
195 450 608
Interest and dividend income
56 78 186
------ ------ ------
Total Revenues 6,386 16,802 23,292
------ ------ ------
Operating and Maintenance 3,056 7,149 10,535
Interest expense 1,176 2,066 2,237
Depreciation and amortization
714 2,669 4,091
Impairment of real property
423 1,565 -
------ ------ ------
Total Expenses 5,369 13,449 16,863
------ ------ ------
Income from discontinued operations before minority
interest 1,017 3,353 6,429
Minority interest
361 1,289 2,688
------ ------ ------
Income from discontinued operations $ 656 $2,064 $3,741
====== ====== ======
HOME PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16 PROFORMA CONDENSED FINANCIAL INFORMATION
The Company acquired two apartment communities ("2003 Acquired
Communities") with 730 units in two unrelated transactions during the
twelve-month period ended December 31, 2003. The total purchase price
(including closing costs) of $93 million equates to approximately $127 per
apartment unit. Consideration for the communities included $68.3 million
from the Company's line of credit and $24.7 million of assumed debt.
In addition, during 2003, the Company sold seven apartment communities
("2003 Disposed Properties") having 1,568 units in seven unrelated
transactions as part of its strategic disposition program. The total sales
price of $59.3 million equates to $38 per apartment unit. A gain on sale of
approximately $4 million, prior to the allocation of minority interest, has
been recorded in relation to these sales and is reflected in discontinued
operations.
The following unaudited proforma information was prepared as if: the (i)
the 2003 transactions related to the acquisition of the "2003 Acquired
Communities" occurred on January 1, 2002, (ii) the 2002 transactions
related to the acquisitions of 21 apartment communities in seven separate
transactions occurred on January 1, 2001, (iii) the disposition of the
"2003 Disposed Properties" occurred on January 1, 2002, (iv) the 2001
transactions related to the disposition of twelve apartment communities in
eight separate transactions occurred on January 1, 2001, and (v) the 2002
Series F Preferred Share offering and the two common equity offerings
occurred on January 1, 2001. 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, 2001
or 2002, 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, 2003, 2002, and 2001
consist principally of providing net operating activity and recording
interest, depreciation and amortization from January 1, 2001 or 2002 to the
acquisition date as appropriate.
For the years ended
December 31,
(unaudited)
2003 2002 2001
---- ---- ----
Total revenues $438,790 $421,905 $407,235
Net Income 39,371 47,051 40,924
Net income available to common shareholders 28,031 26,037 28,643
Net income available to common shareholders:
Basic $0.96 $1.00 $1.26
Diluted $0.95 $0.98 $1.25
Weighted average numbers of shares outstanding:
Basic 29,208,242 26,166,499 22,805,629
========== ========== ==========
Diluted 29,575,660 26,447,280 22,932,123
========== ========== ==========
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, 2003, 2002 and 2001
are as follows:
2003 2002 2001
---- ---- ----
Cash paid for interest $85,895 $76,326 $65,268
Mortgage loans assumed associated with property acquisitions 25,239 153,581 67,807
Issuance of UPREIT Units associated with property and other
acquisitions 4,806 11,522 19,133
Increase in real estate associated with the purchase of
UPREIT Units 5,600 2,200 1,666
Exchange of UPREIT Units for common shares 7,442 4,411 1,910
Fair value of hedge instruments 956 1,618 920
Compensation cost of stock options issued 804 - -
Notes issued in exchange for officer and director stock
purchases - - 1,965
Transfer of notes receivable due from affiliates in exchange
for additional equity in the Management Companies - - 23,699
18 GAIN (LOSS) ON DISPOSITION OF PROPERTY AND BUSINESS
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.
During 2001, the Company disposed of fourteen apartment communities with
2,855 units in six unrelated transactions and two general partnership
interests. The total sales price of $122 million equates to $43 per unit.
The total gain on sale of these transactions amounted to approximately $26
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, 2003 and
2002 are as follows:
2003
----
First Second Third Fourth
----- ------ ----- ------
Revenues 105,133 $107,886 $110,027 $111,458
Adjustment for discontinued operations 1,822 1,827 1,173 -
------- ------- -------- --------
Revenues as reported on Form 10-Q 106,955 109,713 111,200 111,458
Net Income (loss) 7,390 12,135 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
2002
----
First Second Third Fourth
----- ------ ----- ------
Revenues $88,614 $94,493 $100,090 $103,259
Adjustment for discontinued operations 1,525 1,833 817 -
------- ------- -------- --------
Revenues as reported on Form 10-Q 90,139 96,326 100,907 103,259
Net Income 9,525 19,078 16,856 (520)
Per share data:
Basic earnings per share data:
Net income available to common shareholders $0.25 $0.39 $0.49 $(0.16)
Diluted earnings per share data:
Net income available to common shareholders $0.24 $0.39 $0.49 $(0.16)
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, 2003 and 2002 have been reclassified to reflect discontinued
operations in accordance with SFAS No. 144.
