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Home Properties Reports Second Quarter 2014 Results and Announces Quarterly Dividend

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SOURCE Home Properties, Inc.

-Positive Portfolio Operating Trends

-Exiting New Development Business

-Reaffirming Commitment to Existing Markets

ROCHESTER, N.Y., July 31, 2014 /PRNewswire/ -- Home Properties, Inc. (NYSE: HME) today reported financial results for the quarter and six months ended June 30, 2014. All per share results are reported on a diluted basis.

Home Properties

Results for the Quarter

  • Earnings per share ("EPS") was $0.39 per share, as compared to $0.51 per share in the second quarter of 2013. The decrease in EPS is primarily attributable to one-time charges of approximately $3.8 million incurred in connection with the Company's exit from the business of developing new apartment communities, as described in detail below, and lower gains on the disposition of property in 2014.
  • Funds from Operations ("FFO") was $1.04 per share, as compared to $1.11 per share in the prior year period. The decrease in FFO is primarily attributable to the $3.8 million charges related to the Company's exit from new development.
  • Operating Funds from Operations ("OFFO") was $1.11 per share, as compared to $1.11 per share in the prior year period.

Results for the Six Months

  • EPS was $1.18 per share, as compared to $1.50 per share in the first six months of 2013.
  • FFO was $2.04 per share, as compared to $2.17 per share in the prior year period.
  • OFFO was $2.10 per share, as compared to $2.17 per share in the prior year period.

Definitions of FFO and OFFO, and reconciliations of GAAP net income to these measures, are provided in the financial data section of this release.

"The past four months have been very active at Home Properties, as we continue to focus on the creation of stockholder value throughout the organization," said Edward J. Pettinella, President and Chief Executive Officer. "Our property management team has been successful in their efforts to increase rents and occupancy, and I am encouraged by improving portfolio trends in the second quarter, with new leases executed at rents 3.0% higher than expiring leases and renewals 3.2% higher. We are making significant strides in occupancy as well, with a 40 basis point improvement over the first quarter of 2014. The acquisition of two apartment communities was completed and we are on pace to meet our goal of acquiring $150 to $250 million of properties in 2014."

Pettinella continued: "After thoughtful consideration and deliberation, we decided to exit the new development business. We believe that this change in strategy is a positive one as it simplifies the investment story for Home Properties, reduces risk, and allows management to spend more time on what Home does best – own, operate, acquire, and reposition Class C/B apartment communities.

We also completed our review of existing and potential new markets. We identified no new markets for expansion and are reaffirming our commitment to the markets in which we operate today."

Same-Property Operating Results (1)


Second Quarter 2014 Compared to

Second Quarter 2013

Second Quarter 2014 Compared to

First Quarter 2014

Rental Income

2.4 % increase

1.5% increase

Total Revenues

2.4% increase

0.1% decrease

Property Level



   Operating Expenses

2.0% increase

9.7% decrease

Net Operating Income ("NOI")

2.6% increase

6.1% increase

Average Physical

95.4%, or a

95.4%, or a

   Occupancy(2)

40 basis point decrease

40 basis point increase

Average Monthly Rental Rates

2.8% increase to $1,323

1.0% increase to $1,323

(1)   For 115 core properties containing 39,915 apartment units owned since January 1, 2013

(2)   Average physical occupancy – defined as the number of occupied apartment units divided by total apartment units

For the six months ended June 30, 2014, same-property total revenues increased 2.6% and property level operating expenses increased 5.5%, resulting in a 0.9% increase in NOI, as compared to the first six months of 2013. The increase in property level operating expenses is largely the result of costs incurred in the first quarter of 2014 related to record severe winter weather in the majority of the Company's operating markets.

Exit from New Development Business
The Company announced today that it is exiting the business of developing new apartment communities. The two projects currently under construction will be completed – Eleven55 Ripley in Silver Spring, Maryland and The Courts at Spring Mill Station in Conshohocken, Pennsylvania. No additional new apartment communities will be started.

"We have created significant value through our development activities and are very proud of the seven Class A projects developed and currently valued at more than $530 million," commented Mr. Pettinella. "However, we believe that it is in the best interest of the Company's stockholders for us to dissolve our new development platform and focus 100% on our core differentiating strategy of acquiring and redeveloping mature apartment communities."

