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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13136
HOME PROPERTIES OF NEW YORK, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 16-1455126
-------- ----------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
850 Clinton Square, Rochester, New York 14604
(Address of principal executive offices) (Zip Code)
(585) 546-4900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former
year, if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class of Common Stock Outstanding at October 31, 2002
--------------------- -------------------------------
$.01 par value 26,778,912
HOME PROPERTIES OF NEW YORK, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Operations (Unaudited) -
Nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Operations (Unaudited) -
Three months ended September 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Nine months ended September 30, 2002 and 2001 6
Consolidated Statements of Comprehensive Income (Unaudited) -
Three months ended September 30, 2002 and 2001 7
Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2002 and 2001 8
Notes to Consolidated Financial Statements (Unaudited) 9-18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33-36
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2002 2001
---- ----
(Unaudited) (Note 1)
ASSETS
Real estate:
Land $ 367,140 $ 287,473
Buildings, improvements and equipment 2,130,644 1,847,605
--------- -----------
2,497,784 2,135,078
Less: accumulated depreciation ( 239,538) ( 201,564)
------------ ------------
Real estate, net 2,258,246 1,933,514
Cash and cash equivalents 7,814 10,719
Cash in escrows 43,915 39,230
Accounts receivable 8,252 8,423
Prepaid expenses 18,057 17,640
Investment in and advances to affiliates 36,623 42,870
Deferred charges 7,517 5,279
Other assets 7,067 6,114
-------------- --------------
Total assets $2,387,491 $2,063,789
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,161,281 $ 960,358
Line of credit 86,000 32,500
Accounts payable 17,405 21,838
Accrued interest payable 6,719 5,782
Accrued expenses and other liabilities 12,743 13,180
Security deposits 22,427 18,948
------------ ------------
Total liabilities 1,306,575 1,052,606
---------- ----------
Commitments and contingencies
Minority interest 346,134 341,854
----------- ------------
8.36% Series B convertible cumulative preferred stock, liquidation preference of
$25.00 per share; no shares and 2,000,000 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively, net of issuance
costs - 48,733
----------------- -------------
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares
issued and outstanding at September 30, 2002. No shares issued or
outstanding at December 31, 2001 60,000 -
Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares
authorized; 1,086,800 and 1,150,000 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 107,680 114,000
Common stock, $.01 par value; 80,000,000 shares authorized; 26,689,611 and
24,010,855 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively 267 240
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 639,291 572,273
Accumulated other comprehensive income (687) (532)
Distributions in excess of accumulated earnings (68,943) (57,768)
Officer and director notes for stock purchases (2,826) (7,617)
--------------- ---------------
Total stockholders' equity 734,782 620,596
------------ ------------
Total liabilities and stockholders' equity $2,387,491 $2,063,789
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2002 2001
---- ----
Revenues:
Rental income $ 278,020 $ 249,146
Property other income 10,328 9,484
Interest and dividend income 1,079 2,548
Other income 451 1,610
-------------- -------------
Total revenues 289,878 262,788
----------- -----------
Expenses:
Operating and maintenance 121,789 112,570
General and administrative 8,758 7,292
Interest 56,964 48,591
Depreciation and amortization 48,529 45,505
Impairment of real property 1,565 -
------------- -------------
Total expenses and charges 237,605 213,958
----------- ----------
Income before gain (loss) on disposition of property, minority interest and
discontinued operations 52,273 48,830
Gain (loss) on disposition of property (402) 22,085
--------------- ------------
Income before minority interest and discontinued operations 51,871 70,915
Minority interest 13,655 24,134
------------ ------------
Income from continuing operations 38,216 46,781
------------ ------------
Discontinued operations:
Income from operations, net of $1,021 in 2002 and $1,424 in 2001, allocated
to minority interest 1,643 1,964
Gain on disposition of property, net of $3,402 allocated to minority interest 5,601 -
------------- -------------
Income from discontinued operations 7,244 1,964
------------- ------------
Net income 45,460 48,745
Preferred dividends (11,027) (13,492)
Premium on Series B preferred stock repurchase (5,025) -
-------------- -------------
Net income available to common shareholders $ 29,408 $ 35,253
============ ==========
Per share data:
Basic earnings per share data:
Income from continuing operations $ .86 $1.52
Discontinued operations .28 .09
------ -------
Net income available to common shareholders $1.14 $1.61
===== =====
Diluted earnings per share data:
Income from continuing operations $ .85 $1.52
Discontinued operations .28 .09
------ -------
Net income available to common shareholders $1.13 $1.61
===== =====
Weighted average number of shares outstanding
- Basic 25,780,578 21,852,439
========== ==========
- Diluted 26,099,471 21,948,154
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2002 2001
---- ----
Revenues:
Rental income $ 97,990 $ 86,481
Property other income 4,210 3,353
Interest and dividend income 284 531
Other income (loss) (130) 684
------------- ------------
Total revenues 102,354 91,049
--------- ----------
Expenses:
Operating and maintenance 40,927 35,571
General and administrative 2,837 2,324
Interest 19,990 17,099
Depreciation and amortization 17,373 15,553
Impairment of real property 1,565 -
------------ -------------
Total expenses and charges 82,692 70,547
----------- ----------
Income before gain on disposition of property, minority interest and
discontinued operations 19,662 20,502
Gain on disposition of property - 8,437
------------- -----------
Income before minority interest and discontinued operations 19,662 28,939
Minority interest 5,969 10,318
------------ ----------
Income from continuing operations 13,693 18,621
----------- ----------
Discontinued operations:
Income from operations, net of $151 in 2002 and $493 in 2001, allocated to
minority interest 251 674
Gain on disposition of property, net of $1,756 allocated to minority interest 2,912 -
------------ -------------
Income from discontinued operations 3,163 674
------------ ------------
Net income 16,856 19,295
Preferred dividends (3,793) (4,498)
------------ ------------
Net income available to common shareholders $ 13,063 $ 14,797
========== ==========
Per share data:
Basic earnings per share data:
Income from continuing operations $ .37 $ .64
Discontinued operations .12 .03
----- -----
Net income available to common shareholders $ .49 $ .67
===== =====
Diluted earnings per share data:
Income from continuing operations $ .37 $ .64
Discontinued operations .12 .02
----- -----
Net income available to common shareholders $ .49 $ .66
===== =====
Weighted average number of shares outstanding
- Basic 26,428,655 21,963,017
========== ==========
- Diluted 26,755,132 29,233,625
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
2002 2001
---- ----
Net income $ 45,460 $ 48,745
Other comprehensive income:
Cumulative effect of accounting change - (339)
Change in fair value of hedge instruments (67) (296)
------------ ------------
Other comprehensive loss, net of minority interest (67) (635)
------------ -----------
Comprehensive income $ 45,393 $ 48,110
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
2002 2001
---- ----
Net income $ 16,856 $19,295
Other comprehensive income:
Change in fair value of hedge instruments (348) (248)
----------- -----------
Other comprehensive loss, net of minority interest (348) (248)
----------- -----------
Comprehensive income $ 16,508 $19,047
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 45,460 $ 48,745
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in income of affiliates 829 45
Income allocated to minority interest 18,078 25,558
Depreciation and amortization 50,181 47,859
Impairment of real property 1,565 -
Gain on disposition of property (8,601) (22,085)
Changes in assets and liabilities:
Other assets (1,301) 1,907
Accounts payable and accrued liabilities (1,145) 4,107
----------- ----------
Total adjustments 59,606 57,391
--------- ---------
Net cash provided by operating activities 105,066 106,136
-------- --------
Cash flows from investing activities:
Purchase of properties, net of mortgage notes assumed and UPREIT Units
issued (222,345) (123,122)
Additions to properties (83,838) (89,501)
Proceeds from sale of properties 79,374 94,684
Advances to affiliates (8,244) (10,593)
Payments on advances to affiliates 13,662 13,988
--------- ----------
Net cash used in investing activities (221,391) (114,544)
--------- ----------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net of issuance costs of $1,902 58,098 -
Proceeds from sale of common stock, net of issuance costs of $1,492