HOME PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
20 SUBSEQUENT EVENTS
On January 30, 2004, the Company acquired four communities as part of a
portfolio with a total of 534 units in the New Jersey region. The total
purchase price of $64.2 million, including closing costs, equates to
approximately $120 per unit. Consideration for the properties included $34
million in assumed debt (fair market value of $37 million), $11.9 million
in Operating Partnership Units and $18.3 million cash was funded through
the use of the Company's line of credit.
On March 2, 2004, the Company acquired a 240-unit community in Frederick,
Maryland. The total purchase price of $29.4 million, including closing
costs, equates to approximately $123 per apartment unit. Consideration for
this property was funded through the use of the Company's line of credit.
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(IN THOUSANDS)
Initial Total
Cost Costs Cost
Build- Capi- Build- Total
ings, talized ings, Cost,
Improve- Subse- Improve- Netof
ments quent ments Accum- Accum- Year
& Adjust- to & ulated ulated of
Encum- Equip- ments Acqui- Equip Total Depre- Depre- Acqui-
Community brances Land ment (a) sition Land ment (b) ciation ciation sition
- --------- ------- ---- ---- --- ------ ---- ---- --- ------- ------- ------
1600 East $1,000 $8,550 $4,887 $1,000 $13,437 $14,437 $2,736 $11,701 1997
1600 Elmwood $11,176 299 5,698 3,372 3,890 299 12,960 13,259 6,523 6,736 1983
Apple Hill 29,889 3,486 20,458 6,939 3,486 27,397 30,883 4,718 26,165 1998
Arbor Crossing 1,072 4,382 1,033 1,072 5,415 6,487 729 5,758 1999
Bayview/Colonial 5,626 1,600 8,504 3,069 1,600 11,573 13,173 1,020 12,153 2000
Beechwood 560 3,459 1,976 560 5,435 5,995 916 5,079 1998
Blackhawk 13,953 2,968 14,609 3,936 2,968 18,545 21,513 1,738 19,775 2000
Bonnie Ridge 37,008 4,830 42,960 16,819 4,830 59,779 64,609 7,741 56,868 1999
Braddock Lee 9,630 3,810 8,899 4,365 3,810 13,264 17,074 2,631 14,443 1998
Brittany Place 19,848 4,728 39,725 2,753 4,728 42,478 47,206 1,610 45,596 2002
Brook Hill 330 7,920 25 4,305 330 12,250 12,580 3,483 9,097 1994
Cambridge Village 3,339 2,460 3,204 755 2,460 3,959 6,419 199 6,220 2002
Canterbury-MD 30,539 4,944 21,487 2,191 4,944 23,678 28,622 2,904 25,718 1999
Canterbury Square 6,102 2,352 10,831 4,430 2,352 15,261 17,613 2,950 14,663 1997
Carriage Hill-MI 3,486 840 5,995 1,700 840 7,695 8,535 1,327 7,208 1998
Carriage Hill-NY 5,910 570 3,856 2,541 570 6,397 6,967 1,559 5,408 1996
Carriage Park 5,029 1,280 8,211 2,908 1,280 11,119 12,399 2,052 10,347 1998
Castle Club 6,882 948 8,957 1,662 948 10,619 11,567 1,108 10,459 2000
Cedar Glen 715 2,027 1,652 715 3,679 4,394 666 3,728 1998
Charter Square 10,306 3,952 18,315 7,222 3,952 25,537 29,489 4,734 24,755 1997
Cherry Hill Club 2,841 492 4,109 2,445 492 6,554 7,046 1,264 5,782 1998
Cherry Hill Village 5,282 1,120 6,854 2,253 1,120 9,107 10,227 1,500 8,727 1998
Chesterfield 6,764 1,482 8,240 3,809 1,482 12,049 13,531 2,310 11,221 1997
Cider Mill 66,131 15,552 66,119 1,824 15,552 67,943 83,495 2,363 81,132 2002
Cornwall Park 5,713 439 2,973 3,707 439 6,680 7,119 1,528 5,591 1996
Country Village 6,290 2,236 11,197 5,020 2,236 16,217 18,453 2,770 15,683 1998
Courtyards Village 5,106 3,360 9,844 1,686 3,360 11,530 14,890 764 14,126 2001
