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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 June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13136
HOME PROPERTIES 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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 July 31, 2003
$.01 par value 28,963,842
HOME PROPERTIES OF NEW YORK, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Operations (Unaudited) -
Six months ended June 30, 2003 and 2002 4
Consolidated Statements of Operations (Unaudited) -
Three months ended June 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Six months ended June 30, 2003 and 2002 6
Consolidated Statements of Comprehensive Income (Unaudited) - 7
Three months ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) - 8
Six months ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements (Unaudited) 9-22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 33-36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40-45
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
---- ----
(Unaudited) (Note1)
ASSETS
Real estate:
Land $384,270 $376,998
Buildings, improvements and equipment 2,277,499 2,220,280
---------- ----------
2,661,769 2,597,278
Less: accumulated depreciation (292,780) (257,284)
---------- ----------
Real estate, net 2,368,989 2,339,994
Cash and cash equivalents 6,710 8,782
Cash in escrows 43,989 45,735
Accounts receivable 6,746 7,576
Prepaid expenses 11,054 19,046
Investment in and advances to affiliates 10,525 19,475
Deferred charges 8,794 9,093
Other assets 7,569 6,565
---------- ----------
Total assets $2,464,376 $2,456,266
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $1,318,111 $1,300,807
Line of credit 39,000 35,000
Accounts payable 14,447 19,880
Accrued interest payable 7,009 6,612
Accrued expenses and other liabilities 14,981 12,412
Security deposits 22,222 22,252
---------- ----------
Total liabilities 1,415,770 1,396,963
---------- ----------
Commitments and contingencies
Minority interest 328,258 333,061
Stockholders' equity:
Cumulative redeemable preferred stock, $.01 par value; 3,000,000
shares authorized; 2,400,000 shares issued and outstanding at
June 30, 2003 and December 31, 2002 60,000 60,000
Convertible cumulative preferred stock, $.01 par value; 10,000,000 shares
authorized; 750,000 and 1,086,800 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively 74,000 107,680
Common stock, $.01 par value; 80,000,000 shares authorized; 28,867,094 and
27,027,003 shares issued and outstanding at June 30, 2003 and December
31, 2002, respectively 289 270
Excess stock, $.01 par value; 10,000,000 shares authorized; no shares
issued or outstanding - -
Additional paid-in capital 697,718 649,489
Accumulated other comprehensive income (880) (972)
Distributions in excess of accumulated earnings (110,208) (89,452)
Officer and director notes for stock purchases (571) (773)
---------- ----------
Total stockholders' equity 720,348 726,242
---------- ----------
Total liabilities and stockholders' equity $2,464,376 $2,456,266
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
HOME PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
---- ----
Revenues:
Rental income $206,240 $177,971
Property other income 7,808 6,615
Interest and dividend income 299 795
Other income 2,321 1,084
---------- ----------
Total Revenues 216,668 186,465
---------- ----------
Expenses:
Operating and maintenance 95,812 79,755
General and administrative 9,701 5,921
Interest 42,934 36,713
Prepayment penalty 1,349 -
Depreciation and amortization 38,524 30,703
Impairment of real property 423 -
Impairment of assets held as General Partner 520 -
---------- ----------
Total Expenses 189,263 153,092
---------- ----------
Income from operations 27,405 33,373
Equity in earnings (losses) of unconsolidated affiliates (1,184) (1,100)
---------- ----------
Income before minority interest and discontinued operations 26,221 32,273
Minority interest 7,111 7,746
---------- ----------
Income from continuing operations 19,110 24,527
---------- ----------
Discontinued operations
Income from operations, net of $60 in 2003 and $1,001 in 2002 allocated to
minority interest 103 1,599
Gain on disposition of property, net of $188 in 2003 and $1,646 in 2002
allocated to minority interest 320 2,689
---------- ----------
Discontinued operations 423 4,288
---------- ----------
Income before loss on disposition of property 19,533 28,815
Loss on disposition of property, net of $5 in 2003 and $157 in 2002 allocated
to minority interest (10) (245)
---------- ----------
Net income 19,523 28,570
Preferred dividends (6,710) (7,234)
Premium on Series B preferred stock repurchase - (5,025)
---------- ----------
Net income available to common shareholders $12,813 $16,311
========== ==========
Basic earnings per share data:
Income from continuing operations $.44 $.47
Discontinued operations .02 .17
---------- ----------
Net income available to common shareholders $.46 $.64
========== ==========
Diluted earnings per share data:
Income from continuing operations $.43 $.47
Discontinued operations .02 .16
---------- ----------
Net income available to common shareholders $.45 $.63
========== ==========
Weighted average number of shares outstanding:
Basic 27,881,682 25,451,169
========== ==========
Diluted 28,307,215 25,773,934
========== ==========
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 JUNE 30, 2003 AND 2002
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
---- ----
Revenues:
Rental income $104,319 $91,887
Property other income 4,163 3,482
Interest and dividend income 109 422
Other income 1,122 535
---------- ----------
Total Revenues 109,713 96,326
---------- ----------
Expenses:
Operating and maintenance 46,040 38,688
General and administrative 4,582 2,822
Interest 21,634 18,909
Depreciation and amortization 19,471 16,269
Impairment of assets held as General Partner 93 -
---------- ----------
Total Expenses 91,820 76,688