In the second quarter of 2014, the Company recognized a non-cash charge for the impairment in value of land parcels that will not be developed and other related charges of approximately $3.8 million. This one-time charge does not negatively impact OFFO. Net severance charges in connection with the elimination of development employee positions, totaling approximately $1.8 million, will be expensed over the third and fourth quarters of 2014 and the first quarter of 2015. In addition, the Company expects to recognize approximately $1.2 million of interest expense related to land and predevelopment carrying costs in the third and fourth quarters of 2014 that would have otherwise been capitalized.

The Company anticipates that gains on the sale of its remaining development land parcels over the course of the next year will be equal to or greater than the combined impairment and severance charges and interest expense triggered by its exit from the new development business.

Commitment to Existing Markets
In the normal course of operating its business, the Company conducts periodic reviews of potential new markets in conjunction with a thorough review of its existing footprint. The process begins with a review of data and analysis provided by third party consultants, followed by significant research completed by internal personnel, including visits to the various markets, meetings with brokers and property owners, and the completion of underwriting analysis. This process was recently completed and the Company identified no new markets that meet its investment requirements; therefore, it has no plans to enter into any new markets.

Today, the Company is reaffirming its commitment to the existing HME markets of Baltimore, Boston, Chicago, Southeast Florida, Long Island, Northern New Jersey, Philadelphia and Washington, D.C. and will continue to seek acquisition opportunities in all of these markets.

Acquisitions
On June 19, the Company acquired The Preserve at Milltown in Downingtown, Pennsylvania. The 376-unit garden apartment community is located 33 miles northwest of Philadelphia in Chester County near Downingtown Station, which provides train access to Philadelphia, New York City and surrounding communities. The Preserve also has excellent access to employment centers and services.

The Preserve was built in 1975 and consists of 23 two-story buildings with brick and vinyl exteriors, balconies and pitched roofs. During the first three years of ownership, the Company expects to invest a total of $3.6 million in interior renovations, upgrading 15% of the community's apartments each year as leases expire.

At closing, The Preserve was 93.4% occupied at monthly rents averaging $1,084 per unit. The Company expects a 6.3% first year capitalization rate on its investment after allocating 2.7% of rental revenues for management and overhead expenses and before normalized capital expenditures.

On July 30, the Company acquired Willowbrook Apartments in Jeffersonville, Pennsylvania. The 248-unit garden apartment community is located in Montgomery County in the King of Prussia/Valley Forge area. Willowbrook has immediate access to employment centers and a wide range of cultural, entertainment and recreational opportunities.

Willowbrook was built in 1972 and consists of eight two-story buildings with stucco veneer exteriors, vinyl siding accents on the gables, and pitched roofs. During the first three years of ownership, the Company expects to invest a total of $2.3 million in interior renovations, adding in-unit laundry equipment and upgrades as leases expire.

At closing, Willowbrook was 96% occupied at monthly rents averaging $1,230 per unit. The Company expects a 6.8% first year capitalization rate on its investment after allocating 2.7% of rental revenues for management and overhead expenses and before normalized capital expenditures.

Capital Markets
On June 30, the Company repaid two fixed rate mortgages:

  • a $31.7 million 5.27% fixed rate mortgage with a July 1, 2014 maturity date and
  • a $10.3 million 5.25% fixed rate mortgage with a September 1, 2028 maturity date.

Both properties have been added to the Company's unencumbered asset pool.

As of June 30, 2014:

  • The Company had approximately $9 million of cash on hand and an additional $162 million of available capacity on its corporate credit facility.
  • Unencumbered assets represented 55.7% of total undepreciated assets, up from 51.9% at December 31, 2013.
  • The Company's ratio of debt-to-total market capitalization was 35.8%.
  • Total debt of $2.4 billion was outstanding at a weighted average interest rate of 4.3% and staggered maturities averaging 4 years.
  • Approximately 87% of totaled indebtedness was at fixed rates.
  • Interest coverage for the quarter was 4.0 times and the fixed charge ratio was 3.7 times.

2014 Guidance
Based on actual year-to-date results and expectations for the balance of the year, the Company has decreased the midpoint of its prior FFO guidance by $0.13 per share, to $4.35, and the range of FFO per share to $4.31 to $4.39. Quarterly 2014 FFO per share guidance is as follows: third quarter range of $1.11 to $1.15 and fourth quarter range of $1.16 to $1.20.

The midpoint of 2014 OFFO per share guidance has been decreased by $0.07 per share to $4.42 with a range of $4.38 to $4.46. Quarterly guidance for the balance of the year is equal to the FFO ranges provided above.