Coventry Village. 784 2,349 2,071 784 4,420 5,204 798 4,406 1998
Curren Terrace 15,211 1,908 11,001 5,168 1,908 16,169 18,077 3,119 14,958 1997
Cypress Place 6,322 2,304 7,886 2,586 2,304 10,472 12,776 950 11,826 2000
Deerfield Woods 3,204 864 4,896 1,572 864 6,468 7,332 665 6,667 2000
Devonshire Hills 24,117 14,850 33,068 3,143 14,850 36,211 51,061 2,441 48,620 2001
East Hill 231 1,570 882 231 2,452 2,683 413 2,270 1998
East Meadow 7,140 2,250 10,835 522 2,250 11,357 13,607 998 12,609 2000
East Winds 960 5,099 1,849 960 6,948 7,908 638 7,270 2000
Elmwood Terrace 22,089 6,048 14,754 2,456 6,048 17,210 23,258 1,722 21,536 2000
Emerson Sq. 2,257 384 2,028 1,041 384 3,069 3,453 779 2,674 1997
Executive 2,827 600 3,434 2,436 600 5,870 6,470 1,177 5,293 1997
Fairview 7,595 580 5,305 3,039 2,995 580 11,339 11,919 5,367 6,552 1985
Falcon Crest 13,208 2,772 11,182 4,497 2,772 15,679 18,451 2,196 16,255 1999
Falkland Chase 24,695 9,000 49,723 55 9,000 49,778 58,778 427 58,351 2003
Fenland Field 12,490 3,510 11,097 1,572 3,510 12,669 16,179 861 15,318 2001
Fordham Green 2,824 802 5,299 2,479 802 7,778 8,580 1,378 7,202 1997
Gardencrest Apts. 4,594 24,360 61,730 5,698 24,360 67,428 91,788 2,765 89,023 2002
Gateway Village 7,166 1,320 6,649 570 1,320 7,219 8,539 883 7,656 1999
Glen Brook 1,414 4,836 1,539 1,414 6,375 7,789 803 6,986 1999
Glen Manor 6,094 1,044 4,583 1,759 1,044 6,342 7,386 1,071 6,315 1997
Golf Club 16,210 3,990 21,368 9,706 3,990 31,074 35,064 3,356 31,708 2000
Golfview Manor 303 110 545 369 110 914 1,024 176 848 1997
Greentrees 4,531 1,152 8,637 2,903 1,152 11,540 12,692 2,134 10,558 1997
Hampton Court 3,380 1,252 4,632 3,186 1,252 7,818 9,070 692 8,378 2000
Harborside 8,657 250 6,113 32 3,698 250 9,843 10,093 3,068 7,025 1995
Hawthorne
Consolidation 10,870 8,940 23,534 8,801 8,940 32,335 41,275 1,480 39,795 2002
Heritage Square 2,000 4,823 535 2,000 5,358 7,358 245 7,113 2002
Hill Brook Place 11,745 2,192 9,156 2,898 2,192 12,054 14,246 1,422 12,824 1999
Holiday/Muncy
Consolidation 3,671 3,575 6,134 497 3,575 6,631 10,206 280 9,926 2002
Home Properties
of Bryn Mawr 12,997 3,160 18,015 8,236 3,160 26,251 29,411 2,883 26,528 2000
Home Properties
of Devon 28,892 6,280 35,777 13,774 6,280 49,551 55,831 5,273 50,558 2000
Home Properties
of Newark 17,136 2,592 12,764 10,642 2,592 23,406 25,998 3,001 22,997 1999
Idylwood 8,764 700 16,927 58 8,242 700 25,227 25,927 7,143 18,784 1995
Kingsley 6,176 1,640 11,705 3,823 1,640 15,528 17,168 2,919 14,249 1997
Lake Grove 27,040 7,360 12,068 10,248 7,360 22,316 29,676 4,655 25,021 1997
Lakeshore 5,107 573 3,872 3,401 573 7,273 7,846 1,559 6,287 1996
Lakeview 3,988 636 4,578 2,084 636 6,662 7,298 1,198 6,100 1998
Macomb Manor 3,778 1,296 7,377 1,284 1,296 8,661 9,957 918 9,039 2000
Maple Lane 11,603 2,547 15,011 3,168 2,547 18,179 20,726 2,361 18,365 1999
Maple Tree 840 4,464 1,121 840 5,585 6,425 511 5,914 2000
Mid-Island 6,675 4,160 6,618 3,444 4,160 10,062 14,222 2,204 12,018 1997
Mill Company 1,925 384 1,684 818 384 2,502 2,886 463 2,423 1982
Mill Towne
Village 8,530 3,840 13,801 6,313 3,840 20,114 23,954 1,410 22,544 2001
Morningside 18,520 6,147 28,853 16,434 6,147 45,287 51,434 8,116 43,318 1998
New Orleans 7,376 1,848 8,886 5,882 1,848 14,768 16,616 2,762 13,854 1997
Newcastle 6,000 197 4,007 3,707 3,186 197 10,900 11,097 4,941 6,156 1982