---------- ----------
Income from operations 17,893 19,638
Equity in earnings (losses) of unconsolidated affiliates (444) (224)
---------- ----------
Income before minority interest and discontinued operations 17,449 19,414
Minority interest 5,174 4,003
---------- ----------
Income from continuing operations 12,275 15,411
---------- ----------
Discontinued operations
Income from operations, net of $584 allocated to minority interest - 954
Gain (loss) on disposition of property, net of ($75) in 2003 and $1,672 in
2002 allocated to minority interest (131) 2,729
---------- ----------
Discontinued operations (131) 3,683
---------- ----------
Income before loss on disposition of property 12,144 19,094
Loss on disposition of property, net of $5 in 2003 and $10 in 2002 allocated to
minority interest (10) (16)
---------- ----------
Net income 12,134 19,078
Preferred dividends (3,192) (3,852)
Premium on Series B preferred stock repurchase - (5,025)
---------- ----------
Net income available to common shareholders $8,942 $10,201
========== ==========
Basic earnings per share data:
Income from continuing operations $.32 $.25
Discontinued operations - .14
---------- ----------
Net income available to common shareholders $.32 $.39
========== ==========
Diluted earnings per share data:
Income from continuing operations $.31 $.25
Discontinued operations - .14
---------- ----------
Net income available to common shareholders $.31 $.39
========== ==========
Weighted average number of shares outstanding:
Basic 28,289,752 26,053,314
========== ==========
Diluted 28,807,558 26,449,554
========== ==========
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 SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED, IN THOUSANDS)
2003 2002
---- ----
Net income $19,523 $28,570
Other comprehensive income (net of minority interest):
Change in fair value of hedge instruments 92 (88)
------- -------
Comprehensive income $19,615 $28,482
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
PROPERTIES OF NEW YORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED, IN THOUSANDS)
2003 2002
---- ----
Net income $12,134 $19,078
Other comprehensive income (net of minority interest):
Change in fair value of hedge instruments 36 (281)
------- -------
Comprehensive income $12,170 $18,797
======= =======
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 SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED, IN THOUSANDS)
2003 2002
---- ----
Cash flows from operating activities:
Net income $19,523 $28,570
------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in (earnings) losses of unconsolidated affiliates 1,184 1,100
Income allocated to minority interest 7,354 10,236
Depreciation and amortization 39,279 32,465
Impairment of assets held as General Partner 520 -
Impairment of real property 423 -
(Gain) loss on disposition of property (493) (3,933)
Loss from early extinguishment of debt 1,349 -
Changes in assets and liabilities:
Other assets 9,679 4,495
Accounts payable and accrued liabilities (2,515) 215
------- --------
Total adjustments 56,780 44,578
------- -------- ------- --------
Net cash provided by operating activities 76,303 73,148
------- --------
Cash flows used in investing activities:
Purchase of properties and other assets, net of mortgage
notes assumed and UPREIT Units issued (32,173) (166,865)
Additions to properties (47,096) (53,087)
Proceeds from sale of properties, net 20,266 40,173
Advances to affiliates (1,785) (4,621)
Payments on advances to affiliates 4,081 10,055
------- --------
Net cash used in investing activities (56,707) (174,345)
------- -------- ------- --------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net - 58,098
Proceeds from sale of common stock, net 16,675 39,292
Repurchase of Series B preferred stock - (29,392)
Proceeds from mortgage notes payable 50,800 104,330
Payments of mortgage notes payable (33,496) (29,554)
Payment of prepayment penalty in connection with the early
extinguishment of debt (1,349) -
Proceeds from line of credit 90,000 78,000
Payments on line of credit (86,000) (52,500)
Payments of deferred loan costs (463) (1,949)
Additions to cash escrows, net 1,746 (8,845)
Repayment of officer loans 202 1,963
Dividends and distributions paid (59,783) (56,226)
------- --------
Net cash provided by (used in) financing activities (21,668) 103,217
------- --------
Net increase (decrease) in cash and cash equivalents (2,072) 2,020
Cash and cash equivalents:
Beginning of year 8,782 10,719
------- --------
End of year $6,710 $12,739
======= ========
Supplemental disclosure of non-cash operating, investing and financing
- ----------------------------------------------------------------------
activities:
-----------
Mortgage loans assumed associated with property acquisitions $ - $69,907
Conversion of preferred to common stock 33,680 24,367
Exchange of UPREIT Units/partnership interest for common shares 3,378 1,025
Fair value of hedge instruments 1,472 1,054
Issuance of UPREIT Units associated with property and other acquisitions 4,806 -
Compensation cost of stock options issued 409 -
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, 2002.
2. Organization and Basis of Presentation
Organization
The Company is engaged primarily in the ownership, management, acquisition,
and rehabilitation of residential apartment communities in the
Northeastern, Mid-Atlantic and Midwestern United States. As of June 30,
2003, the Company operated 288 apartment communities with 50,840
apartments. Of this total, the Company owned 151 communities, consisting of
41,508 apartments, managed as general partner, 7,422 apartments and fee
managed 1,910 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 63.7% (62.2% at June 30, 2002) partnership interest in
the Operating Partnership. Such interest has been calculated as the
percentage of outstanding common shares divided by the total outstanding
common shares and Operating Partnership Units ("UPREIT Units") outstanding.