A significant portion of the reduction in guidance is directly attributable to the Company's exit from the new development business: $0.10 for FFO and $0.04 for OFFO. In addition, extreme weather conditions experienced in the first quarter of 2014 resulted in delays in completing units in the two development projects currently under construction, resulting in reduced NOI from these properties of $0.02 per share for both FFO and OFFO. Guidance for operating results from Core Properties, G&A, and interest expense have been reduced by $0.01 per share for the balance of the year.

A reconciliation of May 1 to current guidance is provided below:

FULL YEAR 2014 GUIDANCE(1)


Per Share


FFO


OFFO

May 1, 2014 Guidance

$  4.48


$  4.49

Change to Guidance as a result of second quarter actual results:




Impairment and other charges related to exit from new development business

$ (0.06)


NA

Changes to third and fourth quarter Guidance:




Amounts triggered due to exit from new development business




      Severance

$ (0.02)


$ (0.02)

      Reduced capitalized interest on land parcels previously designated for development

$ (0.02)


$ (0.02)

Delayed NOI from two development projects under construction

$ (0.02)


$ (0.02)

Normal operations – NOI, interest expense, G&A

$ (0.01)


$ (0.01)

Current Guidance

$  4.35


$  4.42


(1) Represents the mid-point of Guidance range; additional details included in quarterly Supplemental Information available at www.homeproperties.com in the Investors section.

Dividend Declared
The Company announced a regular cash dividend on the Company's common shares of $0.73 per share for the quarter ended June 30, 2014. The dividend is payable on August 27, 2014 to shareholders of record on August 13, 2014 and is equivalent to an annualized rate of $2.92 per share. The current annual dividend represents a 4.4% yield based on the July 30 closing price of $66.69. Home Properties' common stock will begin trading ex-dividend on August 11, 2014.

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.

Second Quarter 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 of the Company's website, www.homeproperties.com. For live audio-only participation, please dial 800-913-1647 (International 212-231-2900).

Third Quarter Conference/Event Schedule
Home Properties is scheduled to participate in the Bank of America Merrill Lynch 2014 Global Real Estate Conference on September 10-11 in New York City, the BMO Capital Markets 9th Annual North American Real Estate Conference on September 15-16 in Chicago, and the Western New York Investors Conference on September 26 in Buffalo, New York. Presentation materials will be available at www.homeproperties.com in the "Investors" section.

Third Quarter Earnings Release and Conference Call
The Company's third quarter 2014 financial results are scheduled to be released after the stock market closes on Thursday, October 30, 2014. A conference call, which will be simultaneously webcast, is scheduled for Friday, October 31, 2014 at 11:00 AM ET. It will be accessible following the instructions for the current quarter's conference call.

Forward-Looking Statements
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 are described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission and 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. The Company assumes no obligation to update or supplement forward-looking statements because of subsequent events.

About Home Properties
Home Properties is a publicly traded apartment real estate investment trust that owns, operates, acquires and rehabilitates apartment communities primarily in suburbs of major metropolitan areas in selected Northeast and Mid-Atlantic markets. An S&P 400 Company, Home Properties owns and operates 121 communities containing 42,198 apartment units. For more information, visit Home Properties' website at www.homeproperties.com.

 

HOME PROPERTIES, INC.

SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data – Unaudited)






Three Months Ended


Six Months Ended


June 30


June 30


2014


2013


2014


2013

Rental income

$ 155,022


$ 149,313


$ 307,375


$ 296,607

Property other income

13,170


12,828


28,730


27,008

Other income

179


215


321


464

   Total revenues

168,371


162,356


336,426


324,079









Operating and maintenance

60,302


57,942


126,761


118,000

General and administrative

7,127


7,337


16,384


16,420

Interest

25,196


28,690


50,523


58,685

Depreciation and amortization

45,167


42,002


89,546


83,414

Other expenses

274


16


282


32

Impairment and other charges

3,842


-


3,842


-

   Total expenses

141,908


135,987


287,338


276,551









Income from continuing operations

26,463


26,369


49,088


47,528









Discontinued operations








   Income (loss) from discontinued operations

-


1,385


40


2,193

   Gain on disposition of property

-


4,645


31,306


45,004

Discontinued operations

-


6,030


31,346


47,197









Net income

26,463


32,399


80,434


94,725









Net income attributable to noncontrolling interest

(3,994)


(5,363)


(12,174)


(15,809)









Net income attributable to common stockholders

$   22,469


$   27,036


$   68,260


$   78,916









Reconciliation from net income attributable to
common stockholders to Funds From Operations:








