Home Properties Reports Third Quarter 2012 Results

FFO Per Share Exceeds Wall Street's Mean Estimate by 4 Cents

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Nov 01, 2012, 04:30 ET

ROCHESTER, N.Y., Nov. 1, 2012 /PRNewswire/ -- Home Properties, Inc. (NYSE: HME) today released financial results for the third quarter ended September 30, 2012. All results are reported on a diluted basis.

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"Home Properties benefited from positive fundamentals in the multifamily real estate sector during the third quarter of 2012, producing same-store net operating income growth of 8.3% compared to the prior year third quarter, which is the largest year-over-year third quarter increase since 2001," said Edward J. Pettinella, Home Properties President and CEO. "Increased rent growth, continued high occupancy, favorable expense control and strong results from recent acquisitions and new construction have contributed to excellent quarterly results."

Earnings per share ("EPS") for the quarter ended September 30, 2012 was $0.71, compared to $0.20 for the quarter ended September 30, 2011. The $0.51 increase in EPS is primarily attributable to a $19.7 million gain on disposition of property combined with a $13.5 million increase in income from continuing operations from both the properties owned throughout 2011 and 2012 (the "Core" properties) and those acquired, developed, or redeveloped subsequent to January 1, 2011 (the "Non-Core" properties).

For the quarter ended September 30, 2012, Funds From Operations ("FFO") was $67.3 million, or $1.09 per share, compared to $46.4 million, or $0.87 per share, for the quarter ended September 30, 2011, which equates to a 26.3% increase on a per-share basis. Third quarter 2012 FFO of $1.09 per share was $0.04 above the midpoint of the guidance range provided by management and the analysts' mean estimate, as reported by Thomson. A reconciliation of GAAP net income to FFO is included in the financial data accompanying this news release.

Third Quarter Operating Results

For the third quarter of 2012, same-property comparisons (for 111 Core properties containing 37,386 apartment units owned since January 1, 2011) reflected an increase in rental income of 4.2% and a 4.3% increase in total revenues compared to the same quarter a year ago. Net operating income ("NOI") increased by 8.3% from the third quarter of 2011. Property level operating expenses decreased by 2.1% compared to the prior year quarter, primarily due to decreases in repairs and maintenance, personnel costs and property management general and administrative costs, which were partially offset by an increase in real estate taxes.

Average physical occupancy for the Core properties was 95.5% during the third quarter in both 2012 and 2011. Average monthly rental rates of $1,240 in the 2012 third quarter represent a 3.9% increase compared to the year-ago period.

On a sequential basis, compared to the 2012 second quarter results for Core properties, average monthly rental rates were up 1.4% in the third quarter of 2012. This increase was offset by a 0.9% seasonal decline in economic occupancy resulting in a 0.5% increase in rental income and total revenues. Expenses decreased 0.7% producing an NOI increase of 1.1%. Average physical occupancy decreased 0.7% to 95.5%.

Physical occupancy for the 6,421 apartment units acquired/developed/redeveloped between January 1, 2011 and September 30, 2012 averaged 92.0% during the third quarter of 2012, at average monthly rents of $1,370.

Year-to-Date Operating Results

For the nine months ended September 30, 2012, same-property comparisons for the Core properties reflected an increase in total revenues of 4.6% and a decrease in total expense of 1.8% resulting in an 8.8% increase in NOI compared to the first nine months of 2011. Property level operating expenses in 2012 decreased, primarily due to lower electricity, natural gas heating costs, personnel and snow removal costs. These decreases were partially offset by increases in property insurance and real estate taxes.

Average physical occupancy for the Core properties was 95.7% during the first nine months of 2012, up from 95.6% a year ago, with average monthly rental rates of $1,224, an increase of 4.4% over the prior year period.

Acquisitions/Dispositions/Development

There were no acquisitions of apartment communities in the third quarter of 2012.

During the third quarter of 2012, the Company closed on two separate sale transactions, with a total of 424 units, for $41.2 million, producing approximately $40.1 million in net proceeds after closing costs. A gain on sale of approximately $19.7 million was recorded in the third quarter related to these sales. The two apartment communities sold were located in the Philadelphia and Baltimore regions.

Subsequent to the end of the quarter, on October 11, 2012, the Company sold one property with 318 units in the Philadelphia region for $29.8 million, producing approximately $4.7 million in net proceeds after mortgage payoffs and closing costs. A gain on sale of approximately $15.9 million will be recorded in the fourth quarter of 2012 related to this sale.