The remaining 36.3% (37.8% at June 30, 2002) is reflected as Minority
Interest in these consolidated financial statements. The Company owns a
1.0% general partner interest in the Operating Partnership and the
remainder as a limited partner through its wholly owned subsidiary, Home
Properties I, LLC, which owns 100% of the limited partner, Home Properties
Trust. Home Properties Trust was formed in September 1997, as a Maryland
real estate trust and as a qualified REIT subsidiary ("QRS") and owns the
Company's share of the limited partner interests in the Operating
Partnership. For financing purposes, the Company has formed a limited
liability company (the "LLC") and a partnership (the "Financing
Partnership"), which beneficially own certain apartment communities
encumbered by mortgage indebtedness. The LLC is wholly owned by the
Operating Partnership. The Financing Partnership is owned 99.9% by the
Operating Partnership and 0.1% by the QRS.
Effective January 1, 2003, the accompanying consolidated financial
statements include the accounts of Home Properties Management, Inc. and
Home Properties Resident Services, Inc. (the "Management Companies"). The
Operating Partnership acquired all of the shares held by Nelson and Norman
Leenhouts ("the Leenhoutses") in the first quarter of 2003. The value of
the Leenhoutses shares was based upon an internal valuation and amounted to
approximately $81. As a result, the Management Companies are now wholly
owned subsidiaries of the Company. Prior to January 1, 2003, investments in
these entities were accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated in these
consolidated financial statements.
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)
The Company accounts for its investment as managing general partner ("GP")
in unconsolidated affordable housing limited partnerships ("LP") using the
equity method of accounting. As managing GP of the LP, the Company has the
ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective
partnership agreements, participation in policy-making processes, and the
employment of its management personnel. However, the Company does not have
a controlling interest in the respective LPs. The limited partners have
significant rights, such as the right to replace the general partner (for
cause) and the right to approve the sale or refinancing of the assets of
the respective partnership in accordance with the partnership agreement.
The Company records its allocable share of the respective partnership's
income or loss based on the terms of the agreement. To the extent it is
determined that the LPs cannot absorb their share of the losses, if any,
the GP will record the LPs share of such losses. In addition to the extent
the Company has outstanding loans or advances and the limited partner has
no remaining capital account, the Company will absorb such losses.
Reclassifications
Certain reclassifications have been made to the 2002 consolidated financial
statements to conform to the 2003 presentation.
New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 - "Consolidation of
Variable Interest Entities", an interpretation of ARB No. 51 -
"Consolidated Financial Statements." The interpretation addresses
consolidation by businesses of special purpose entities (variable interest
entities, "VIE"). This interpretation addresses consolidation by business
enterprises of variable interest entities in which the equity investment at
risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties or in
which the equity investors do not have the characteristics of a controlling
financial interest. This interpretation requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
interpretation also requires disclosures about variable interest entities
that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of this
interpretation apply immediately to variable interest entities created
after January 31, 2003, and in the first fiscal year or interim period
beginning after June 15, 2003, to existing variable interest entities.
Management is uncertain but is assuming it is reasonably possible that each
of the limited partnerships in which it holds the general partnership
interest would be considered a VIE where the Company is the primary
beneficiary, and as a result the Company would consolidate all or a certain
number of the limited partnership's assets and liabilities.
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)
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003. The provisions of
FAS 149 are not expected to have a material impact on the Company's
financial statements.
In May 2003, FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company is still in
the process of evaluating the potential impact of this standard on its
financial statements.
3. Adoption of New Accounting Policy
Effective January 1, 2003, the Company adopted the provisions of SFAS 148
"Accounting for Stock Based Compensation - An Amendment of SFAS 123." Under
the transition provisions of this Statement, the Company has elected the
"Modified Prospective Method" for recognizing stock-based compensation
costs for the three and six-month periods ended June 30, 2003. Under this
method the Company recognizes stock-based compensation cost from the
beginning of the fiscal year in which the recognition provisions are first
applied as if the fair value based accounting method in this Statement had
been used to account for all employee awards granted, modified, or settled
in fiscal years beginning after December 15, 1994. For the three and
six-months ended June 30, 2003, the Company recognized $372 and $652,
respectively, in stock compensation costs related to its stock compensation
plans. Of this total, $207 and $409, for the three and six-month periods
ended June 30, 2003, respectively, related to the expensing of stock
compensation costs associated with stock options granted by the Company.
The remaining $165 and $243, for the three and six-month periods ended June
30, 2003, respectively, pertains to the stock compensation costs recognized
by the Company relative to its restricted stock grants.
For the three and six-months ended June 30, 2002, the Company used the
intrinsic value method in accordance with the Accounting Principle Board
Opinion No. 25 ("APB No. 25") to account for stock-based employee
compensation arrangements. Under this method, the Company did not recognize
compensation cost for stock options when the option exercise price equals
or exceeded the market value on the date of grant. Restricted stock grants
were recognized as compensation expense over the vesting period based upon
the market value on the date of grant. Had the Company determined
compensation cost based upon the fair value of the stock option grants
under SFAS No. 123, "Accounting for Stock-Based Compensation," the fair
values of the options granted at the grant dates would be recognized as
compensation expense over the vesting periods, and the Company's net income
and earnings per share for the three and six-month periods ended June 30,
2002 would have been as follows:
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. Adoption of New Accounting Policy (continued)
Six Months Three Months
---------- ------------
2002 2002
---- ----
Net income, as reported $16,311 $10,201
Total stock compensation cost recognized 116 64
Total stock compensation cost had SFAS 123 been adopted (491) (276)
------- ------
Proforma net income had SFAS 123 been adopted $15,936 $9,989
======= ======
Per share data:
Basic - as reported $0.64 $0.39
======= ======
Basic - proforma $0.63 $0.38
======= ======
Diluted - as reported $0.63 $0.39
======= ======
Diluted - proforma $0.62 $0.38
======= ======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for grants in 2003 and 2002: dividend yields ranging from 8.40% to 9.40%;
expected volatility of 19.17%; and expected lives of 7.5 years for the
options with a lifetime of ten years, and five years for options with a
lifetime of five years. The interest rate used in the option-pricing model
is based on a risk free interest rate ranging from 4.29% to 6.87%.