in 2002 and $91 in 2001 47,451 33,704
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 118,472 65,640
Payments on mortgage notes payable (46,229) (53,946)
Proceeds from line of credit 161,000 135,500
Payments on line of credit (107,500) (63,500)
Payments of deferred loan costs (3,001) (513)
Additions to cash escrows, net (4,685) (3,566)
Repayment of officer loans 4,555 -
Dividends and distributions paid (85,349) (77,643)
---------- ----------
Net cash provided by financing activities 113,420 3,156
-------- ----------
Net decrease in cash (2,905) (5,252)
Cash and cash equivalents:
Beginning of period 10,719 10,449
--------- ---------
End of period $ 7,814 $ 5,197
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Mortgage loans assumed associated with property acquisitions $128,678 $ 59,878
Conversion of preferred to common stock 6,320 -
Exchange of UPREIT Units/partnership interest for common shares 1,929 1,202
Fair value of hedge instruments 1,611 1,095
Issuance of UPREIT Units associated with property and other acquisitions 11,526 19,133
Notes issued in exchange for officer and director stock purchases - 1,965
Increase in real estate associated with the purchase of minority interest
UPREIT Units - 1,666
Transfer of notes receivable due from affiliates in exchange for additional
equity in affiliates - 23,699
The accompanying notes are an integral part of these consolidated financial
statements.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Unaudited Interim Financial Statements
The interim consolidated financial statements of Home Properties of New
York, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information and the applicable rules and regulations of the Securities
and Exchange Commission. Accordingly, certain disclosures accompanying
annual financial statements prepared in accordance with generally
accepted accounting principles are omitted. The year-end balance sheet
data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisting
solely of normal recurring adjustments, necessary for the fair
presentation of the consolidated financial statements for the interim
periods have been included. The current period's results of operations
are not necessarily indicative of results which ultimately may be
achieved for the year. The interim consolidated financial statements
and notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form
10-K for the year ended December 31, 2001 and Form 8-K dated January
23, 2002 (which financial statements reflect the impact of property
sales as discontinued operations pursuant to the provisions of SFAS 144
- "Accounting for the Impairment of Disposal of Long-Lived Assets") for
the year ended December 31, 2001.
2. Organization and Basis of Presentation
Organization
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 September 30, 2002, the Company operated 292 apartment
communities with 51,329 apartments. Of this total, the Company owned
146 communities consisting of 41,200 apartments, managed as general
partner 8,061 apartments, and fee managed 2,068 apartments for
affiliates and third parties. The Company also fee manages 2.2 million
square feet of office and retail properties.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its 62.2% (58% at September 30, 2001) 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
outstanding. The remaining 37.8% (42% at September 30, 2001) is
reflected as Minority Interest in these consolidated financial
statements. 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 .1% by Home Properties Trust, a wholly owned
qualified REIT subsidiary ("QRS") of the Company. Investments in
entities where the Company has the ability to exercise significant
influence over but does not have financial and operating control are
accounted for using the equity method. All significant inter-company
balances and transactions have been eliminated in these consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the 2001 consolidated
financial statements to conform to the 2002 presentation.
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.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. Organization and Basis of Presentation (continued)
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 from
continuing operations and net income for the three and nine-month
periods ended September 30, 2002 increased approximately $2.6 and $7.8
million, respectively or $.10 and $.30 per diluted share, respectively.
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.
New Accounting Standards
In April 2002, the FASB issued Statement of Financial Accounting
Standard ("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 becomes effective for the Company for the
year ending December 31, 2003. The Company does not expect this
pronouncement to have a material impact on the Company's financial
position, results of operations, or cash flows.
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
becomes effective for exit and disposal activities initiated after
December 31, 2002. The Company does not expect this pronouncement to
have a material impact on the Company's financial position, results of
operations, or cash flows.
3. Earnings Per Common Share
Basic earnings per share ("EPS") is computed as net income available to
common shareholders divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through
stock-based compensation including stock options, warrants 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 applicable to common shareholders is the same for
both the basic and diluted calculation for the nine and three-month
periods ended September 30, 2002 and the nine-month period ended
September 30, 2001. Income from continuing operations applicable to
common shareholders has been adjusted by $4,498 to reflect the
dividends related to the convertible preferred stock that is
considered dilutive for the three-month period ended
September 30, 2001.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Earnings Per Common Share (continued)
The reconciliation of the basic weighted average shares outstanding and
diluted weighted average shares outstanding for the nine and
three-months ended September 30, 2002 and 2001 is as follows:
Nine Months Three Months
----------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average
number of shares outstanding 25,780,578 21,852,439 26,428,655 21,963,017
Effect of dilutive stock options 95,715 158,227
and warrants 318,893 326,477
Effect of convertible cumulative
preferred stock 7,112,381
----------------- --------------------------------- -----------
- - -
- - - -
Diluted weighted average
number of shares outstanding 26,099,471 21,948,154 26,755,132 29,233,625
========== ========== ========== ==========
Basic earnings per share $1.14 $1.61 $0.49 $0.67
===== ===== ===== =====
Diluted earnings per share $1.13 $1.61 $0.49 $0.66
===== ===== ===== =====
Unexercised stock options and warrants to purchase 678,490 and
1,772,562 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
nine and three-month periods ended September 30, 2002 and 2001,
respectively. For the nine and three-months periods ended September 30,
2002 (as applicable and on a weighted average basis), the 1,788,629 and
1,121,148 shares, respectively, of the Series B, C, D and E Convertible
Cumulative Preferred Stock (4,317,515 and 3,677,041 common stock
equivalents, respectively) have an antidilutive effect and are not
included in the computation of diluted EPS. In addition, for the nine
month period ended September 30, 2001, the 4,816,667 shares of the
Series A, B, C, D, and E Convertible Cumulative Preferred Stock
(7,112,381 common stock equivalents) on an as-converted basis have an
antidilutive effect and are not included in the computation of diluted
EPS.
4. Preferred Stock and Stockholders' Equity
On August 20, 2002, 63,200 of the Series E Convertible Preferred Shares
were converted into 200,000 shares of common stock. The conversion had
no effect on the reported results of operations.
On May 24, 2002, the Company repurchased the 1.0 million shares
outstanding of its Series B Convertible Cumulative Preferred Stock 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 for
the nine- month period ended September 30, 2002.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Preferred Stock and Stockholders' Equity (continued)
On March 18, 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).
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.
On February 4, 2002, 1.0 million of the Series B Convertible Cumulative
Preferred Shares were converted into 839,771 shares of common stock.
The conversion had no effect on the reported results of operations.
5. Other Income
Other income for the nine and three-months ended September 30, 2002 and
2001 is summarized as follows:
Nine Months Three Months
----------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Management fees $1,506 $1,668 $537 $685
Other (226) (13) (341) (4)
Management Companies (829) (45) (326) 3
-------- --------- ----- -------
$ 451 $1,610 ($130) $684
======= ====== ====== ====
Certain property management, leasing and development activities are
performed by Home Properties Management, Inc. and Home Properties
Resident Services, Inc. (the "Management Companies"). Both are Maryland
corporations and, effective January 1, 2001, have elected to convert to
taxable REIT subsidiaries under the Tax Relief Extension Act of 1999.