The weighted average historical cap rate for these three dispositions was 6.3%.

During the third quarter, the Company fully completed the development of The Apartments at Cobblestone Square, located in Fredericksburg, Va. The property averaged 84.1% occupancy during the third quarter of 2012; and, as of October 31, 97.1% of the 314 units were occupied with 98.4% of the units leased.

Capital Markets Activities

As of September 30, 2012, the Company's ratio of debt-to-total market capitalization was 43.3% (based on a September 28, 2012 stock price of $61.27 used to determine equity value), with $128 million outstanding on its $275 million revolving credit facility and $8.2 million of unrestricted cash on hand. Total debt of $2.9 billion was outstanding, at interest rates averaging 4.5% and with staggered maturities averaging five years. Approximately 85% of total indebtedness is at fixed rates. Interest coverage for the quarter was 3.1 times and the fixed charge ratio was 3.0 times.

On May 14, 2012, the Company extended its At-The-Market (ATM) equity offering program, with authorization to sell up to 4.4 million common shares. During the third quarter, 1,272,225 shares were sold (including 10,100 shares with a settlement date in early October) at an average price of $63.61 generating gross proceeds of $80.9 million and net proceeds of $79.3 million. Year to date, the Company issued 1,970,824 shares at an average price of $62.64 generating gross proceeds of $123.5 million and net proceeds of $120.9 million. There are approximately 2.4 million common shares remaining under this program.

Outlook

Based on higher third quarter results than expected and higher results anticipated for the balance of the year, the Company has increased the midpoint of its prior FFO guidance by seven cents to $4.07 and the range of FFO per share to $4.05 to $4.09 from $3.96 to $4.04. This guidance range reflects management's current assessment of economic and market conditions, including a net one-half cent charge from the effect of Hurricane Sandy. Operating FFO has been increased by six cents to $4.11 at the midpoint with a range of $4.09 to $4.13. The difference between FFO and OFFO is due solely to expensed acquisition costs. Because projected acquisition costs are minimal, the guidance for the fourth quarter of 2012 for FFO and OFFO per share results is identical at a range from $1.02 to $1.06, which also includes the one-half cent reserve for Hurricane Sandy after taking into account various insurance coverages and deductibles.

Dividend Declared

The Company announced a regular cash dividend on the Company's common shares of $0.66 per share for the quarter ended September 30, 2012. The dividend is payable on November 27, 2012 to shareholders of record on November 15, 2012 and is equivalent to an annualized rate of $2.64 per share. The current annual dividend represents a 4.42% yield based on the October 26, 2012 closing price of $59.70. Home Properties' common stock will begin trading ex-dividend on November 13, 2012.

Supplemental Information

The Company produces supplemental information that includes details regarding property operations, other income, acquisitions, sales, geographic market breakdown, debt and new development. The supplemental information is available via the Company's website through the "Investors" section or e-mail upon request.

Third Quarter 2012 Earnings Conference Call

The Company will conduct a conference call and simultaneous webcast tomorrow at 11:00 AM ET to review and comment on the information reported in this release. The webcast, which includes audio and a slide presentation, will be available, live at 11:00 AM and archived by 1:00 PM, through the "Investors" section home page of the website www.homeproperties.com. For live audio-only participation, please dial 800-913-1647 (International 212-231-2900).

Fourth Quarter 2012 Earnings Release and Conference Call

The Company's fourth quarter 2012 financial results are scheduled to be released after the stock market closes on Thursday, February 7, 2013. A conference call, which will be simultaneously webcast, is scheduled for Friday, February 8, 2013 at 11:00 AM ET and will be accessible following the instructions for the current quarter's conference call.

Fourth Quarter 2012 Conference/Event Schedule

Home Properties' President and CEO, Edward J. Pettinella, is scheduled to participate in REITWorld®: NAREIT's Annual Convention for All Things REIT® in San Diego
November 13-15. Any presentation and related materials will be available in the "Investors" section of www.homeproperties.com.

This release contains forward-looking statements. Although the Company believes expectations reflected in such forward-looking statements are based on 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, weather and other conditions that might affect operating expenses, the timely completion of repositioning and new development activities within anticipated budgets, the actual pace of future acquisitions and dispositions, and continued access to capital to fund growth.