4. 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, restricted stock, phantom shares
under the Company's incentive compensation plan, 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 is the same for both the basic and diluted calculation.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. Earnings Per Common Share (continued)
The reconciliation of the basic weighted average shares outstanding and
diluted weighted average shares outstanding for the six and three-months
ended June 30, 2003 and 2002 is as follows:
Six Months Three Months
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Income from continuing operations $19,110 $24,527 $12,275 $15,411
Less: Loss on disposal of property (10) (245) (10) (16)
Less: Preferred dividends (6,710) (7,234) (3,192) (3,852)
Less: Premium on Series B preferred stock repurchase - (5,025) - (5,025)
---------- ---------- ---------- ----------
Basic and Diluted - Income from continuing
operations
applicable to common shareholders $12,390 $12,023 $9,073 $6,518
Discontinued operations 423 4,288 (131) 3,683
---------- ---------- ---------- ----------
Net income available to common shareholders $12,813 $16,311 $8,942 $10,201
========== ========== ========== ==========
Basic weighted average number of shares outstanding 27,881,682 25,451,169 28,289,752 26,053,314
Effect of dilutive stock options 282,452 322,765 375,253 396,240
Effect of phantom and restricted shares 143,081 - 142,553 -
---------- ---------- ---------- ----------
Diluted weighted average number of shares
outstanding 28,307,215 25,773,934 28,807,558 26,449,554
========== ========== ========== ==========
Basic earnings per share
Income from continuing operations $.44 $.47 $.32 $.25
Discontinued operations .02 .17 - .14
---------- ---------- ---------- ----------
Net Income available to common shareholders $.46 $.64 $.32 $.39
========== ========== ========== ==========
Basic earnings per share
Income from continuing operations $.43 $.47 $.31 $.25
Discontinued operations .02 .17 - .14
---------- ---------- ---------- ----------
Net Income available to common shareholders $.45 $.63 $.31 $.39
========== ========== ========== ==========
Unexercised stock options and warrants to purchase 2,115,743 shares
(excluding 701,190 anti-dilutive shares) of the Company's common stock are
dilutive and included in diluted weighted average number of shares
outstanding as of June 30, 2003. Unexercised stock options and warrants to
purchase 2,401,648 shares (excluding 63,000 anti-dilutive shares) of the
Company's common stock are dilutive and included in diluted weighted
average number of shares outstanding as of June 30, 2002. For the six and
three-months periods ended June 30, 2003 (as applicable and on a weighted
average basis), the 1,085,078 and 831,143, respectively, of the Series B,
C, D and E Convertible Cumulative Preferred Stock (2,771,593 and 3,016,922
common stock equivalents, respectively) have an anti-dilutive effect and
are not included in the computation of diluted EPS. In addition, for the
six and three-months periods ended June 30, 2002 (as applicable and on a
weighted average basis), the 1,945,580 and 1,448,343, respectively, of the
Series B, C, D and E Convertible Cumulative Preferred Stock (4,444,277 and
4,274,497 common stock equivalents, respectively) on an as-converted basis
have an anti-dilutive effect and are not included in the computation of
diluted EPS.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. Stockholders Equity
On January 9, 2003, 100,000 shares of Series C Preferred Shares were
converted into 330,579 shares of common stock. The conversion had no effect
on the reported results of operations of the Company.
On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted
into 116,456 shares of common stock. The conversion had no effect on the
reported results of operations of the Company.
On May 8, 2003, 200,000 shares of Series C Preferred Shares were converted
into 661,157 shares of common stock. The conversion had no effect on the
reported results of operations of the Company.
6. Other income
Other income for the six and three-month periods ended June 30, 2003 and
2002 is summarized as follows:
Six Months Three-months
---------- ------------
2003 2002 2003 2002
---- ---- ---- ----
Management fees $2,309 $969 $1,138 $473
Other 12 115 (16) 62
------ ------ ------ ----
$2,321 $1,084 $1,122 $535
====== ====== ====== ====
7. Equity in earnings (losses) of unconsolidated affiliates
Certain property management, leasing and development activities are
performed by 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. Through December
31, 2002, the Operating Partnership owned non-voting common stock in the
Management Companies which entitled the Operating Partnership to receive
95% and 99% of the economic interest in Home Properties Management, Inc.
and Home Properties Resident Services, respectively. Effective January 1,
2003, the Operating Partnership acquired all of the remaining shares held
by the Leenhoutses. As a result of this transaction, the Management
Companies are now wholly owned subsidiaries of the Company and are
reflected in the consolidated financial statements from January 1, 2003.
Prior to January 1, 2003, the operations of the Management Companies were
recorded using the equity method of accounting.
