ROCHESTER, N.Y., Feb. 19 /PRNewswire-FirstCall/ -- Home Properties today released financial results for the fourth quarter and year ended December 31, 2008. All results are reported on a diluted basis.
"Home Properties' solid 2008 operating results and record Funds from Operations per share once again reflect the Company's defensive characteristics, which have contributed to superior sector performance in a recessionary environment," said Edward J. Pettinella, President and CEO. "We expect this outperformance to continue in 2009 as Home Properties is the only apartment REIT projecting an increase in net operating income for the year."
Earnings per share ("EPS") for the quarter ended December 31, 2008 was $0.85, compared to $0.48 for the quarter ended December 31, 2007. The $0.37 increase in earnings is primarily attributable to a $13.9 million gain on early extinguishment of debt, a $7.2 million increase in gain on disposition of property, partially offset by a $4.0 million real estate impairment charge. After the allocation of minority interest, the combined gains produced a $0.48 per share increase that was offset by a $0.09 per share reduction for the real estate impairment charge. EPS for the year ended December 31, 2008 was $2.15, compared to $1.73 for the year ended December 31, 2007. The year-over-year increase of $0.42 per share is mainly attributable to the fourth quarter 2008 $13.9 million gain on early extinguishment of debt and $4.0 million real estate impairment charge, combined with a $9.4 million increase in gain on disposition of property (before the allocation of minority interest).
For the quarter ended December 31, 2008, Funds From Operations ("FFO") was $46.1 million, or $1.02 per share, compared to $36.7 million, or $0.79 per share, for the quarter ended December 31, 2007. For the year ended December 31, 2008, FFO was $162.4 million, or $3.57 per share, compared to $151.1 million, or $3.20 per share, for the year ended December 31, 2007. Excluding the non-cash charges of $0.09 per share in the 2008 fourth quarter related to a real estate impairment charge and $0.04 per share in 2007 related to costs associated with the initial offering of the Series F preferred shares which were redeemed, Operating FFO for 2008 was $3.65, compared to $3.24 in 2007, which is a 12.7% increase over 2007. Finally, if all unusual non-recurring items are excluded, 2008 FFO per share would have been $3.37, compared to $3.24 in 2007, or an increase of 3.9%. A reconciliation of GAAP net income to FFO is included in the financial data accompanying this news release.
As referenced above, the Company recorded a non-cash charge of $4 million for impairment on an affordable property in Columbus, Ohio where Home Properties is the general partner owning a 0.01% interest. In the fourth quarter of 2008, the Company determined that it planned to sell the property over the next 12 to 18 months, rather than hold it for the long term. This decision led to a re-evaluation of the fair market value of the property. Under the guidance of FAS No.144, the Company reviewed the value of the long-term asset with the substantially shortened holding period, which triggered the recording of an impairment charge of $4 million.
Fourth Quarter Operating Results
For the fourth quarter of 2008, same-property comparisons (for 102 "Core" properties containing 34,560 apartment units owned since January 1, 2007) reflected an increase in total revenues of 3.9% compared to the same quarter a year ago. Net operating income ("NOI") increased by 2.4% from the fourth quarter of 2007. Property level operating expenses increased by 6.0% for the quarter, primarily due to increases in repairs and maintenance costs, personnel, and property insurance, partially offset by a reduction in advertising and snow removal costs.
Average physical occupancy for the Core properties was 94.9% during the fourth quarter of 2008, compared to 94.6% during the fourth quarter of 2007. Average monthly rental rates, including utility recoveries, increased 3.3% compared to the year-ago period.
On a sequential basis, compared to the 2008 third quarter results for the Core properties, total revenues were up 2.1% in the fourth quarter of 2008, expenses were up 8.0%, and net operating income was down 2.0%. Average physical occupancy decreased 0.2% to 94.9%; however, average monthly rental rates including utility recoveries were 2.2% higher and rental income, including utility recoveries, posted a 2.1% increase. The sequential expense growth can be attributed to the typical seasonality of higher natural gas heating and snow removal costs incurred in the fourth quarter.
Occupancies for the 2,570 net apartment units acquired/developed between January 1, 2007 and December 31, 2008 (the "Recently Acquired Communities") averaged 93.2% during the fourth quarter of 2008, at average monthly rents of $1,051.
Year-to-Date Operating Results
For the year ended December 31, 2008, same-property comparisons for the Core properties reflected an increase in total revenues of 3.4%, resulting in a 3.3% increase in net operating income, compared to 2007. Property level operating expenses increased by 3.6% for the year, primarily due to increases in repairs and maintenance costs, property insurance and real estate taxes. These increases were partly offset by reductions in natural gas heating costs, advertising and snow removal costs.
Average physical occupancy for the Core properties was 95.0% during 2008, compared to 94.8% a year ago, with rent, including utility recoveries, rising 3.1%. Average monthly rental rates, including utility recoveries, increased 3.3% compared to the year-ago period.