Home Properties is a publicly traded multifamily real estate investment trust (REIT) that owns, operates, develops, acquires and rehabilitates apartment communities primarily in selected Northeast and Mid-Atlantic markets. An S&P 400 Company, Home Properties owns and operates 124 communities containing 43,489 apartment units. For more information, visit Home Properties' website at www.homeproperties.com.

HOME PROPERTIES, INC.
SUMMARY OF OCCUPANCY AND PROPERTY OPERATING RESULTS

	Avg. Physical
Third Quarter Results:	Occupancy^(a)		3Q 2012	3Q 2012 vs. 3Q 2011 % Growth

			Average
			Monthly	Base
			Rent/	Rental	Total	Total
	3Q 2012	3Q 2011	Occ Unit	Rates	Revenue	Expense	NOI
Core Properties^(b)	95.5%	95.5%	$1,240	3.9%	4.3%	(2.1%)	8.3%
Non-Core Properties^(c)	92.0%	NA	$1,370	NA	NA	NA	NA
TOTAL PORTFOLIO	94.9%	NA	$1,259	NA	NA	NA	NA

	Avg. Physical
Year-To-Date Results:	Occupancy^(a)		YTD 2012	YTD 2012 vs. YTD 2011 % Growth

			Average
			Monthly	Base
	YTD	YTD	Rent /	Rental	Total	Total
	2012	2011	Occ Unit	Rates	Revenue	Expense	NOI
Core Properties^(b)	95.7%	95.6%	$1,224	4.4%	4.6%	(1.8%)	8.8%
Non-Core Properties^(c)	90.4%	NA	$1,404	NA	NA	NA	NA
TOTAL PORTFOLIO	95.0%	NA	$1,246	NA	NA	NA	NA

^(a)	Average physical occupancy is defined as total possible rental income, net of vacancy expense, as a percentage of total possible rental income. Total possible rental income is determined by valuing occupied units at contract rates and vacant units at market rents.

^(b)	Core Properties consist of 111 properties with 37,386 apartment units owned throughout 2011 and 2012.

^(c)	Non-Core Properties consist of 14 properties with 6,421 apartment units acquired, developed, or redeveloped subsequent to January 1, 2011, such that full year comparable operating results are not available. Non-Core Properties excludes properties still under development where construction is not 100% complete.

HOME PROPERTIES, INC.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data – Unaudited)

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2012	2011	2012	2011

Rental income	$ 155,335	$ 132,902	$ 448,331	$ 387,952
Property other income	12,654	10,517	39,785	35,017
Other income	32	25	63	94
Total revenues	168,021	143,444	488,179	423,063
Operating and maintenance	59,975	54,838	178,945	165,785
General and administrative	8,018	7,803	27,367	22,865
Interest	32,871	32,696	95,843	98,403
Depreciation and amortization	43,186	35,996	124,602	104,564
Other expenses	15	1,630	2,726	1,739
Total expenses	144,065	132,963	429,483	393,356
Income from continuing operations	23,956	10,481	58,696	29,707
Discontinued operations
Income from discontinued operations	466	277	1,216	920
Gain on disposition of property	19,667	-	19,667	-
Discontinued operations	20,133	277	20,883	920

Net income	44,089	10,758	79,579	30,627

Net income attributable to noncontrolling interest	(7,676)	(2,250)	(14,051)	(6,700)
Net income attributable to common stockholders	$ 36,413	$ 8,508	$ 65,528	$ 23,927
Reconciliation from net income attributable to common stockholders to Funds From Operations:
Net income available to common stockholders	$ 36,413	$ 8,508	$ 65,528	$ 23,927
Real property depreciation and amortization	42,863	35,625	123,442	103,493
Noncontrolling interest	7,676	2,250	14,051	6,700
Gain on disposition of property	(19,667)	-	(19,667)	-
FFO - basic and diluted ⁽¹⁾	$ 67,285	$ 46,383	$ 183,354	$ 134,120

⁽¹⁾

Pursuant to the updated guidance for Funds From Operations provided 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 disposition of property, impairment write-downs of depreciable real estate, noncontrolling interest and extraordinary items plus depreciation from real property. The Company believes all adjustments not specifically provided for are consistent with the definition. Other similarly titled measures may not be calculated in the same manner.