Net income attributable to common stockholders

$   22,469


$   27,036


$  68,260


$  78,916

Real property depreciation and amortization

44,587


42,695


88,676


85,360

Noncontrolling interest

3,994


5,363


12,174


15,809

Gain on disposition of property

-


(4,645)


(31,306)


(45,004)

FFO - basic and diluted, as defined by NAREIT

71,050


70,449


137,804


135,081

Loss from early extinguishment of debt in connection with sale of real estate

-


-


802


1,416

FFO - basic and diluted (1)

$   71,050


$   70,449


$ 138,606


$ 136,497









(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 adds back debt extinguishment costs and other one-time costs incurred as a result of repaying property specific debt triggered upon sale of a 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. 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


Six Months Ended


June 30


June 30


2014


2013


2014


2013

FFO – basic and diluted

$ 71,050


$ 70,449


$ 138,606


$ 136,497

FFO – basic and diluted

$ 71,050


$ 70,449


$ 138,606


$ 136,497

Acquisition costs of closed deals included in other expenses

274


16


282


32

Impairment and other charges

3,842


-


3,842


-

Operating FFO (2)

$ 75,166


$ 70,465


$ 142,730


$ 136,529

FFO – basic and diluted

$ 71,050


$ 70,449


$ 138,606


$ 136,497

Recurring non-revenue generating capital expenses

(9,094)


(8,901)


(18,225)


(17,934)

AFFO (3)

$ 61,956


$ 61,548


$ 120,381


$ 118,563

Operating FFO

$ 75,166


$ 70,465


$ 142,730


$ 136,529

Recurring non-revenue generating capital expenses

(9,094)


(8,901)


(18,225)


(17,934)

Operating AFFO (2) (3)

$ 66,072


$ 61,564


$ 124,505


$ 118,595









Weighted average shares/units outstanding:








   Shares – basic

57,247.9


52,299.4


57,162.3


51,954.6

   Shares – diluted

57,795.1


52,922.0


57,660.2


52,581.5









   Shares/units – basic (4)

67,452.0


62,695.4


67,379.1


62,366.2

   Shares/units – diluted (4)

67,999.3


63,318.0


67,877.0


62,993.0









Per share/unit:








   Net income – basic

$0.39


$0.52


$1.19


$1.52

   Net income – diluted

$0.39


$0.51


$1.18


$1.50









   FFO – basic

$1.05


$1.12


$2.06


$2.19

   FFO – diluted

$1.04


$1.11


$2.04


$2.17

   Operating FFO (2)

$1.11


$1.11


$2.10


$2.17









   AFFO (3)

$0.91


$0.97


$1.77


$1.88









   Operating AFFO (2) (3)

$0.97


$0.97


$1.83


$1.88









   Common Dividend paid

$0.73


$0.70


$1.46


$1.40

(2)    Operating FFO is defined as FFO adjusted for the addback of acquisition costs on closed deals and land impairment costs.

(3)    Adjusted Funds From Operations ("AFFO") is defined as FFO less an annual reserve for anticipated recurring, non-revenue generating capitalized costs of $900 and $848 per apartment unit in 2014 and 2013, respectively. 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)






June 30, 2014


December 31, 2013

 

Land

$     812,204


$     786,868

Land held for sale

13,734


-

Construction in progress

136,957


187,976

Buildings, improvements and equipment

4,680,578


4,645,921


5,643,473


5,620,765

Accumulated depreciation

(1,303,082)


(1,243,243)

Real estate, net

4,340,391


4,377,522





Cash and cash equivalents

9,382


9,853

Cash in escrows

26,451


23,738

Accounts receivable

12,973


14,937

Prepaid expenses

11,264


22,089

Deferred charges

10,281


11,945

Other assets

3,484


7,793





Total assets

$  4,414,226


$  4,467,877





Mortgage notes payable

$  1,675,731


$  1,814,217

Unsecured notes payable

450,000


450,000

Unsecured line of credit

282,500


193,000

Accounts payable

28,919


27,540

Accrued interest payable

7,757


8,392

Accrued expenses and other liabilities

33,817


33,936

Security deposits

18,930


18,479





Total liabilities

2,497,654


2,545,564





Common stockholders' equity

1,628,360


1,629,253

Noncontrolling interest

288,212


293,060

Total equity

1,916,572


1,922,313





Total liabilities and equity

$  4,414,226


$  4,467,877





Total shares/units outstanding:




Common stock

57,330.6


56,961.6

Operating partnership units

10,201.0


10,287.2


67,531.6


67,248.8

 

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