Effective March 1, 2001, the Company recapitalized Home Properties
Resident Services, Inc. by contributing $23.7 million of loans due from
affiliated partnerships to equity. 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 inside directors. The Operating Partnership owns non-voting
common stock in the Management Companies which entitles the Operating
Partnership to receive 95% and 99% of the economic interest in Home
Properties Management, Inc. and Home Properties Resident Services,
respectively.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. Other Income (continued)
The Company's share of income from the Management Companies for the
nine and three-months ended September 30, 2002 and 2001 is summarized
as follows:
Nine Months Three Months
----------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Management fees $2,134 $2,569 $717 $877
Interest income 637 1,195 260 437
Miscellaneous 31 32 (2) 19
General and administrative (2,720) (2,294) (978) (898)
Interest expense (562) (1,128) (176) (289)
Other expense (349) (423) (150) (139)
--------- --------- ------ ------
Net income (loss) ($ 829) ($ 49) ($329) $ 7
-------- --------- ------ -------
Company's share ($ 829) ($ 45) ($326) $ 3
======== ========= ====== =======
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.
6. 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
unconsolidated management and interest income. Non-segment assets to
reconcile to total assets include cash and cash equivalents, cash in
escrows, accounts receivable, prepaid expenses, investments in and
advances to affiliates, deferred charges and other assets.
Core properties consist of all apartment communities owned as of
January 1, 2001, where comparable operating results are available for
the periods presented. Non-core properties consist of apartment
communities acquired during 2001 and 2002, 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 of the Company's Form 10-K for the year ended December
31, 2001.
The Company assesses and measures segment operating results based on a
performance measure referred to as Funds from Operations ("FFO"). FFO
is generally defined as net income (loss), before gains (losses) from
the sale of property, non-cash impairment charges, extraordinary items,
plus real estate depreciation including adjustments for unconsolidated
partnerships and joint ventures. This presentation excludes the
dividends on the Series F Preferred Stock and assumes the conversion of
convertible preferred stock. FFO for the nine-month period ended
September 30, 2002 adjusts for the add back of the premium on the
Series B preferred stock repurchase. 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
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. Segment Reporting (continued)
indicative of cash available to fund cash needs and should not be
considered an alternative to cash flows as a measure of liquidity. All
REITs may not be using the same definition for FFO. During 2002, 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 2001 presentation.
The revenues, profit (loss), and assets for each of the reportable
segments are summarized as follows as of and for the nine and
three-month periods ended September 30, 2002, and 2001.
Nine Months Three Months
----------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues
Apartments owned
Core properties $250,014 $238,785 $ 85,454 $ 81,294
Non-core properties 38,334 19,845 16,746 8,540
Reconciling items 1,530 4,158 154 1,215
----------- ---------- ----------- ---------
Total Revenue $289,878 $262,788 $102,354 $ 91,049
======== ======== ======== ========
Profit (loss)
Funds from operations:
Apartments owned
Core properties $142,339 $134,250 $ 50,362 $ 48,427
Non-core properties 24,220 11,810 10,911 5,836
Reconciling items 1,530 4,158 154 1,215
---------- ---------- ----------- ---------
Segment contribution to FFO 168,089 150,218 61,427 55,478
General & administrative expenses (8,758) (7,292) (2,837) (2,324)
Interest expense (56,964) (48,591) (19,990) (17,099)
Depreciation of unconsolidated affiliates 505 291 68 88
Non-real estate depreciation/amortization (823) (426) (420) (115)
Redeemable preferred dividend (2,805) - (1,350) -
Income from discontinued operations before minority
interest, depreciation and gain on disposition of
property 3,584 5,269 469 1,790
---------- ---------- ----------- ---------
Funds from Operations 102,828 99,469 37,367 37,818
Depreciation - apartments owned (48,626) (46,960) (17,020) (16,061)
Depreciation of unconsolidated affiliates (505) (291) (68) (88)
Redeemable preferred dividend 2,805 - 1,350 -
Impairment of real property (1,565) - (1,565) -
Gain (loss) on disposition of properties (402) 22,085 - 8,437
Income from discontinued operations before minority
interest and gain on disposition of property (2,664) (3,388) (402) (1,167)
Minority interest (13,655) (24,134) (5,969) (10,318)
--------- ----------- ---------- ---------
Income from continuing operations $ 38,216 $ 46,781 $ 13,693 $ 18,621
========= ========= ========= ========
Assets - As of September 30, 2002 and December 31, 2001
2002 2001
---- ----
Apartments owned:
- Core $1,664,469 $1,712,745
- Non-core 593,777 220,769
Reconciling items 129,245 130,275
----------- ------------
Total Assets $2,387,491 $2,063,789
========== ==========
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. Pro Forma Condensed Financial Information
The Company acquired fourteen apartment communities ("2002 Acquired
Communities") with 3,839 units in four unrelated transactions during
the nine-month period ended September 30, 2002. The total purchase
price (including closing costs) of $347.6 million equates to
approximately $91 per apartment unit. Consideration for the communities
included $82.9 million of cash on hand, $128.7 million of assumed debt
(fair market value of $145.1 million), $102.4 million from the
Company's line of credit and $21.8 million of cash raised through
common and preferred equity offerings and $11.8 million in Operating
Partnership Units ("OP Units") in the Company (fair market value of
$11.5).
In addition, during the nine-month period ended September 30, 2002, the
Company sold eleven apartment communities ("2002 Disposed Properties")
having 1,647 units in seven unrelated transactions as part of its
strategic disposition program. The total sales price of $83.9 million
equates to $51 per apartment unit. A gain on sale of approximately $9
million, prior to the allocation of minority interest, has been
recorded in relation to these sales and is reflected in discontinued
operations.
The following proforma information was prepared as if the following had
occurred on January 1, 2001 (i) the 2002 transactions related to the
acquisition of the "2002 Acquired Communities", (ii) the 2001
transactions related to the acquisition of ten apartment communities in
nine separate transactions, (iii) the disposition of the "2002 Disposed
Properties", (iv) the 2001 transactions related to the disposition of
14 apartment communities in six separate and (v) the 2002 Series F
Preferred Share offering and the two common equity offerings. 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 the beginning of 2001, nor does it
purport to represent the results of operations for future periods.
Adjustments to the proforma condensed combined statement of operations
for the nine-months ended September 30, 2002 and 2001, consist
principally of providing net operating activity and recording interest,
depreciation and amortization from January 1, 2001 to the acquisition
date.
For the Nine-Months Ended
September 30,
2002 2001
---- ----
Total revenues $309,363 $298,780
Net Income 41,215 39,017
Net income available to common shareholders 23,918 21,790
Per common share data:
Net income available to common shareholders
Basic $0.92 0.97
Diluted $0.91 0.97
Weighted average number of shares outstanding:
Basic 25,930,274 22,557,041
Diluted 26,249,167 22,652,756
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. Derivative Financial Instruments
The Company has three interest rate swaps that effectively convert
variable rate debt to fixed rate debt. As of September 30, 2002, the
aggregate fair value of the Company's interest rate swaps was $1,611
prior to the allocation of minority interest and is included in accrued
expenses and other liabilities in the consolidated balance sheets. For
the nine and three-months ending September 30, 2002, 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 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.
9. Disposition of Property and 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, 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 nine and three-months
periods ended September 30, 2002 are eleven apartment community
dispositions. The operations of these eleven properties have been
reflected as discontinued operations on a comparative basis for the
nine and three-months periods ended September 30, 2001. For purposes of
the discontinued operations presentation, the Company only includes
interest expense associated with specific mortgage indebtedness of the
properties that are sold or classified as held for sale. As of
September 30, 2002, there were no properties classified as held for
sale.