HOME PROPERTIES, INC.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data – Unaudited)

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2012	2011	2012	2011

FFO – basic and diluted	$ 67,285	$ 46,383	$ 183,354	$ 134,120
FFO – basic and diluted	$ 67,285	$ 46,383	$ 183,354	$ 134,120
Acquisition costs of closed deals included in other expenses	15	1,630	2,726	1,739
Operating FFO ⁽²⁾	$ 67,300	$ 48,013	$ 186,080	$ 135,859
FFO – basic and diluted	$ 67,285	$ 46,383	$ 183,354	$ 134,120
Recurring non-revenue generating capital expenses	(9,363)	(7,973)	(27,285)	(23,550)
Addback of non-cash interest expense	-	553	-	1,639
AFFO⁽³⁾	$ 57,922	$ 38,963	$ 156,069	$ 112,209
Operating FFO	$ 67,300	$ 48,013	$ 186,080	$ 135,859
Recurring non-revenue generating capital expenses	(9,363)	(7,973)	(27,285)	(23,550)
Addback of non-cash interest expense	-	553	-	1,639
Operating AFFO^{(2) (3)}	$ 57,937	$ 40,593	$ 158,795	$ 113,948
Weighted average shares/units outstanding:
Shares – basic	50,255.2	41,707.7	49,218.7	39,743.3
Shares – diluted	50,934.2	42,531.0	49,848.4	40,462.5
Shares/units – basic ⁽⁴⁾	60,868.0	52,767.7	59,873.9	50,910.7
Shares/units – diluted ⁽⁴⁾	61,547.0	53,591.1	60,503.6	51,630.0
Per share/unit:
Net income – basic	$0.72	$0.20	$1.33	$0.60
Net income – diluted	$0.71	$0.20	$1.31	$0.59
FFO – basic	$1.11	$0.88	$3.06	$2.63
FFO – diluted	$1.09	$0.87	$3.03	$2.60
Operating FFO⁽²⁾	$1.09	$0.90	$3.08	$2.63
AFFO ⁽³⁾	$0.94	$0.73	$2.58	$2.17
Operating AFFO^{(2) (3)}	$0.94	$0.76	$2.62	$2.21
Common Dividend paid	$0.66	$0.62	$1.98	$1.86

⁽²⁾	Operating FFO is defined as FFO as computed in accordance with NAREIT definition, adjusted for the add back of acquisition costs on closed deals.

⁽³⁾	Adjusted Funds From Operations ("AFFO") is defined as gross FFO less an annual reserve for anticipated recurring, non-revenue generating capitalized costs of $848 and $800 per apartment unit in 2012 and 2011, respectively. Non-cash interest expense of the exchangeable senior notes in accordance with ASC 470-20 (formerly APB14-1) has been added back for 2011. The resulting sum is divided by the weighted average shares/units on a diluted basis to arrive at AFFO per share/unit.

⁽⁴⁾	Basic includes common stock outstanding plus operating partnership units in Home Properties, L.P., which can be converted into shares of common stock. Diluted includes additional common stock equivalents.

HOME PROPERTIES, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(in thousands - Unaudited)

	September 30, 2012	December 31, 2011
Land	$ 799,272	$ 721,542
Construction in progress	64,655	64,201
Buildings, improvements and equipment	4,606,058	4,256,581
	5,469,985	5,042,324
Accumulated depreciation	(1,094,705)	(983,759)
Real estate, net	4,375,280	4,058,565

Cash and cash equivalents	8,195	8,297
Cash in escrows	74,207	32,604
Accounts receivable	10,288	12,142
Prepaid expenses	23,490	15,994
Deferred charges	14,230	16,322
Other assets	12,058	9,282

Total assets	$ 4,517,748	$ 4,153,206

Mortgage notes payable	$ 2,208,427	$ 2,260,836
Unsecured notes payable	550,000	400,000
Unsecured line of credit	128,000	2,500
Accounts payable	29,829	20,953
Accrued interest payable	12,239	10,286
Accrued expenses and other liabilities	32,273	29,474
Security deposits	19,789	19,513

Total liabilities	2,980,557	2,743,562

Common stockholders' equity	1,274,554	1,153,668
Noncontrolling interest	262,637	255,976
Total equity	1,537,191	1,409,644

Total liabilities and equity	$ 4,517,748	$ 4,153,206

Total shares/units outstanding:
Common stock	51,234.4	48,321.3
Operating partnership units	10,591.1	10,739.8
	61,825.5	59,061.1