Northgate 289 6,987 19 4,202 289 11,208 11,497 3,463 8,034 1994
Oak Manor 4,918 616 4,143 1,916 616 6,059 6,675 1,100 5,575 1998
Oak Park Manor 4,825 1,192 9,228 3,866 1,192 13,094 14,286 2,436 11,850 1997
Orleans Village 43,745 8,510 59,096 9,967 8,510 69,063 77,573 6,228 71,345 2000
Owings Run 31,670 5,537 32,734 1,193 5,537 33,927 39,464 4,028 35,436 1999
Paradise 8,860 972 7,160 3,675 972 10,835 11,807 2,699 9,108 1997
Park
Shirlington 12,124 4,410 10,251 5,489 4,410 15,740 20,150 3,077 17,073 1998
Parkview Garden 8,000 1,208 7,245 4,133 1,208 11,378 12,586 2,207 10,379 1997
Patricia 5,417 600 4,219 1,920 600 6,139 6,739 1,040 5,699 1998
Pavilion 29,867 5,184 25,443 19,016 5,184 44,459 49,643 5,209 44,434 1999
Pearl Street 1,118 49 1,189 626 49 1,815 1,864 499 1,365 1995
Perinton Manor 9,395 224 6,120 3,661 2,690 224 12,471 12,695 5,834 6,861 1982
Pleasant View 43,817 5,710 48,051 13,653 5,710 61,704 67,414 10,837 56,577 1998
Pleasure Bay 6,042 1,620 6,282 4,397 1,620 10,679 12,299 1,599 10,700 1998
Racquet Club 22,223 1,868 23,187 4,474 1,868 27,661 29,529 4,373 25,156 1998
Racquet Club
South 2,920 309 3,904 1,468 309 5,372 5,681 848 4,833 1999
Raintree 6,840 0 6,654 4,980 6,951 0 18,585 18,585 7,366 11,219 1985
Redbank Village 11,709 2,000 14,110 6,109 2,000 20,219 22,219 3,291 18,928 1998
Rider Terrace 240 1,275 336 240 1,611 1,851 139 1,712 2000
Ridley Brook 10,175 1,952 7,752 2,334 1,952 10,086 12,038 1,282 10,756 1999
Riverton 6,023 240 6,640 2,547 4,824 240 14,011 14,251 6,704 7,547 1983
Royal Garden 33,470 5,500 14,191 10,098 5,500 24,289 29,789 5,236 24,553 1997
Scotsdale 9,991 1,692 11,963 2,872 1,692 14,835 16,527 2,658 13,869 1997
Selford
Townhomes 3,960 1,224 4,224 1,632 1,224 5,856 7,080 742 6,338 1999
Seminary Hill 9,900 2,960 10,250 4,938 2,960 15,188 18,148 1,769 16,379 1999
Seminary Towers 20,322 5,480 19,464 9,337 5,480 28,801 34,281 3,565 30,716 1999
Shakespeare Park 2,452 492 3,442 217 492 3,659 4,151 449 3,702 1999
Sherry Lake 20,430 2,397 15,684 4,414 2,397 20,098 22,495 3,117 19,378 1998
Sherwood
Consolidation 8,190 3,255 10,791 1,175 3,255 11,966 15,221 377 14,844 2002
South Bay 1,098 1,975 3,436 1,098 5,411 6,509 526 5,983 2000
Southern
Meadows 19,840 9,040 32,008 2,339 9,040 34,347 43,387 2,308 41,079 2001
Southpointe Sq. 2,556 896 4,627 2,285 896 6,912 7,808 1,351 6,457 1997
Spanish Gardens 5,600 398 9,263 20 3,598 398 12,881 13,279 3,728 9,551 1994
Springwells Park 10,531 1,515 16,886 4,021 1,515 20,907 22,422 2,712 19,710 1999
Stephenson
House 1,416 640 2,418 1,073 640 3,491 4,131 717 3,414 1997
Stone Ends 24,029 5,600 28,468 244 5,600 28,712 34,312 680 33,632 2003
Stratford Greens 16,139 12,565 33,893 2,113 12,565 36,006 48,571 1,716 46,855 2002
Sunset Gardens 8,908 696 4,693 3,130 696 7,823 8,519 1,720 6,799 1996
Tamarron 5,200 1,320 8,507 610 1,320 9,117 10,437 1,105 9,332 1999
Terry Apartments 650 3,452 397 650 3,849 4,499 339 4,160 2000
The Colony Apts. 7,830 34,225 7,453 7,830 41,678 49,508 4,919 44,589 1999
The Lakes 2,821 23,144 3,289 2,821 26,433 29,254 3,040 26,214 1999
The Landings 13,143 2,459 16,815 6,585 2,459 23,400 25,859 4,408 21,451 1996
The Manor Apts.-
MD 20,042 8,700 27,807 3,079 8,700 30,886 39,586 2,049 37,537 2001
The Manor Apts.-
VA 5,600 1,386 5,770 2,634 1,386 8,404 9,790 1,398 8,392 1999