During the nine-month period ended September 30, 2002, the Company sold
eleven apartment communities having 1,647 units in seven unrelated
transactions as part of its strategic disposition program. The total
sales price of $83.9 million equates to $51 per apartment unit. A gain
on sale of approximately $9 million, prior to the allocation of
minority interest, has been recorded in relation to these sales and is
reflected in discontinued operations.
In connection with the Company's strategic asset disposition program,
management is constantly reevaluating the performance of its portfolio
on a property-by-property basis. The Company from time to time
determines that it is in the best interest of the Company to dispose of
assets that have reached their potential or are less efficient to
operate due to their size or remote location and reinvest such proceeds
in higher performing assets located in targeted geographic markets. It
is possible that the Company will sell such properties at a loss. In
addition, it is possible that for assets held for use, certain holding
period assumptions made by the Company may change which could result in
the Company's recording of an impairment charge.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. Disposition of Property and Discontinued Operations (continued)
---------------------------------------------------------------
The operating results of discontinued operations are summarized as
follows as of and for the nine and three-months periods ended September
30, 2002, and 2001.
Nine Three
Months Months
2002 2001 2002 2001
----------- ------------ ------------ -----------
Revenues:
Rental Income $5,361 $ 9,791 $ 594 $3,309
Property other income 94 232 7 87
----------- ------------ ------------ -----------
Total Revenues 5,455 10,023 601 3,396
Operating and Maintenance 1,637 4,289 132 1,412
Interest expense 234 465 - 194
Depreciation and amortization 920 1,881 67 623
----------- ------------ ------------ -----------
Total Expenses 2,791 6,635 199 2,229
Income from discontinued operations before
minority interest and gain on disposition
of property 2,664 3,388 402 1,167
Minority interest 1,021 1,424 151 493
----------- ------------ ------------ -----------
Income from discontinued operations before
gain on disposition of property 1,643 1,964 251 674
Gain on disposition of property, net of
minority interest 5,601 - 2,912 -
----------- ------------ ------------ -----------
Income from discontinued operations $7,244 $ 1,964 $3,163 $ 674
=========== ============ ============ ===========
10. Line of Credit
In September 2002, the Company extended its revolving line of credit
with M&T Bank for a period of three years, increasing the line from
$100 million to $115 million. The Company's outstanding balance as of
September 30, 2002 was $86 million. Borrowings under the line of credit
bear interest at 1.15% over the one-month LIBOR rate. The line of
credit expires on September 1, 2005.
11. Contingency
The Company had recently undergone a state tax audit whereby the state
has assessed taxes of $469 for the 1998 and 1999 tax years under audit.
If the state's position is applied to all tax periods through September
30, 2002, the assessment would be approximately $1.5 million. The
Company believes that the assessment and the state's underlying
position for the tax periods 1998 through 2000 are neither supportable
by the law nor consistent with previously provided interpretative
guidance from the office of the State Secretary of Revenue. The Company
has filed an appeal to the Commonwealth Court in the state for the 1998
and 1999 tax years. There have been no further proceedings to date and
the Company intends to vigorously contest the assessments. The Company
has been advised that it has meritorious positions for its previous tax
filings for the years 1998, 1999, and 2000. However, the Company has
accrued
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. Contingency (continued)
approximately $660 as of September 30, 2002 for estimated costs
associated with this matter.
12. Impairment of Real Property
During September, 2002, the Company recorded an impairment charge of
$1,565 on an apartment community located in Columbus, Ohio. During the
third quarter the Company made the decision to pursue the sale of this
property pursuant to its strategic disposition program. Although the
Company determined that it did not meet the criteria as held for sale
pursuant to SFAS 144, the Company performed an impairment test on a
held and used basis which resulted in assigning probabilities of
identified cash flows based upon certain alternative courses of action.
As a result of this analysis, the Company determined that an impairment
was noted. Accordingly, the Company recorded an impairment charge based
upon the fair market value of the property, less estimated costs to
sell, compared to its net book value. The property, however, has not
been reflected in discontinued operations for either the nine or
three-month period ended September 30, 2002, as it does not meet the
criteria for held for sale classification.
13. Transactions with Affiliates
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 upon the performance of
the underlying property. During the three-months ended September 30,
2002, $308 became payable and was paid to the Company within the 30
days allowed under the terms of the agreement. This amount was
classified in Other Property Income in the Consolidated Statement of
Operations.
14. Subsequent Events
On October 11, 2002 the Company acquired five communities in the Hudson
Valley region of New York with a total of 224 units (collectively the
"Wallace Portfolio"). The total purchase price of $12.8 million,
including closing costs, equates to approximately $57 per unit and was
funded by the assumption of $7.4 million in debt (fair market value of
$8.5) and $5.4 million in cash.
HOME PROPERTIES OF NEW YORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
Forward-Looking Statements
This discussion 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
activities within anticipated budgets, the actual pace of future acquisitions
and continued access to capital to fund growth.
Liquidity and Capital Resources
The Company's principal liquidity demands are expected to be distributions to
the common and preferred stockholders and Operating Partnership Unitholders,
capital improvements and repairs and maintenance for the properties, acquisition
of additional properties, property development and debt repayments.
The Company intends to meet its short-term liquidity requirements through net
cash flows provided by operating activities and its unsecured line of credit.
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.
During the quarter, the Company extended its revolving line of credit with M&T
Bank for a period of three years, increasing the line from $100 million to $115
million. The Company's outstanding balance as of September 30, 2002 was $86
million. 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 effect the Company's results of
operations and financial condition. The line of credit expires on September 1,
2005.
To the extent the Company does not satisfy its long-term liquidity requirements
through net cash flows provided by operating activities and its credit facility,
it intends to satisfy such requirements through the issuance of UPREIT units,
proceeds from the Dividend Reinvestment Plan ("DRIP"), proceeds from the sale of
properties, long term secured or unsecured indebtedness, or the issuance of
additional equity securities. As of September 30, 2002, the Company owned 19
properties with 3,570 apartment units, which were unencumbered by debt.
During the fourth quarter of 2002, the Company anticipates closing on various
non-recourse mortgage loans totaling approximately $183 million with interest
fixed at a weighted average rate of 5.25% with an average term of 6.2 years.
These loans will replace $84 million of existing financing with a weighted
average interest rate of 8.07%. The annual savings in interest expense on the
$84 million is projected to exceed $2.3 million. The net proceeds of $99 million
will be used to repay existing indebtedness on the Company's outstanding line of
credit and for general corporate purposes including the funding of future
acquisitions. In connection with these transactions, an extraordinary item of
approximately $2.3 million will be incurred in the fourth quarter relative to
prepayment penalties on the existing loans paid off before maturity.
In May, 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of shares of common
stock and other securities. The available balance on the shelf at September 30,
2002 is $144.4 million.
On September 30, 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 carried 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, no-call
provision. On February 4, 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.
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 carries 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 can be converted. The stock has a
conversion price of $30.25 per share and a five-year, no-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.
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, no-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 carries 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 can be converted. The stock has a
conversion price of $31.60 per share and a five-year, no-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.
The conversion had no 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).
The issuance of UPREIT Units for property acquisitions continues to be a
significant source of capital. During the third quarter of 2002, the Company
acquired an 864-unit property for a total purchase price of $73.7 million. The
Company issued UPREIT units valued at approximately $11.8 million (fair market
value of $11.5), 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 million using UPREIT Units valued at approximately $19
million, with the balance paid in cash or assumed debt.
During 2001, $32 million of common stock was issued under the Company's DRIP. An
additional $21 million has been raised through the DRIP program during the first
nine months of 2002.