In addition, the Company accounts for its investment as managing general
partner in unconsolidated affordable housing limited partnerships using the
equity method of accounting. The Company's share of earnings (losses) from
these investments are included in this line item. 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.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. Equity in earnings (losses) of unconsolidated affiliates (continued)
The Company's share of earnings (losses) from the Management Companies and
investment in limited partnerships for the six and three-months ended June
30, 2003 and 2002 is summarized as follows:
Six Months Three Months
---------- ------------
2003 2002 2003 2002
---- ---- ---- ----
Management fees $ - $1,417 $ - $751
Interest income - 377 - 187
Miscellaneous - 33 - 16
General and administrative - (1,742) - (925)
Interest expense - (386) - (173)
Other expense - (199) - (100)
------- ------- ----- -----
Net loss - ($500) - ($244)
------- ------- ----- -----
Company's share - ($503) - ($242)
Company's share of earnings (losses)
from investment in limited partnerships (1,184) (597) (444) 18
------- ------- ----- -----
Equity in earnings (losses) of unconsolidated
affiliates ($1,184) ($1,100) ($444) ($224)
======= ======= ===== =====
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.
In December 2002, the Company, including its equity affiliates, determined
that it would market for sale virtually all of the assets associated with
its interest in various affordable housing limited partnerships. Such
assets include the equity interest in the affordable housing partnerships,
loans, advances and management contracts. The Company recorded impairment
charges aggregating $520 during the first six months of 2003 from monies
loaned to certain equity affiliates to fund operating shortfalls, which are
not anticipated to be recovered from projected sale proceeds.
The Company intends to sell the assets in three phases:
Phase I consists of the Company's interest in 40 properties containing
1,357 units, all New York State Rural Development properties, which are
under contract to be sold. A closing is anticipated during the third
quarter of 2003 at approximately book value.
Phase II consists of the Company's interest in 49 properties with 1,471
units, all Pennsylvania Rural Development properties. An offer has been
accepted for approximately book value. The final contract is being
negotiated. The Company anticipates closing on this phase during the fourth
quarter of 2003.
Phase III consists of the Company's interest in the remaining 35 properties
with 3,421 units, primarily located in Upstate New York and Pennsylvania.
The Company has received competitive bids and is expected to select a
qualified buyer in the next several months with closing anticipated in the
first quarter of 2004.
The Company plans on retaining the general partner interest in one 77-unit
property located in Rochester, New York. The property is 80% market rate
and is managed as a market rate community.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. Equity in earnings (losses) of unconsolidated affiliates (continued)
Summarized balance sheet information relating to these partnerships is as
follows (amounts are in thousands):
June 30, December 31,
-------- ------------
2003 2002
---- ----
Balance Sheets:
Real estate, net $248,839 $266,613
Other assets 33,135 37,764
-------- --------
Total assets $281,974 $304,377
======== ========
Mortgage notes payable $247,149 $253,285
Advances from affiliates 22,334 24,725
Other liabilities 15,488 15,125
Partners' equity (deficit) (2,997) 11,242
-------- --------
Total liabilities and partners' equity (deficit) $281,974 $304,377
======== ========
The Company's ability to sell the affordable assets on the timelines
described above is dependent on a variety of factors, some of which are
outside of the Company's control, such as the receipt of the approvals of
various partners, lenders and governmental agencies necessary for the sale.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. 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 and meets the majority of the aggregation criteria under SFAS 131.
The operating segments are aggregated and segregated as Core and Non-core
properties.
Non-segment revenue to reconcile to total revenue consists of interest and
dividend income and other income. Non-segment assets to reconcile to total
assets include cash and cash equivalents, cash in escrows, accounts
receivable, prepaid expenses, investments in and advances to affiliates,
deferred charges and other assets.
Core properties consist of all apartment communities which have been owned
more than one full calendar year. Therefore, the Core Properties represent
communities owned as of January 1, 2002. Non-core properties consist of
apartment communities acquired during 2002 and 2003, such that full year
comparable operating results are not available.
The accounting policies of the segments are the same as those described in
Notes 1 and 2 of the Company's Form 10-K.
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, impairment charges on depreciable property or investments,
extraordinary items, plus real estate depreciation including adjustments
for unconsolidated partnerships and joint ventures less dividends from
non-convertible preferred shares. The Company considers debt extinguishment
costs, which are incurred as a result of repaying property specific debt,
as a component of the gain or loss on sale of the property. FFO is not a
measure of operating results or cash flows from operating activities as
measured by generally accepted accounting principles and it is not
indicative of cash available to fund cash needs and should not be
considered an alternative to cash flows as a measure of liquidity. Other
companies may calculate similarly titled performance measures in a
different manner.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. Segment Reporting (continued)
The revenues, profit (loss), and assets for each of the reportable segments
are summarized as follows as of and for the six and three-month periods
ended June 30, 2003, and 2002.