The Meadows 3,425 208 2,776 1,230 1,474 208 5,480 5,688 2,515 3,173 1984
The New Colonies 21,660 1,680 21,426 8,893 1,680 30,319 31,999 5,437 26,562 1998
The Sycamores 4,625 15,776 305 4,625 16,081 20,706 455 20,251 2002
Timbercroft 6,967 1,704 6,857 1,535 1,704 8,392 10,096 996 9,100 1999
Trexler Park 10,140 2,490 13,890 4,326 2,490 18,216 20,706 1,874 18,832 2000
Valley View 4,178 1,056 4,981 3,651 1,056 8,632 9,688 1,633 8,055 1997
Village Green 7,426 1,103 13,223 4,654 232 1,103 18,109 19,212 5,267 13,945 1994-1996
Village Square-MD 21,772 2,590 13,385 3,152 2,590 16,537 19,127 1,279 17,848 1999
Village Square-PA 3,559 768 3,599 2,811 768 6,410 7,178 1,995 5,183 1997
Virginia Village 9,271 5,160 21,999 3,868 5,160 25,867 31,027 2,051 28,976 2001
Wayne Village 11,032 1,925 12,968 4,319 1,925 17,287 19,212 3,078 16,134 1998
Wellington Lakes 7,717 1,600 4,887 1,969 1,600 6,856 8,456 466 7,990 2001
Wellington Woods 1,140 3,483 1,298 1,140 4,781 5,921 306 5,615 2001
West Springfield
Terrace 2,440 31,833 433 2,440 32,266 34,706 971 33,735 2002
Westminster 6,698 861 5,787 2,314 861 8,101 8,962 2,012 6,950 1996
Westwood Village 17,450 7,260 22,855 4,836 7,260 27,691 34,951 1,333 33,618 2002
William Henry 23,665 4,666 22,347 7,532 4,666 29,879 34,545 3,041 31,504 2000
Windsor Realty 2,166 402 3,315 1,337 402 4,652 5,054 798 4,256 1998
Woodgate 3,235 480 3,811 1,823 480 5,634 6,114 1,204 4,910 1997
Woodholme Manor 3,846 1,232 4,620 2,017 1,232 6,637 7,869 539 7,330 2001
Woodland Garden 5,804 2,022 10,518 3,766 2,022 14,284 16,306 2,730 13,576 1997
Woodmont Village 3,836 2,880 5,723 806 2,880 6,529 9,409 317 9,092 2002
Yorkshire Village 1,577 1,200 2,025 356 1,200 2,381 3,581 117 3,464 2002
Corporate Assets 1,308 3,748 16 _______ 17,586 3,748 17,602 21,350 6,296 15,054 Various
---------- -------- ---------- ------- -------- -------- ---------- ---------- -------- ----------
$1,380,696 $387,655 $1,793,786 $27,344 $544,207 $387,655 $2,365,337 $2,752,992 $330,062 $2,422,930
========== ======== ========== ======= ======== ======== ========== ========== ======== ==========
(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
$2,321,000.
(c) The $1,308,000 in the Other Asset Encumbrances consists of a two notes
payable.
SCHEDULE III
HOME PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(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,
2003, are as follows:
2003 2002 2001
---- ---- ----
Balance, beginning of year $2,597,278 $2,135,078 $1,895,269
Management Companies 5,846 - -
New property acquisition 96,801 433,043 213,325
Additions 106,346 115,692 130,468
Increase in real estate associated with
the purchase of UPREIT Units 5,600 2,200 1,666
Disposals, retirements and impairments ( 58,879) ( 88,735) ( 105,650)
---------- ---------- ----------
Balance, end of year $2,752,992 $2,597,278 $2,135,078
========== ========== ==========
The changes in accumulated depreciation for the three years ended December 31,
2003, are as follows:
2003 2002 2001
---- ---- ----
Balance, beginning of year $257,284 $201,564 $153,324
Management Companies 2,287 - -
Depreciation for the year 79,187 67,610 64,684
Disposals and retirements ( 8,696) ( 11,890) ( 16,444)
---------- ---------- ----------
Balance, end of year $330,062 $257,284 $201,564
========== ========== ==========
HOME PROPERTIES OF NEW YORK, INC.