The DRIP was amended, effective April 10, 2001, in order to reduce management's
perceived dilution from issuing new shares at or below the underlying net asset
value. The discount on reinvested dividends and optional cash purchases was
reduced from 3% to 2%. The maximum monthly investment (without receiving
approval from the Company) was reduced from $5 thousand to $1 thousand. As
expected, these changes significantly reduced participation in the plan.
Management will continue to monitor the relationship between the Company's stock
price and estimated net asset value. During times when this difference is small,
management has the flexibility to issue waivers to DRIP participants to provide
for investments in excess of the $1 thousand maximum monthly investment. In
connection with the announcement of the February, 2002 dividend, the Company
announced such waivers will be considered beginning with the March 2002 optional
cash purchase, as management believes the stock is trading at or above its
estimate of net asset value. For the three-month period ended March 31, 2002,
the Company granted 53 waivers for purchases aggregating a total of $3.9
million. No waivers were granted during the second and third quarters.
On August 6, 2002 the Board of Directors increased its authorization 2,000,000
shares to repurchase its common stock or UPREIT units in connection with the
Company's stock repurchase program. The shares/units may be repurchased through
open market or privately negotiated transactions at the discretion of Company
management. The Board's action does not establish a target stock price or a
specific timetable for share repurchase. During the first nine months of 2002,
there were no shares or UPREIT Units repurchased by the Company. At September
30, 2002 the Company had authorization to repurchase 3,135,800 shares of common
stock and UPREIT Units under the stock repurchase program.
As of September 30, 2002, the weighted average rate of interest on mortgage debt
is 7.28% and the weighted average maturity is approximately 9 years.
Approximately 99.4% of the debt is fixed rate. This limits the exposure to
changes in interest rates, minimizing the effect on results of operations and
financial condition.
Off-Balance Sheet Investments
The Company has investments in and advances to approximately 133 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.
The Company has guaranteed the low income housing tax credits to the limited
partners for a period of five years in 42 partnerships totaling approximately
$48.5 million. Such guarantee requires the Company to operate the properties in
compliance with Internal Revenue Code Section 42 for 15 years. In addition,
acting as the general partner in certain partnerships, the Company is obligated
to advance funds to meet partnership operating deficits. However, such funding
requirements in some partnerships cease after a five-year period. 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.
These partnerships are funded with non-recourse financing. The Company's
proportionate share of non-recourse financing was $5.7 million at September 30,
2002. The Company has guaranteed a total of $602 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 $23.5 million at September 30, 2002. The Company assesses 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.
The Company believes the properties operations conform to the applicable
requirements as set forth above and do not anticipate any payment on the
guarantees described above.
Acquisitions and Dispositions
During the third quarter of 2002, the Company acquired two communities in
Maryland with a total of 1,455 apartment units in two unrelated transactions.
Total consideration for the two communities was $115 million, including closing
costs, or an average of $79 per unit. Consideration for the properties included
$58.8 million in assumed debt (fair market value of $69.7 million), $44.4
million cash, and $11.8 million in Operating Partnership Units in the Company
(fair market value of $11.5). The weighted average first year cap rate on the
acquisitions closed during 2002 is 8.6%.
Also, during the third quarter of 2002, the Company sold one community with a
total of 664 units located in Virginia for total consideration of $41.6 million
or an average of $62,700 per unit. A gain on sale of approximately $4.7 million
(before allocation of minority interest) was reported in the third quarter and
is reflected in discontinued operations. The weighted average first year cap
rate on the sale is 8.4% (before a reserve for capital expenditures). In
conformity with NAREIT guidelines, the gains from real property are not included
in reported FFO results.
In connection with the Company's strategic asset disposition program, management
is constantly reevaluating the performance of its portfolio on a
property-by-property basis. The Company from time to time determines that it is
in the best interest of the Company to dispose of assets that have reached their
potential or are less efficient to operate due to their size or remote location
and reinvest such proceeds in higher performing assets located in targeted
geographic markets. It is possible that the Company will sell such properties at
a loss. In addition, it is possible that for assets held for use, certain
holding period assumptions made by the Company may change which could result in
the Company's recording of an impairment charge.
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 estimates that on an annual basis $525 per unit is spent on
recurring capital expenditures. During the three and nine-month periods ended
September 30, 2002, approximately $131 and $393 per unit was estimated to be
spent on recurring capital expenditures, respectively. The table below
summarizes the actual total capital improvements incurred by major categories
for the three and nine-month periods ended September 30, 2002 and 2001 and an
estimate of the breakdown of total capital improvements by major categories
between recurring and non-recurring, revenue generating capital improvements for
the three and nine-month periods ended September 30, 2002 as follows:
For the three-month period ended September 30,
(in thousands, except per unit data)
2002 2001
------------------------------------------------------------------ -----------------------
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 $ - $ - $ 642 $ 16 $ 642 $ 16 $ 824 $ 23
Major building
improvements 911 22 4,014 100 4,925 122 6,623 181
Roof replacements 348 9 1,007 25 1,355 34 1,357 37
Site improvements 334 8 2,664 67 2,998 75 4,748 130
Apartment upgrades 657 16 9,574 239 10,231 255 11,547 316
Appliances 546 14 845 21 1,391 35 1,527 42
Carpeting/Flooring 1,714 43 1,619 40 3,333 83 2,926 80
HVAC/Mechanicals 505 13 3,369 84 3,874 97 2,883 79
Miscellaneous 224 6 658 16 882 22 610 17
---- -- ---- --- ---- --- --- ---
Totals 5,239 $131 $24,392 $608 $29,631 $ 739 $33,045 $ 905
(a) Calculated using the weighted average number of units outstanding,
including 34,540 core units, 2001 acquisition units of 2,820 and
2002 acquisition units of 2,683 for the three-months ended
September 30, 2002 and 34,540 core units and 2001 acquisition
units of 1,993 for the three-months ended September 30, 2001.