Six Months Three Months
---------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Apartments owned
Core properties $184,046 $178,211 $93,357 $90,155
Non-core properties 30,002 6,376 15,125 2,215
Reconciling items 2,620 1,878 1,231 956
-------- -------- -------- -------
Total Revenue $216,668 $186,465 $109,713 $93,326
Profit (loss)
Funds from operations:
Apartments owned
Core properties $100,480 $100,898 $53,415 $53,356
Non-core properties 17,756 3,934 9,027 3,326
Reconciling items 2,620 1,878 1,231 956
-------- -------- -------- -------
Segment contribution to FFO 120,856 106,710 63,673 57,638
General & administrative expenses (9,701) (5,921) (4,582) (2,822)
Interest expense (42,934) (36,713) (21,634) (18,909)
Depreciation of unconsolidated affiliates 1,113 437 564 65
Non-real estate depreciation/amortization (1,147) (403) (538) (190)
Redeemable preferred dividend (Series F) (2,700) (1,455) (1,350) (1,350)
Equity in earnings (losses) of unconsolidated affiliates (1,184) (1,100) (444) (224)
Impairment of assets held as General Partner (520) - (93) -
Income from discontinued operations before minority
interest, depreciation and loss on disposition of property 163 3,906 - 2,070
-------- -------- -------- -------
Funds from Operations 63,946 65,461 35,596 36,278
Depreciation - apartments owned (37,377) (31,606) (18,933) (16,611)
Depreciation of unconsolidated affiliates (1,113) (437) (564) (65)
Redeemable preferred dividend 2,700 1,455 1,350 1,350
Prepayment penalty (1,349) - - -
Impairment of real property (423) - - -
Income from discontinued operations before minority
interest and loss on disposition of property (163) (2,600) - (1,538)
Minority interest (7,111) (7,746) (5,174) (4,003)
-------- -------- -------- -------
Income from continuing operations $19,110 $24,527 $12,275 $15,411
======== ======== ======== =======
Assets - As of June 30, 2003 and December 31, 2002
Apartments owned:
- Core $1,876,161 $1,872,424
- Non-core 492,828 467,570
Reconciling items 95,387 116,272
---------- ----------
Total Assets $2,464,376 $2,456,266
========== ==========
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. Pro Forma Condensed Financial Information
The Company acquired one apartment community ("2003 Acquired Community")
with 280 units in one transaction during the six and three-month periods
ended June 30, 2003. The total purchase price (including closing costs) of
$34 million equates to approximately $121 per unit. Consideration for the
community was funded through the use of the Company's line of credit.
In addition, the Company disposed of two apartment communities ("2003
Disposed Properties") with 552 units in two unrelated transactions during
the first quarter of 2003. The total selling price (including closing
costs) of $19.3 million resulted in a $451 gain on sale of real estate, net
of minority interest. Due to the prepayment of debt associated with the
sale of one of the properties, a $1,349 charge was recorded during the
first quarter. During the second quarter of 2003, the Company reported a
$131 loss, net of minority interest, relating to additional expenses
incurred in the same quarter for sales which took place during 2002. These
costs represent a change in estimate from those accrued at the time of
sale.
The following proforma information was prepared as if (i) the 2003
transaction related to the acquisition of the "2003 Acquired Community" had
occurred on January 1, 2002, (ii) the 2002 transactions related to the
acquisition of 21 apartment communities in seven separate transactions had
occurred on January 1, 2002, (iii) the disposition of the "2003 Disposed
Properties" had occurred on January 1, 2002, (iv) the 2002 transactions
related to the disposition of twelve apartment communities in eight
separate transactions had occurred on January 1, 2002, and (v) the 2002
Series F Preferred Share offering and the two common equity offerings had
occurred on January 1, 2002. 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
2002, nor does it purport to represent the results of operations for future
periods. Adjustments to the proforma condensed combined statement of
operations for the six and three-months ended June 30, 2003 and 2002,
consist principally of providing net operating activity and recording
interest, depreciation and amortization from January 1, 2002 to the earlier
of June 30, 2003 or 2002, as applicable, or the acquisition date.
For the Six-months Ended For the Three-months Ended
------------------------ --------------------------
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
Total revenues $217,164 $208,366 $109,961 $105,384
Net income available to common shareholders 13,618 16,652 9,152 7,981
Per common share data:
Net income available to common shareholders
Basic $0.49 $0.64 $0.32 $0.30
Diluted $0.48 $0.63 $0.32 $0.29
Weighted average numbers of shares outstanding:
Basic 27,881,682 26,035,093 28,289,752 26,757,916
Diluted 28,307,215 26,357,858 28,807,558 27,154,156
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. Derivative Financial Instruments
The Company has three interest rate swaps that effectively convert variable
rate debt to fixed rate debt. As of June 30, 2003, the aggregate fair value
of the Company's interest rate swaps was $1,472 prior to the allocation of
minority interest and is included in accrued expenses and other liabilities
in the consolidated balance sheets. For the six-months ending June 30,
2003, as the critical terms of the interest rate swaps and the hedged items
are the same, no ineffectiveness was recorded in the consolidated
statements of operations. All components of the interest rate swaps were
included in the assessment of hedge effectiveness. The 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.
11. Disposition of Property and Discontinued Operations
Included in discontinued operations for the six-month period ended June 30,
2002 are fourteen apartment community dispositions (two and twelve sold in
2003 and 2002, respectively) and two properties sold in 2003 for the
six-month period ended June 30, 2003. 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. Properties classified in this manner
through June 30, 2003, have been reflected on a comparative basis for the
period ended June 30, 2002.
As part of its strategic disposition program, during 2002, the Company sold
twelve properties with a total of 1,724 units for total consideration of
$87 million, or an average of $51 per unit. In January, 2003, the Company
sold the two apartment communities referred to above having 552 units in
two unrelated transactions. The total sales price of $21.1 million equates
to $38 per unit. A gain on sale of approximately $451, net of minority
interest, was recorded in the first quarter from these transactions and is
reflected in discontinued operations. Due to the prepayment of debt
associated with the sale of one of the properties, a $1,349 charge was
recorded during the first quarter. During the second quarter, the Company
reported a $131 loss, net of minority interest, relating to additional
expenses incurred in the same quarter for sales which took place during
2002. These costs represent a change in estimate from those accrued at the
time of sale.