Acquisitions
The Company previously announced the acquisition during the fourth quarter of Saddle Brooke Apartments, a 468-unit property located in Cockeysville, Maryland, for $51.5 million.
On December 30, 2008, the Company acquired Westchester West, a 345-unit apartment community located in Silver Spring, Maryland, for $49.0 million, including closing costs, which equates to approximately $142,000 per apartment unit. Consideration for the purchase included the assumption of two existing mortgages. The first mortgage totaled $28.8 million (fair market value of $27.2 million) at a fixed interest rate of 5.03% maturing on March 1, 2015. The second mortgage totaled $7.9 million (fair market value of $7.6 million) at a fixed rate of 5.89% also maturing on March 1, 2015. The balance of the purchase price was paid in cash. The weighted average first year capitalization rate ("cap rate") projected on this acquisition is 6.9% after allocating 3% of rental revenues for management and overhead expenses and before normalized capital expenditures.
These purchases from the same buyer were agreed upon in September of 2008. "These acquisitions were two positive outliers in what continues to be a very difficult acquisitions market," Pettinella said. "We continue to look at deals but, especially in the current market, with recently exacerbated liquidity and recessionary issues, we don't anticipate closing on any acquisitions in the foreseeable future."
Dispositions
During the fourth quarter of 2008, the Company closed on three separate sale transactions, with a total of 629 units, for $60 million, producing approximately $54 million in net proceeds after mortgage payoffs and closing costs. A gain on sale of approximately $21.7 million, before the allocation of minority interest, was recorded in the fourth quarter related to these sales. The weighted average cap rate for these dispositions was 7.4%.
Subsequent to the end of the quarter, on January 30, 2009, the Company sold three properties with a total of 741 units to one buyer for $68 million, producing approximately $25 million in net proceeds after mortgage payoffs and closing costs. A gain on sale of approximately $13.8 million (before the allocation of minority interest) will be recorded in the first quarter of 2009 related to this sale. The weighted average first year cap rate projected on these dispositions is 7.6%. Two of the properties were located in the Hudson Valley, N.Y. region, with the third in New Jersey. With the sales in the fourth and first quarters, the Company has now executed its plan to exit the Hudson Valley region.
Development
The Company has only two projects currently under construction as well as investments in entitled land. The Company owns no raw land and has no real estate development investments in which the cost is in excess of fair market value. Therefore, the Company has not had to record any development pipeline impairment charges, unlike many of its peers. In 2009, none of the Company's pre-construction projects are scheduled to commence construction nor does the Company plan to acquire new entitled or raw land for development.
Capital Markets Activities
As of December 31, 2008, the Company's ratio of debt-to-total market capitalization was 55.8% (based on a 12/31/2008 stock price of $40.60 to determine equity value), with $71.0 million outstanding on its $140.0 million revolving credit facility and $6.6 million of unrestricted cash on hand. Total debt of $2.32 billion was outstanding, at rates of interest averaging 5.4% and with staggered maturities averaging approximately six and one-quarter years. Approximately 94.5% of total indebtedness is at fixed rates. Interest coverage averaged 2.2 times during the quarter (2.3 for the year), and the fixed charge ratio averaged 2.1 times for the quarter (2.2 for the year).
The Company did not repurchase any of its common shares during the fourth quarter. As of December 31, 2008, the Company has Board authorization to buy back up to approximately 2.3 million additional shares of its common stock or Operating Partnership Units, although it has no current plans to do so.
During the fourth quarter, the Company repurchased a total of $60 million face value of its Exchangeable Senior Notes for $45.4 million in several privately-negotiated transactions. The notes were repurchased at a 24.4% discount to face value, which produced a risk-free Internal Rate of Return of approximately 15% and reduced the Company's 2011 debt maturities by $60 million. A gain on debt extinguishment of approximately $13.9 million (after the write-off of debt issuance costs) was recorded in the fourth quarter. After fees and other accruals, this transaction adds $0.29 per share to FFO for the fourth quarter.
Also in the fourth quarter, the Company closed on approximately $141 million in new secured loans, generating $83 million after the payoff of $58 million in maturing loans. The proceeds were used to fund the cash portion of the Westchester West acquisition, to purchase the Exchangeable Senior Notes, and to reduce the outstanding balance on the line of credit. The Company has reduced 2009 maturities from $45 million as of September 30, 2008 to only $19 million today by refinancing prior to maturity as well as extending maturity dates.
On January 30, 2009, Fitch Ratings has affirmed the Company's bank credit facility and exchangeable senior note rating at BBB with a "stable" outlook.