For the nine-month period ended September 30,
(in thousands, except per unit data)
2002 2001
--------------------------------------------------------------------------- -----------------------
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 $ - $ - $3,799 $ 98 $ 3,799 $ 98 $ 2,705 $ 77
Major building improvements 2,653 68 12,420 320 15,073 388 18,581 526
Roof replacements 1,014 26 2,435 63 3,449 88 2,779 79
Site improvements 971 25 7,614 196 8,585 221 9,387 266
Apartment upgrades 1,914 49 23,430 603 25,344 652 28,448 805
Appliances 1,590 41 1,790 46 3,380 87 3,731 106
Carpeting/Flooring 4,991 128 3,294 85 8,284 214 7,544 213
HVAC/Mechanicals 1,470 38 7,381 190 8,851 228 7,806 221
Miscellaneous 652 18 2,453 62 3,105 80 2,284 65
---- --- ------ --- ------ --- --- ----
Totals $ 15,255 $ 393 $64,616 $1,663 $79,871 $2,056 $ 83,265 2,358
(a) Calculated using the weighted average number of units outstanding,
34,540 core units, 2001 acquisition units of 2,820 and 2002
acquisition units of 1,498 for the nine-months ended September 30,
2002 and 35,204 core units and 2001 acquisition units of 811 for
the nine-months ended September 30, 2001.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the three-month period ended September 30,
(in thousands, except per unit data)
2002 2001
-------------------------------------------------------------- ---------------------
Recurring Non-recurring Total Capital Total Capital
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
Core Communities owned
< 5 years $ 3,842 $ 131 $ 17,221 $ 587 $ 21,063 $ 718 $ 29,802 $ 971
Core Communities owned
> 5 years 678 131 1,820 351 2,498 482 2,569 669
---- ----- ------ ---- ------ ---- ----- ---
Core Communities-subtotal 4,520 131 19,041 551 23,561 682 32,271 937
2002 Acquisition Communities 351 131 2,121 791 2,472 922 - -
2001 Acquisition Communities 368 131 3,230 1,145 3,598 1,276 674 338
---- ------ ------ ----- ------ ------ ------ ---
Sub-total 5,239 131 24,392 608 29,631 739 33,045 905
2002 Disposed Communities 181 131 204 148 385 279 881 535
2001 Disposed Communities - - - - - - 458 242
Corporate office expenditures (1) - - - - 735 - 1,296 -
---- ------ ------ ----- ------ ------ ------ ---
$ 5,420 $ 131 $ 24,596 $ 594 $ 30,751 $ 725 $ 35,680 $ 858
For the nine-month period ended September 30,
(in thousands, except per unit data)
2002 2001
-------------------------------------------------------------- ---------------------
Recurring Non-recurring Total Capital Total Capital
Cap Ex Per Unit Cap Ex Per Unit Improvements Per Unit Improvements Per Unit
Core Communities owned
< 5 years $ 11,527 $ 393 $ 48,174 $ 1,641 $ 59,701 $ 2,034 $ 75,671 $ 2,465
Core Communities owned
> 5 years 2,033 393 5,403 1,043 7,436 1,436 6,887 1,792
------ ------ ----- ----- ------ ----- ----- -----
Core Communities-subtotal 13,560 393 53,577 1,551 67,137 1,944 82,558 2,390
2002 Acquisition Communities 588 393 3,219 2,149 3,807 2,542 - -
2001 Acquisition Communities 1,107 393 7,820 2,773 8,927 3,166 707 874
------ ------ ----- ------ ----- ----- --- ---
Sub-total 15,255 393 64,616 1,663 79,871 2,056 83,265 2,358
2002 Disposed Communities 340 393 632 729 972 1,122 1,866 1,133
2001 Disposed Communities - - - - - - 2,120 1,225
Corporate office expenditures (1) - - - - 2,995 - 2,250 -
------ ------ ----- ------ ----- ----- --- ---
$ 15,595 $ 393 $ 65,248 $ 1,642 $83,838 $ 2,035 $ 89,501 $ 2,253
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office.
Contractual Obligations and Other Commitments
The primary obligations of the Company relate to its mortgage notes payable and
its borrowings under the line of credit. The Company's mortgage notes payable
and line of credit outstanding at September 30, 2002 and December 31, 2001 are
summarized as follows (in thousands):
September 30, 2002 December 31, 2001
--------------- ---------------
Fixed rate mortgage notes payable $1,155,226 $954,203
Variable rate mortgage notes payable 6,055 6,155
------------- -----------
Total mortgage notes payable 1,161,281 960,358
Variable rate line of credit facility 86,000 32,500
------------ ----------
Total mortgage notes payable and line of credit facility $1,247,281 $992,858
========== ========
Mortgage notes payable are collateralized by certain apartment communities and
mature at various dates from November, 2002 through June, 2036. The weighted
average interest rate of the Company's variable rate notes and credit facility
was 3.01% and 3.27% at September 30, 2002 and December 31, 2001, respectively.
The weighted average interest rate of the Company's fixed rate notes was 7.30%
and 7.27% at September 30, 2002 and December 31, 2001, respectively.
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.
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 $602 of debt
associated with two partnerships, b) guarantee of the low income housing tax
credits to the limited partners for a period of five years in 42 partnerships
totaling approximately $48.5 million, and c) the Company is obligated to advance
funds to meet partnership operating deficits for certain partnerships. The
Company believes the properties operations conform to the applicable
requirements as set forth above and do not anticipate any payment on these
guarantees.
Results of Operations
Comparison of nine months ended September 30, 2002 to the same period in 2001
The Company had 122 apartment communities with 34,540 units which were owned
during the nine-month periods being presented (the "Core Properties"). The
Company acquired an additional 24 apartment communities with 6,659 units during
2001 and 2002 (the "Acquired Communities"). In addition, the Company also
disposed of 27 properties with a total of 5,319 units during 2001 and 2002.
These dispositions, excluding the eleven property dispositions that occurred
during 2002, classified as discontinued operations both in 2002 and 2001, are
herein referred to as the Disposed Communities. The inclusion of these Acquired
Communities, net of Disposed Communities, generally accounted for the
significant changes in operating results for the nine-months ended September 30,
2002.
A summary of the Core Properties net operating income is as follows (in
thousands):
Nine Months Three Months
-------------------------------------- --------------------------------------
2002 2001 % Chg 2002 2001 % Chg
---- ---- ----- ---- ---- -----
Rental income $240,187 $229,927 4.5% $81,691 $78,247 4.4%
Property other income 9,827 8,858 10.9% 3,763 3,047 23.5%
--------- --------- ----- -------- -------- -----
Total income 250,014 238,785 4.7% 85,454 81,294 5.1%
Operating and
maintenance (107,675) (104,535) (3.0%) (35,092) (32,867) (6.8%)
--------- --------- ------ -------- -------- ------
Net operating income $142,339 $134,250 6.0% $50,362 48,427 4.0%
======== ======== ===== ======= ====== =====
Of the $28,874 increase in rental income, $18,614 is attributable to the
Acquired Communities, net of Disposed Communities. The balance of this increase,
which is from the Core Properties, was the result of an increase of 6.7% in
weighted average rental rates, offset by a decrease in occupancy from 94.0% to
92.1%.
Property other income, which consists primarily of income from operation of
laundry facilities, late charges, administrative fees, garage and carport
charges, net profits from corporate apartments, cable revenue, pet charges,
miscellaneous charges to residents and equity in earnings of the general
partnership interests increased by a net amount of $844. Of this increase $862
is attributable to the Acquired Communities along with $969 representing a 10.9%
increase for the Core Properties. These increases were offset by decreases
attributable to the Disposed Communities of $428 and $559 attributable to a
decrease in earnings from the general partnerships interests.
Interest and dividend income decreased $1,469 due to decreased levels of
financing to affiliates. Interest income includes interest earned on certain
officer and director notes for stock purchases. These loans were granted in
1996, 1997, 1998, and 2001. The terms have not changed since the original grant
date. Additional detail on these loans can be found in Note 8 in the Company's
Form 10-K for the year ended December 31, 2001.
Other income, which reflects the net contribution from management and
development activities after allocating certain overhead and interest expense,
decreased by $1,159 due primarily to an increase in the Company's share of
losses from the Management Companies and partnership investments.
Of the $9,219 increase in operating and maintenance expenses, $12,035 is
attributable to the Acquired Communities offset by a decrease of $5,956
attributable to Disposed Communities. The balance, a $3,140 increase, is
attributable to the Core Properties and is primarily due to an increase in real
estate taxes and personnel expense partially offset by savings in natural gas
utility costs.
General and administrative expense increased in 2002 by $1,466, or 20%. General
and administrative expenses as a percentage of total revenues were 3.0% for 2002
as compared to 2.8% for 2001. The increase can be attributed to increased
acquisition related expenses as well as incentive compensation costs. During
2002, the Company reclassified certain property related operating expenses from
General and Administrative to Operating and Maintenance, on a comparative basis.
Interest expense increased $8,373 due to the increase in the amount of debt
outstanding.
Depreciation and amortization increased $3,024 due to the depreciation on the
Acquired Communities and the additions to the Core Properties. This increase is
net of the effect of the change in accounting estimate made by management in the
first quarter related to certain depreciable lives of real estate and related
assets. The change reduced the depreciation expense for the period by
approximately $7.8 million. The Company expects this change in useful lives to
increase net income by approximately $10.3 million in 2002 over 2001.