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)
11. Disposition of Property and Discontinued Operations (continued)
On July 25, 2003, the Company sold one additional community with a total of
212 units. The total sales price of $10.5 million equates to $50 per
apartment unit. The Company expects to record a loss on sale in the third
quarter, net of minority interest of approximately $240. This property has
not been reflected in discontinued operations at June 30, 2003 as all
significant contingencies surrounding the sale had not been resolved.
The operating results of the components of discontinued operations are
summarized as follows for the six and three-month periods ended June 30,
2003 and 2002.
Six months Three months
---------- ------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental Income $184 $6,826 $- $2,994
Property other income 6 187 - 92
---- ------ ----- ------
Total Revenues 190 7,013 - 3,086
---- ------ ----- ------
Operating and Maintenance (6) 2,612 - 799
Interest expense 33 495 - 217
Depreciation and amortization - 1,306 - 532
---- ------ ----- ------
Total Expenses 27 4,413 - 1,548
---- ------ ----- ------
Income from discontinued operations before
minority interest and gain (loss) on
disposition of property 163 2,600 - 1,538
Minority interest 60 1,001 - 584
---- ------ ----- ------
Income from discontinued operations before gain
(loss) on disposition of property and related
minority interest 103 1,599 - 954
Gain (loss) on disposition of property 320 2,689 (131) 2,729
---- ------ ----- ------
Income (loss) from discontinued operations $423 $4,288 ($131) $3,683
==== ====== ===== ======
12. Commitments and Contingencies
Contingencies
In 2001, the Company underwent a state tax audit. 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 years through December 31, 2001, the
assessment would be $1.3 million. At the time, the Company believed the
assessment and the state's underlying position was neither supportable by
the law nor consistent with previously provided interpretative guidance
from the office of the State Secretary of Revenue. After two subsequent
enactments by the state legislature during 2002 affecting the pertinent tax
statute, the Company has been advised that its filing position for
1998-2001 should prevail. Based upon this information as of June 30, 2003,
the Company has recorded an accrual of $525, representing only its 2002
liability. Effective January 1, 2003, the Company reorganized the ownership
of Home Properties Trust, subjecting the Company to a much lower level of
tax going forward.
HOME PROPERTIES OF NEW YORK, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. Commitments and Contingencies (continued)
Guarantees
The Company has guaranteed a total of $597 of debt associated with two
entities where the Company is the general partner. All other mortgage notes
payable of affiliates are non-recourse debt to the limited partnerships and
the Company. In addition, the Company, through its general partnership
interests in certain affordable property limited partnerships, has
guaranteed the Low Income Housing Tax Credits to limited partners in 75
partnerships totaling approximately $63.8 million. As of June 30, 2003,
there were no known conditions that would make such payments necessary, and
no amounts have been recorded. In addition, the Company, acting as general
partner in certain partnerships, is obligated to advance funds to meet
partnership operating deficits.
13. Impairment of Real Property
During the first quarter of 2003, the Company listed for sale a 120-unit
property located in Detroit. As a result of tests performed in accordance
with SFAS No. 144, it was determined that the book value of this property
was in excess of the undiscounted cash flows. Therefore, an impairment of
real property of $423 was recorded for the three-month period ended March
31, 2003. This property is not reflected in discontinued operations as all
significant contingencies surrounding the potential sale have not been
resolved.
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.
As of June 30, 2003, the Company had an unsecured line of credit from M & T Bank
of $115 million. The Company's outstanding balance as of June 30, 2003, was $39
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 affect the Company's results of
operations and financial condition. The line of credit expires on September 1,
2005.
To the extent that 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, additional long term secured or unsecured
indebtedness, or the issuance of additional equity securities. As of June 30,
2003, the Company owned 23 properties with 3,769 apartment units, which were
unencumbered by debt.
In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. The available balance on the shelf
registration statement at June 30, 2003 was $144.4 million.
In September 1999, the Company completed the sale of $50 million of Series B
Preferred Stock in a private transaction with GE Capital. The Series B Preferred
stock 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, non-call
provision. On February 14, 2002, 1,000,000 shares of the Series B Preferred
stock were converted to 839,771 common shares. The conversion had no effect on
the reported results of operations. On May 24, 2002 the Company repurchased the
remaining 1.0 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.
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, non-call provision. As
part of the Series C Preferred Stock transaction, the Company also issued
240,000 warrants to purchase common shares at a price of $30.25 per share,
expiring in five years. On January 9, 2003, holders of 100,000 shares of Series
C Preferred Shares elected to convert those shares for 330,579 shares of common
stock. On May 8, 2003, 200,000 shares of Series C Preferred Shares were
converted into 661,157 shares of common stock. The conversions had no effect on
the reported results of operations.
In June 2000, the Company completed the sale of $25 million of Series D
Preferred Stock in a private transaction with The Equitable Life Assurance
Society of the United States. The Series D Preferred Stock carries an annual
dividend rate equal to the greater of 8.775% or the actual dividend paid on the
Company's common shares into which the preferred shares can be converted. The
stock has a conversion price of $30 per share and a five-year, non-call
provision.
In December 2000, the Company completed the sale of $30 million of Series E
Preferred Stock in a private transaction, again with affiliates of Prudential
and Teachers. The Series E Preferred Stock 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, non-call provision. In
addition, as part of the Series E Preferred Stock transaction, the Company
issued warrants to purchase 285,000 common shares at a price of $31.60 per
share, expiring in five years. On August 20, 2002, 63,200 of the Series E
Convertible Preferred Shares were converted into 200,000 shares of common stock.