FORM 10-K
For Fiscal Year Ended December 31, 2003
Exhibit Index
Exhibit
Number Exhibit Location
- ------ ------- --------
2.1 Agreement among Home Properties of New York, Inc. and Incorporated by reference to the
Philip J. Solondz, Daniel Solondz and Julia Weinstein Form 8- K filed by Home Properties
Relating to Royal Gardens I, together with Amendment No. 1 of New York, Inc. dated 6/6/97 (the
"6/6/97 8-K")
2.2 Agreement among Home Properties of New York, Inc and Incorporated by reference to the
Philip Solondz and Daniel Solondz relating to Royal 6/6/97 8-K
Gardens II, together with Amendment No. 1
2.15 Contribution Agreement, dated October __, 1997 between Incorporated by reference to the
Home Properties of New York between Home Properties of Form 8-K filed by Home Properties of
New York, L.P. and Berger/Lewiston Associates Limited New York, Inc. dated 10/7/97
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 Incorporated by reference to the
Properties of New York, L.P., Braddock Lee Limited Form 8-K filed by Home Properties of
Partnership and Tower Construction Group, LLC New 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 Incorporated by reference to the
New York, L.P. and Strawberry Hill Apartment Company Form 8-K filed by Home Properties of
LLLP, Country Village Limited Partnership, Morningside New York, Inc. on 5/22/98 (the
Six, LLLP, Morningside North Limited Partnership and "5/22/98 8-K")
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, Incorporated by reference to the
relating to the CRC Portfolio with schedule setting forth Form 8-K filed by Home Properties of
material details in which documents differ from form New York, Inc. on 7/2/99 (the
"7/2/99 8-K")
2.30 Form of Contribution Agreement relating to the Incorporated by reference to the
Mid-Atlantic Portfolio with schedule setting forth Form 8-K filed by Home Properties of
material details in which documents differ from form New York, Inc. on 7/30/99
2.31 Contribution Agreement among Home Properties of New York, Incorporated by reference to the
L.P., Leonard Klorfine, Ridley Brook Associates and the Form 8-K filed by Home Properties of
Greenacres Associates New 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
L.P., Gateside-Bryn Mawr Company, L.P., Willgold Company, Form 8-K filed by Home Properties of
Gateside-Trexler Company, Gateside-Five Points Company, New York, Inc. on 4/5/00
Stafford Arms, Gateside-Queensgate Company, Gateside
Malvern Company, King Road Associates and Cottonwood
Associates
2.34 Form of Contribution Agreement between Old Friends Incorporated by reference to the
Limited Partnership and Home Properties of New York, L.P. Form 8-K/A filed by Home Properties
and Home Properties of New York, Inc., along with of New York, Inc. on 12/5/00 (the
Amendments Number 1 and 2 thereto "12/5/00 8-K")
2.35 Form of Contribution Agreement between Deerfield Woods Incorporated by reference to the
Venture Limited Partnership and Home Properties of New 12/5/00 8-K/A
York, L.P.
2.36 Form of Contribution Agreement between Macomb Apartments Incorporated by reference to the
Limited Partnership and Home Properties of New York, L.P. 12/5/00 8-K/A
2.37 Form of Contribution Agreement between Home Properties of Incorporated by reference to the
New York, L.P. and Elmwood Venture Limited Partnership 12/5/00 8-K/A
2.38 Form of Sale Purchase and Escrow Agreement between Bank Incorporated by reference to the
of America as Trustee and Home Properties of New York, 12/5/00 8-K/A
L.P.
2.39 Form of Contribution Agreement between Home Properties of Incorporated by reference to the
New York, L.P., Home Properties of New York, Inc. and S&S 12/5/00 8-K/A
Realty, a New York General Partnership (South Bay)
2.40 Form of Contribution Agreement between Hampton Glen Incorporated by reference to the
Apartments Limited Partnership and Home Properties of New 12/5/00 8-K/A
York, L.P.
2.41 Form of Contribution Agreement between Home Properties of Incorporated by reference to the
New York, L.P. and Axtell Road Limited Partnership 12/5/00 8-K/A
2.42 Form of Contribution Agreement between Elk Grove Terrace Incorporated by reference to the
II and III, L.P., Elk Grove Terrace, L.P. and Home Form 8-K filed by Home Properties of
Properties of New York, L.P. New 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 Properties of New York, Inc. Home 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
Home Properties of New York, Inc. 8-K
3.4 Amended and Restated Articles Supplementary of Series A Incorporated by reference to the
Senior Convertible Preferred Stock of Home Properties of Home Properties of New York, Inc.