The $402 loss on disposition of property primarily relates to additional
expenses incurred in the first quarter of 2002 for a sale which closed in the
fourth quarter of 2001. These costs represent a change in estimate from those
accrued at the time of sale.
The impairment of real property of $1,565 relates to apartment community located
in Columbus, Ohio. During the third quarter the Company made the decision to
pursue the sale of this property pursuant to its strategic disposition program.
Although the Company determined that it did not meet the criteria as held for
sale pursuant to SFAS 144, the Company performed an impairment test on a held
and used basis which resulted in assigning probabilities of identified cash
flows based upon certain alternative courses of action. As a result of this
analysis, the Company determined that an impairment was noted. Accordingly, the
Company recorded an impairment charge based upon the fair market value of the
property, less estimated costs to sell, compared to its net book value. The
property however, has not been reflected in discontinued operations for either
the nine or three-month period ended September 30, 2002, as it does not meet the
criteria for held for sale classification.
The property is not currently under contract to be sold, however, based upon the
properties estimated selling price at a comparable cap rate for the region, less
estimated selling costs, as compared to the current net book value of the
property, an impairment charge was incurred.
Minority interest decreased $10,479 primarily due to the decrease in the gain on
disposition of property when compared to the previous period.
The Company adopted the provisions of Statement of Financial Accounting Standard
No. 144 (SFAS), "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, 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. As of September
30, 2002 there were no properties held for sale.
Included in discontinued operations for the nine-month period ended September
30, 2002 are eleven apartment community dispositions. The operations of these
eleven properties have been reflected on a comparative basis for the period
ended September 30, 2001.
Of the $3,285 decrease in net income, $3,443 is attributable to an increase in
income before gain (loss) on disposition of property, minority interest and
discontinued operations offset by the lower gains on sale of property, including
discontinued operations, in the first three quarters of 2002 as compared to 2001
after the allocation of income to minority interest.
Comparison of the three months ended September 30, 2002 to the same period in
2001.
Of the $11,509 increase in rental income, $8,065 is attributable to the Acquired
Communities, net of Disposed Communities. The balance of this increase, which is
from the Core Properties, was the result of an increase of 6.7% in weighted
average rental rates, offset by a decrease in occupancy from 94.2% to 92.2%.
Property other income, which consists primarily of income from operation of
laundry facilities, late charges, administrative fees, garage and carport
charges, net profits from corporate apartments, cable revenue, pet charges,
miscellaneous charges to residents and equity in earnings of the general
partnership interests increased by $857. Of this increase $217 is attributable
to the Acquired Communities, $716 represents a 23.5% increase for the Core
Properties, and $5 is attributable to an increase in earnings from the general
partnership interests. These increases were offset by a decrease attributable to
the Disposed Communities of $81.
Interest and dividend income decreased $247 due to decreased levels of financing
to affiliates.
Other income, which reflects the net contribution from management and
development activities after allocating certain overhead and interest expense,
decreased by $814 due primarily to an increase in the Company's share of losses
from the Management Companies and partnership investments.
Of the $5,356 increase in operating and maintenance expenses, $4,136 is
attributable to the Acquired Communities offset by a decrease of $1,005
attributable to Disposed Communities. The balance, a $2,225 increase, is
attributable to the Core Properties and is primarily due to an increase in real
estate taxes, repairs and maintenance and personnel costs, offset by a reduction
in natural gas utility expenses and property insurance.
General and administrative expense increased in 2002 by $513, or 22.1%. General
and administrative expenses as a percentage of total revenues were consistent
over the same periods representing 2.8% for 2002 as compared to 2.6% for 2001.
During 2002, the Company reclassified certain property related operating
expenses from General and Administrative to Operating and Maintenance, on a
comparative basis.
Interest expense increased $2,891 due to the increase in the amount of debt
outstanding.
Depreciation and amortization increased $1,820 due to the depreciation on the
Acquired Communities and the additions to the Core Properties. This increase is
net of the effect of the change in accounting estimate made by management in the
first quarter related to certain depreciable lives of real estate and related
assets. The change reduced the depreciation expense for the period by
approximately $2.6 million. The Company expects this change in useful lives to
increase net income by approximately $10.3 million in 2002 over 2001.
Minority interest decreased $4,349 primarily due to the decrease in the gain on
disposition of property, including discontinued operations, when compared to the
previous period.
Included in discontinued operations for the nine-month period ended September
30, 2002 are eleven apartment community dispositions. The operations of these
eleven properties have been reflected on a comparative basis for the period
ended September 30, 2001.
Of the $2,439 decrease in net income, $840 is attributable to a decrease in
income before gain (loss) on disposition of property, minority interest and
discontinued operations. The remainder is the result of lower gains on sale of
property, including discontinued operations, in the second quarter of 2002 as
compared to 2001 after the allocation of income to minority interest.
Funds From Operations
Management considers funds from operations ("FFO") to be an appropriate measure
of performance of an equity REIT. FFO is generally defined as net income (loss)
before gains (losses) from the sale of property and business, non-cash
impairment charges and extraordinary items, before minority interest in the
Operating Partnership, plus real estate depreciation. This presentation excludes
the dividends on the Series F Preferred Stock and assumes the conversion of
dilutive common stock equivalents and convertible preferred stock. FFO for the
nine-month period ended September 30, 2002 adjusts for the add back of the
premium on the Series B preferred stock repurchase. Management believes that in
order to facilitate a clear understanding of the consolidated 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. 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. Cash provided
by operating activities was $105,066 and $106,136 for the nine-month periods
ended September 30, 2002 and 2001, respectively. Cash used in investing
activities was $221,391 and $114,544 for the nine-month periods ended September
30, 2002 and 2001, respectively. Cash provided by financing activities was
$113,420 and $3,156 for the nine-month periods ended September 30, 2002 and
2001, respectively. 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 calculation of FFO for the nine and three-months periods ended September 30,
2002 and 2001 are presented below (in thousands):
Nine-months Three-months
Sept. 30 Sept. 30 Sept. 30 Sept. 30
2002 2001 2002 2001
---- ---- ---- ----
Net income available to common shareholders $29,408 $35,253 13,063 $14,797
Convertible preferred dividends 8,222 13,492 2,443 4,498
Series B preferred stock redemption 5,025 - - -
Minority interest 13,655 24,134 5,969 10,318
Minority interest - income from discontinued operations 1,021 1,424 151 493
Depreciation from real property 48,626 46,960 17,020 16,061
Depreciation from real property from unconsolidated entities 505 291 68 88
Impairment of real property 1,565 - 1,565 -
(Gain) loss on disposition of property 402 (22,085) (8,437)
(Gain) loss on disposition of discontinued operations (5,601) - (2,912) -
-------- -------- ------- -------
FFO $102,828 $99,469 $37,367 $37,818
======== ======= ======= =======
Weighted average common shares/units outstanding:
- Basic 41,739.9 37,687.0 42,364.2 38,010.4
- Diluted 46,370.1 44,895.1 46,367.7 45,281.1
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.
Covenants
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 three most
recent quarters since the issuance of the Series F Preferred Stock are presented
below (in thousands). Net operating income from discontinued operations in the
calculation below is defined as total revenues from discontinued operations less
operating and maintenance expenses as presented Note 9 to the consolidated
financial statements.