Outlook
For 2009, the Company expects FFO per share between $3.04 and $3.28 per share, which will produce FFO per share growth of -4.8% to 2.8% when compared to 2008 results as restated for FASB Staff Position APB 14-1. The 2009 projection is net of four cents per share for the effect of APB 14-1. This guidance range reflects management's current assessment of economic and market conditions. The assumptions for the 2009 projections are included with the published supplemental information. The defensive characteristics of the Company's portfolio are contributing to the positive same store NOI results assumed for the midpoint of guidance. Compared to the multifamily peer group, Home's result is the only one that is positive and is 430 basis points better than the straight average for the group.
The quarterly breakdown for the 2009 guidance on FFO per share results is as follows: First quarter $0.76 to $0.82; second quarter $0.77 to $0.83; third quarter $0.76 to $0.82; fourth quarter $0.75 to $0.81.
Earnings Conference Call
The Company will conduct a conference call and simultaneous webcast tomorrow at 11:00 AM Eastern Time to review and comment on the information reported in this release. To listen to the call, please dial 800-954-0647 (International 212-231-2901). An audio replay of the call will be available through February 24, 2009, by dialing 800-633-8284 or 402-977-9140 and entering 21412428. The Company 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 its Web site, http://www.homeproperties.com/.
The Company produces supplemental information that provides details regarding property operations, other income, acquisitions, sales, market geographic breakdown, debt and new development. The supplemental information is available via the Company's Web site, e-mail or facsimile upon request.
First Quarter 2009 Event
Home Properties is scheduled to participate in a roundtable presentation and question and answer session at the Citi 2009 Global Property CEO Conference in Naples, Florida, at 8:25 AM EST on Tuesday, March 3, 2009. Citi will offer audio coverage of the event. The Company's presentation materials will be available in the Investors section of Home Properties' Web site at homeproperties.com under News & Market Data - Presentations with dial-in instructions for the call.
This press 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, the 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 apartment real estate investment trust that owns, operates, develops, acquires and rehabilitates apartment communities primarily in selected Northeast, Mid-Atlantic and Southeast Florida markets. Currently, Home Properties operates 109 communities containing 37,539 apartment units. Of these, 36,389 units in 107 communities are owned directly by the Company; 868 units are partially owned and managed by the Company as general partner, and 282 units are managed for other owners. For more information, visit Home Properties' Web site at homeproperties.com.
Tables to follow. Avg. Fourth Quarter Physical Results: Occupancy(a) 4Q 2008 4Q 2008 vs. 4Q 2007 % Growth Average Monthly 4Q 4Q Rent/ Rental Total Total 2008 2007 Occ Unit Rates Revenue Expense NOI Core Properties(b) 94.9% 94.6% $1,145 2.5% 3.9% 6.0% 2.4% Acquisition Properties(c) 93.2% NA $1,051 NA NA NA NA TOTAL PORTFOLIO 94.8% NA $1,138 NA NA NA NA Avg. Year-To-Date Physical Results: Occupancy(a) YTD 2008 YTD 2008 vs. YTD 2007 % Growth Average Monthly YTD YTD Rent/ Rental Total Total 2008 2007 Occ Unit Rates Revenue Expense NOI Core Properties(b) 95.0% 94.8% $1,135 2.7% 3.4% 3.6% 3.3% Acquisition Properties(c) 93.5% NA $1,042 NA NA NA NA TOTAL PORTFOLIO 94.9% NA $1,129 NA NA NA NA (a) Average physical occupancy is defined as total possible rental income, net of vacancy, 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 102 properties with 34,560 apartment units owned throughout 2007 and 2008. (c) Acquisition Properties consist of 8 properties with 2,570 apartment units acquired/developed subsequent to January 1, 2007. HOME PROPERTIES, INC. SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data - Unaudited) Three Months Ended Year Ended December 31 December 31 2008 2007 2008 2007 Rental income $118,242 $114,104 $466,620 $448,919 Property other income 11,510 9,352 42,764 36,624 Interest income 6 277 166 1,963 Other income 92 62 400 1,124 Total revenues 129,850 123,795 509,950 488,630 Operating and maintenance 56,518 52,659 214,485 203,106 General and administrative 6,703 5,783 25,491 23,413 Interest 30,570 30,152 118,959 117,958 Depreciation and amortization 29,818 27,513 115,020 107,037 Impairment of real estate assets 4,000 - 4,000 - Total expenses 127,609 116,107 477,955 451,514 Income from operations before gain on early retirement of debt 2,241 7,688 31,995 37,116 Gain on early retirement of debt 13,884 - 13,884 - Income from operations 16,125 7,688 45,879 37,116 Minority interest in Operating Partnership (4,612) (2,221) (13,361) (9,729) Income from continuing operations 11,513 5,467 32,518 27,387 Discontinued operations Income from operations, net of minority interest 345 160 576 4,080 Gain on disposition of property, net of minority interest 15,502 10,330 36,572 30,077 Discontinued operations 15,847 10,490 37,148 34,157 Net Income 27,360 15,957 69,666 61,544 Preferred dividends - - - (1,290) Redemption of preferred stock - - - (1,902) Net income available to common Shareholders $27,360 $15,957 $69,666 $58,352 Reconciliation from net income available to common shareholders to Funds From Operations: Net income available to common Shareholders $27,360 $15,957 $69,666 $58,352 Real property depreciation and amortization 29,435 27,914 114,260 110,536 Minority interest 4,612 2,221 13,361 9,729 Minority interest - income from discontinued operations 137 65 233 1,637 Gain on disposition of property, net of minority interest (15,502) (10,330) (36,572) (30,077) Loss from early extinguishment of debt in connection with sale of real estate 30 890 1,413 890 FFO - basic and diluted (1) $46,072 $36,717 $162,361 $151,067 (1) Pursuant to the revised definition of Funds From Operations 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 disposition of property, minority interest and extraordinary items plus depreciation from real property. In 2008 and 2007, the Company added back debt extinguishment costs which were incurred as a result of repaying property specific debt triggered upon sale as a gain or loss on sale of the property. Because of the limitations of the FFO definition as published by NAREIT as set forth above, the Company has made certain interpretations in applying the definition. The Company believes all adjustments not specifically provided for are consistent with the definition. 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 Year Ended December 31 December 31 2008 2007 2008 2007 FFO - basic and diluted $46,072 $36,717 $162,361 $151,067 FFO - basic and diluted $46,072 $36,717 $162,361 $151,067 Impairment of real property 4,000 - 4,000 - Redemption of Series F Preferred stock - - - 1,902 FFO - operating (2) $50,072 $36,717 $166,361 $152,969 FFO - basic and diluted $46,072 $36,717 $162,361 $151,067 Recurring non-revenue generating capital expenses (7,246) (7,157) (28,885) (28,638) AFFO (3) $38,826 $29,560 $133,476 $122,429 FFO - operating $50,072 $36,717 $166,361 $152,969 Recurring non-revenue generating capital expenses (7,246) (7,157) (28,885) (28,638) AFFO - operating $42,826 $29,560 $137,476 $124,331 Weighted average shares/units outstanding: Shares - basic 32,228.6 32,873.7 31,991.8 33,130.1 Shares - diluted 32,356.2 33,346.3 32,332.7 33,794.5 Shares/units - basic (4) 45,144.2 46,268.4 45,200.4 46,520.7 Shares/units - diluted (4) 45,271.8 46,741.0 45,541.3 47,185.2 Per share/unit: Net income - basic $0.85 $0.49 $2.18 $1.76 Net income - diluted $0.85 $0.48 $2.15 $1.73 FFO - basic $1.02 $0.79 $3.59 $3.25 FFO - diluted $1.02 $0.79 $3.57 $3.20 Operating FFO - diluted (2) $1.11 $0.79 $3.65 $3.24 AFFO (3) $0.86 $0.63 $2.93 $2.59 Operating AFFO (2) (3) $0.95 $0.63 $3.02 $2.63 Common Dividend paid $0.67 $0.66 $2.65 $2.61 (2) Operating FFO is defined as FFO as computed in accordance with NAREIT definition, adjusted for the addback of real estate impairment charges and preferred stock redemption costs. This is presented for a consistent comparison of how NAREIT defined FFO in 2003. (3) Adjusted Funds From Operations ("AFFO") is defined as gross FFO less an annual reserve for anticipated recurring, non-revenue generating capitalized costs of $780 and $760 per apartment unit in 2008 and 2007, 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) December 31, 2008 2007 Land $515,610 $510,120 Construction in progress, including land 111,039 54,069 Buildings, improvements and equipment 3,245,741 3,115,966 3,872,390 3,680,155 Accumulated depreciation (636,970) (543,917) Real estate, net 3,235,420 3,136,238 Cash and cash equivalents 6,567 6,109 Cash in escrows 27,904 31,005 Accounts receivable 14,078 11,109 Prepaid expenses 16,277 15,560 Deferred charges 11,473 12,371 Other assets 5,488 4,031 Total assets $3,317,207 $3,216,423 Mortgage notes payable $2,112,331 $1,986,789 Exchangeable senior notes 140,000 200,000 Line of credit 71,000 2,500 Accounts payable 23,731 18,616 Accrued interest payable 10,845 10,984 Accrued expenses and other liabilities 32,043 27,586 Security deposits 21,443 22,826 Total liabilities 2,411,393 2,269,301 Minority interest 259,136 279,061 Stockholders' equity 646,678 668,061 Total liabilities and stockholders' Equity $3,317,207 $3,216,423 Total shares/units outstanding: Common stock 32,431.3 32,600.6 Operating partnership units 12,821.2 13,446.9 45,252.5 46,047.5