New 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
Supplementary to the Amended and Restated Articles of Home 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
Supplementary to the Amended and Restated Articles of Form 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
Supplementary to the Amended and Restated Articles of Form 8-K filed by Home Properties of
Incorporation of Home Properties of New York, Inc. New 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
Supplementary to the Amended and Restated Articles of Form 8-K filed by Home Properties of
Incorporation of Home Properties of New York, Inc. New York, Inc. on 12/22/00 (the
"12/22/00 8-K)
3.9 Amended and Restated By-Laws of Home Properties of New Incorporated by reference to the
York, Inc. (Revised 12/30/96) Form 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
Supplementary to the Amended and Restated Articles of Form 8-A12B filed by Home Properties
Incorporation of Home Properties of New York, Inc. of New York, Inc. on March 20, 2002
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 12/31/94 10-K
debt of it or its subsidiaries with the Commission upon
request
4.7 Spreader, Consolidation, Modification and Extension Incorporated by reference to the
Agreement between Home Properties of New York, L.P. and Form 10-K filed by Home Properties
John Hancock Mutual Life Insurance Company, dated as of New York, Inc. for the period ended
October 26, 1995, relating to indebtedness in the 12/31/95 (the "12/31/95 10-K")
principal amount of $20,500,000
4.8 Amended and Restated Stock Benefit Plan of Home Incorporated by reference to the
Properties of New York, Inc. 6/6/97 8-K
4.9 Amended and Restated Dividend Reinvestment, Stock Incorporated by reference to the
Purchase, Resident Stock Purchase and Employee Stock Form 8-K filed by Home Properties of
Purchase Plan New York, Inc., dated 12/23/97
4.10 Amendment No. One to Amended and Restated Dividend Incorporated by reference to the
Reinvestment, Stock Purchase, Resident Stock Purchase and Home 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
Reinvestment, Stock Purchase, Resident Stock Purchase and Home 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 Incorporated by reference to Home
Purchase, Resident Stock Purchase and Employee Stock Properties of New York, Inc. Form
Purchase Plan 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
Reinvestment, Stock Purchase, Resident Stock Purchase and Home 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
4.15 Director, Officer and Employee Stock Purchase and Loan Incorporated by reference to 5/22/98
Plan 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 Registration Statement on Form S-3,
Purchase 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 Incorporated by reference to the
the Amended and Restated Stock Benefit Plan Form 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 Registration Statement on Form S-3,
Purchase Plan file No. 333-54160, filed 1/23/01
4.25 Sixth Amended and Restated Dividend Reinvestment and Incorporated by reference to the
Direct Stock Purchase Plan Form 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 Incorporated by reference to the
the Amended and Restated Stock Benefit Plan Form 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 Deferral 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
10.1 Second Amended and Restated Agreement Limited Partnership Incorporated by reference to the
of Home Properties of New York, L.P. Form 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 Incorporated by reference to Form
and Restated Agreement of Limited Partnership of Home 10-K of Home Properties of New York,
Properties of New York, L.P. Inc. for the period ended 12/31/97
(the "12/31/97 10-K")
10.3 Articles of Incorporation of Home Properties Management, Incorporated by reference to the
Inc. 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 Incorporated by reference to the
Properties Resident Services, Inc.) 12/31/95 10-K
10.8 Home Properties Trust Declaration of Trust, dated Incorporated by reference to the
September 19, 1997 Form 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
York, Inc. and certain officers and directors Form 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
York, Inc. and Alan L. Gosule Form 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, Incorporated by reference to the
among KAM, Inc., Morris Massry and Raintree Island S-11 Registration Statement
Associates, as amended by Letter Agreement Supplementing
Operating Sublease dated October 1, 1986
10.18 Form of Term Promissory Note payable to Home Properties Incorporated by reference to the
of New York, by officers and directors in association 12/31/96 10-K
with the Executive and Director Stock Purchase and Loan
Program
10.19 Form of Pledge Security Agreement executed by officers Incorporated by reference to the
and directors in connection with Executive and Director 12/31/96 10-K
Stock Purchase and Loan Program
10.20 Schedule of Participants, loan amounts and shares issued Incorporated by reference to the
in connection with the Executive and Director Stock 12/31/96 10-K
Purchase and Loan Program
10.21 Subordination Agreement between Home Properties of New Incorporated by reference to the
York, Inc. and The Chase Manhattan Bank relating to the 12/31/96 10-K
Executive and Director Stock Purchase and Loan Program
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 S-3
Partnership
10.27 Master Credit Facility Agreement by and among Home Incorporated by reference to the
Properties of New York, Inc., Home Properties of New Home Properties of New York, Inc.