Three-months
Sept. 30 June 30 March 31
2002 2002 2002
---- ---- ----
EBITDA
Total revenues $102,354 $98,633 $92,397
Net operating income from discontinued operations 469 519 382
Operating and maintenance (40,927) (39,451) (42,469)
General and administrative (2,837) (2,822) (3,099)
--------- --------- ---------
$59,059 $56,879 $47,211
Fixed Charges
Interest expense $19,990 $18,973 $18,026
Interest expense on discontinued operations - 153 56
Preferred dividends 3,793 3,852 3,382
Capitalized interest 230 269 230
--------- --------- ---------
$24,013 $23,247 $21,694
Times Coverage ratio: 2.46 2.45 2.18
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 2001 and continuing into 2002
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.
Declaration of Dividend
On October 29, 2002, the Company declared a dividend of $.61 per common share
for the period from July 1, 2002 to September 30, 2002. This is the equivalent
of an annual distribution of $2.44 per share. The dividend is payable November
27, 2002 to shareholders of record on November 15, 2002.
On October 29, 2002 the Company also declared a regular dividend of $0.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending November 30, 2002. The dividend on the preferred shares is payable on
December 2, 2002, to shareholders of record on November 15, 2002. This dividend
is equivalent to an annualized rate of $2.25 per share.
Subsequent Events
On October 11, 2002 the Company acquired five communities in the Hudson Valley
region of New York with a total of 224 units (collectively the "Wallace
Portfolio"). The total purchase price of $12.8 million, including closing costs,
equates to approximately $57 per unit and was funded by the assumption of $7.4
million in debt (fair market value of $8.5 million) and $5.4 million in cash.
The weighted average expected first year cap rate for these communities is 7.1%.
Contingency
The Company had recently undergone a state tax audit whereby the state has
assessed taxes of $469 for the 1998 and 1999 tax years under audit. If the
state's position is applied to all tax periods through September 30, 2002, the
assessment would be approximately $1.4 million. The Company believes that the
assessment and the state's underlying position for the tax periods 1998 through
2000 are neither supportable by the law nor consistent with previously provided
interpretative guidance from the office of the State Secretary of Revenue. The
Company has filed an appeal to the Commonwealth Court in the state for the 1998
and 1999 tax years. There have been no further proceedings to date and the
Company intends to vigorously contest the assessments. The Company has been
advised that it has meritorious positions for its previous tax filings for the
years 1998, 1999, and 2000. However, the Company has accrued approximately $663
as of September 30, 2002 for estimated costs associated with this matter.
New Accounting Standards
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 becomes
effective for the Company for the year ending December 31, 2003. The Company
does not expect this pronouncement to have a material impact on the Company's
financial position, results of operations, or cash flows.
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 becomes effective for exit and disposal activities initiated after
December 31, 2002. The Company does not expect this pronouncement to have a
material impact on the Company's financial position, results of operations, or
cash flows.
HOME PROPERTIES OF NEW YORK, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. At September
30, 2002 and December 31, 2001, approximately 99% and 96%, respectively, of the
Company's debt bore interest at fixed rates with a weighted average maturity of
approximately 9 and 10 years, respectively, and a weighted average interest rate
of approximately 7.30% and 7.27%, respectively. The remainder of the Company's
debt bears interest at variable rates with a weighted average maturity of
approximately 3 and 1 years and a weighted average interest rate of 3.01% and
3.27%, at September 30, 2002 and December 31, 2001, respectively. The Company
does not intend to utilize variable rate debt to acquire properties in the
future. On occasion, the Company may assume variable rate debt in connection
with a property acquisition. 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 September 30, 2002 and December 31, 2001, the interest rate risk on $25.2
million and $35 million, respectively of such variable rate debt has been
mitigated through the use of interest rate swap agreements (the "Swaps") with
major financial institutions. The Company is exposed to credit risk in the event
of non-performance by the counter-parties to the Swaps. The Company believes it
mitigates its credit risk by entering into these Swaps with major financial
institutions. The Swaps effectively convert an aggregate of $25.2 million in
variable rate mortgages to fixed rates of 5.91%, 8.22% and 8.40% and $35 million
in variable rate mortgages to fixed rates of 5.91%, 7.66%, 8.22% and 8.40%.
At September 30, 2002 and December 31, 2001, the fair value of the Company's
fixed rate debt, including the $25.2 million which was swapped to a fixed rate,
amounted to a liability of $1.20 billion and $958 million compared to its
carrying amount of $1.16 billion and $960 million, respectively. The Company
estimates that a 100 basis point decrease in market interest rates at September
30, 2002 would have changed the fair value of the Company's fixed rate debt to a
liability of $1.27 billion.
The Company intends to continuously monitor and actively manage interest costs
on its 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 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
September 30, 2002, the Company had no other material exposure to market risk.
HOME PROPERTIES OF NEW YORK, INC.
ITEM 4. CONTROLS AND PROCEDURES
The Company evaluated the design and operation of its disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Securities Exchange Act of 1934 and the rules and forms of the Securities and
Exchange Commission. This evaluation was made under the supervision and with the
participation of management, including the Company's principal executive
officers and principal financial officer within the 90-day period prior to the
filing of this Quarterly Report on Form 10-Q. The principal executive officers
and principal financial officer have concluded, based on their review, that the
Company's disclosure controls and procedures, as defined at Exchange Act Rules
13a-14(c) and 15d-14(c), are effective to ensure that information required to be
disclosed by the Company in reports that it files under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. No
significant changes were made to the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II - OTHER INFORMATION
HOME PROPERTIES OF NEW YORK, INC.
Item 6. Exhibits and Reports or Form 8-K
(a) Exhibit 10.60 Amendment 52 to the Partnership Agreement
Exhibit 10.61 Amendment 53 to the Partnership Agreement
Exhibit 10.62 Amendment 54 to the Partnership Agreement
Exhibit 10.63 Amendment 55 to the Partnership Agreement, including
Schedule A
Exhibit 10.64 Amendment 2 to the Credit Agreement
(b) Reports on Form 8-K:
- Form 8-K was filed on October 22, 2002, date of report January 23,
2002, with respect to Item 5 disclosures reflecting the impact of
the classification as discontinued operations of the apartment
communities sold on or after January 1, 2002 in certain sections
of the Company's annual report filed on Form 10-K for the year
ended December 31, 2001.
- Form 8-K was filed on October 25, 2002, date of report
March 1, 2002, with respect to Items 5 and 7 disclosures
relating to certain real estate acquisitions and dispositions.
- Form 8-K was filed on November 7, 2002, date of report November 1,
2002, with respect to Items 7 and 9 disclosures regarding the
Registrant's press release announcing its results for the third
quarter of 2002 and the third quarter 2002 investor conference
call.
- Form 8-K was filed on November 14, 2002, date of report November
14, 2002, with respect to Items 7 and 9 disclosures regarding
Regulation FD disclosures pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements 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 OF NEW YORK, INC.
--------------------------------
(Registrant)
Date: November 14, 2002
-----------------------------------
By: /s/ Norman P. Leenhouts
-----------------------------------
Norman P. Leenhouts
Chairman and
Co-Chief Executive Officer
Date: November 14, 2002
-----------------------------------
By: /s/ David P. Gardner
--------------------------------------------
David P. Gardner
Senior Vice President and
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Norman Leenhouts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Properties of New
York, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Norman Leenhouts
-------------------------------
Norman Leenhouts
Chairman of the Board of Directors and
Co-Chief Executive Officer
November 14, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, Nelson Leenhouts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Properties of New
York, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Nelson Leenhouts
-------------------------------
Nelson Leenhouts
President and
Co-Chief Executive Officer
November 14, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 PROMULGATED BY
THE SECURITIES AND EXCHANGE COMMISSION
(Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
I, David P. Gardner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Home Properties of New
York, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ David P. Gardner
-------------------------------
David P. Gardner
Senior Vice President and
Chief Financial Officer
November 14, 2002