York, L.P., Home Properties WMF I LLC and Home Properties Form 10-Q for the quarter ended
of New York, L.P. and P-K Partnership doing business as 9/30/98 (the "9/30/98 10-Q")
Patricia Court and Karen Court and WMF Washington
Mortgage Corp., dated as of August 28, 1998
10.28 First Amendment to Master Credit Facility Agreement, Incorporated by reference to the
dated as of December 11, 1998 among Home Properties of Form 10-K filed by Home Properties
New York, Inc., Home Properties of New York, L.P., Home of New York, Inc. for the annual
Properties WMF I LLC and Home Properties of New York, period ended 12/31/98 ( the
L.P. and P-K Partnership doing business as Patricia Court "12/31/98 10-K")
and Karen Court and WMF Washington Mortgage Corp. and
Fannie Mae
10.29 Second Amendment to Master Credit Facility Agreement, Incorporated by reference to the
dated as of August 30, 1999 among Home Properties of New 12/31/99 10-K
York, Inc., Home Properties of New York, L.P., Home
Properties WMF I LLC and Home Properties of New York,
L.P. and P-K Partnership doing business as Patricia Court
and Karen Court and WMF Washington Mortgage Corp. and
Fannie Mae
10.30 Amendments Nos. Ten through Seventeen to the Second Incorporated by reference to the
Amended and Restated Limited Partnership Agreement 12/31/98 10-K
10.31 Amendments Nos. Eighteen through Twenty- Five to the Incorporated by reference to the
Second Amended and Restated Limited Partnership Agreement Home 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 Incorporated by reference to the
of New York, L.P., the Lenders, Party hereto and 9/30/99 10-Q
Manufacturers and Traders Trust Company as Administrative
Agent
10.33 Amendment No. Twenty-Seven to the Second Amended and Incorporated by reference to the
Restated Limited Partnership Agreement 12/29/99 S-3
10.34 Amendments Nos. Twenty-Six and Twenty-Eight through Incorporated by reference to the
Thirty to the Second Amended and Restated Limited 12/31/99 10-K
Partnership Agreement
10.35 Registration Rights Agreement between Home Properties of Incorporated by reference to the
New York, Inc. and GE Capital Equity Investment, Inc., 12/31/99 10-K
dated 9/29/99
10.36 Amendment to Partnership Interest Purchase Agreement and Incorporated by reference to the
Exchange Agreement 12/29/99 S-3
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, Incorporated by reference to the
Inc. and The Equitable Life Assurance Society of the 6/12/00 8-K
United States
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
10.47 Employment Agreement between Home Properties of New York, Incorporated by reference to the
L.P., Home Properties of New York Inc. and Edward J. 12/31/00 10-K
Pettinella, and Amendment No. One, thereto
10.49 Amendment No. Thirty Three to the Second Amended and Incorporated by reference to the
Restated Limited Partnership Agreement 12/31/00 10-K
10.50 Amendment No. Thirty Five to the Second Amended and Incorporated by reference to the
Restated Limited Partnership Agreement 12/31/00 10-K
10.51 Amendment No. Forty Two to the Second Amended and Incorporated by reference to the
Restated Limited Partnership Agreement 12/31/00 10-K
10.52 Amendments Nos. Thirty Four, Thirty Six through Forty Incorporated by reference to the
One, Forty Three and Forty Four to the Second Amended and 12/31/00 10-K
Restated Limited Partnership Agreement
10.53 Purchase and Sale Agreement among Home Properties of New Incorporated by reference to the
York, L.P., Conifer Realty Corporation and Conifer Realty 12/31/00 10-K
LLC, and Amendments Nos. One and Two thereto.
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 Incorporated by reference to the
2000 Stock Benefit Plan 12/31/01 10-K
10.59 Home Properties of New York, Inc. Amendment No. Two to Incorporated by reference to the
2000 Stock Benefit Plan 12/31/01 10-K
10.60 Amendment Nos. Fifty-Two to Fifty-Five to the Second Incorporated by reference to the
Amended and Restated Limited Partnership Agreement Form 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
Amended and Restated Limited Partnership Agreement Form 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 Filed herewith
among Home Properties of New York, L.P., Home Properties
Management, Inc. and Home Leasing, LLC, dated January 1,
2004
10.64 Amendment Nos. Fifty-Nine through Sixty-Seven to the Filed herewith
Second Amended and Restated Limited Partnership Agreement
10.65 Home Properties of New York, Inc. Amendment No. Three to Filed herewith
2000 Stock Benefit Plan
10.66 Employment Agreement, dated as of October 28, 2003 Incorporated by reference to the
between Home Properties, L.P., Home Properties, Inc., Form 8-K filed by Home Properties of
and Nelson B. Leenhouts New York, Inc. on 10/29/03 (the
"10/29/03 8-K")
10.67 Employment Agreement, dated as of October 28, 2003 Incorporated by reference to the
between Home Properties, L.P., Home Properties, Inc. and 10/29/03 8-K
Norman B. 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, Filed herewith
Inc. and Home Properties of New York, L.P. Executive
Retention Plan
11 Computation of Per Share Earnings Schedule Filed herewith
14.1 Home Properties of New York, Inc. Code of Ethics for Filed herewith
Senior Finance Officers
14.2 Home Properties of New York, Inc. Code of Business Filed herewith
Conduct and Ethics
21 List of Subsidiaries of Home Properties of New York, 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