On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted into
116,456 shares of common stock. The conversions 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 source
of capital for the Company. During 2003, the Company exercised an option to
acquire approximately 10 acres of land adjacent to one of its existing
properties for $2.8 million. In connection with this transaction, the Company
issued UPREIT units valued at approximately $2.8 million. In addition, $2
million of UPREIT units were issued to satisfy an existing liability. During
2002, the Company acquired an 864-unit property for a total purchase price of
$81.5 million. The Company issued UPREIT units valued at approximately $11.5
million, with the balance funded by the assumption of debt and cash.
During 2002, $27.4 million of common stock was issued under the Company's DRIP.
An additional $14.5 million has been raised through the DRIP program during the
first six months of 2003.
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 believed the stock was trading at or above its
estimate of net asset value. During the first quarter of 2002, the Company
granted 53 waivers for purchases aggregating a total of $3.9 million. No waivers
were granted during the balance of 2002 or the first six months of 2003.
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 six months of 2003, there
were no shares or UPREIT Units repurchased by the Company. At June 30, 2003 the
Company had authorization to repurchase 3,135,800 shares of common stock and
UPREIT Units under the stock repurchase program.
As of June 30, 2003, the weighted average rate of interest on mortgage debt is
6.34% and the weighted average maturity is approximately 8 years. Approximately
96.7% 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 136 affordable
housing 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 guaranteed the low income housing tax credits to the limited
partners for a period of five years (from the date of property development under
the tax credit program) in 75 partnerships totaling approximately $63.8 million.
Such guarantee requires the Company to operate the properties in compliance with
Internal Revenue Code Section 42 for 15 years. The weighted average number of
compliance years remaining is approximately 10 years. In addition, acting as the
general partner in certain partnerships, the Company is obligated to advance
funds to meet partnership operating deficits. However, such funding requirements
cease after a five-year period. If operating deficits continue to occur after
the expiration of the five-year period, the Company would determine on an
individual partnership basis if it is in the best interest of the Company to
continue to fund these deficits. The Company believes the properties operations
conform to the applicable requirements as set forth above and do not anticipate
any payment on the guarantees described above.
These partnerships are funded with non-recourse financing. The Company's
proportionate share of non-recourse financing was $5.6 million at June 30, 2003.
The Company has guaranteed a total of $597 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 $10.4
million at June 30, 2003. 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.
In December 2002, the Company, including its equity affiliates, determined that
it would market for sale virtually all of the assets associated with its
interest in the aforementioned affordable housing limited partnerships. Such
assets include the equity interest in the affordable housing partnerships,
loans, advances and management contracts. The Company recorded impairment
charges aggregating $520 during the first six months of 2003 from monies loaned
to certain equity affiliates to fund operating shortfalls, which are not
anticipated to be recovered from projected sale proceeds.
The Company intends to sell the assets in three phases:
Phase I consists of the Company's interest in 40 properties containing 1,357
units, all New York State Rural Development properties, which are under contract
to be sold. A closing is anticipated during the third quarter of 2003 at
approximately book value.
Phase II consists of the Company's interest in 49 properties with 1,471 units,
all Pennsylvania Rural Development properties. An offer has been accepted for
approximately book value. The final contract is being negotiated. The Company
anticipates closing on this phase during the fourth quarter of 2003.
Phase III consists of the Company's interest in the remaining 35 properties with
3,421 units, primarily located in Upstate New York and Pennsylvania. The Company
has received competitive bids and is expected to select a qualified buyer in the
next several months with closing anticipated in the first quarter of 2004.
The Company plans on retaining the general partner interest in one 77-unit
property located in Rochester, New York. The property is 80% market rate and is
managed as a market rate community.
Summarized balance sheet information relating to these partnerships is as
follows (amounts are in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Balance Sheets:
Real estate, net $248,839 $266,613
Other assets 33,135 37,764
-------- --------
Total assets $281,974 $304,377
======== ========
Mortgage notes payable $247,149 $253,285
Advances from affiliates 22,334 24,725
Other liabilities 15,488 15,125
Partners' equity (deficit) (2,997) 11,242
-------- --------
Total liabilities and partners' equity (deficit) $281,974 $304,377
======== ========
The Company's ability to sell the affordable assets on the timelines described
above is dependent on a variety of factors, some of which are outside of the
Company's control, such as the receipt of the approvals of various partners,
lenders and governmental agencies necessary for the sale.
Acquisitions and Dispositions
During the first quarter of 2003, the Company acquired its second property in
the Boston area with 280 units in Stoughton, MA. The total purchase price of $34
million, including closing costs, equates to approximately $121 per apartment
unit. The weighted average expected first year capitalization rate on this
acquisition is 7.7%. Capitalization rate ("cap rate") is defined as the rate of
interest used to convert the first year expected net operating income ("NOI")
less a 3.0% management fee into a single present value. NOI is defined by the
Company as rental income and property other income less operating and
maintenance expenses. Management generally considers NOI to be an appropriate
measure of operating performance because it helps investors to understand the
operations of a community. In addition the apartment communities are valued and
sold in the market by using a multiple of NOI.
Also during the first quarter of 2003, the Company sold two communities with a
total of 552 apartment units in Indiana and Ohio for total consideration of
$21.1 million, or an average of $38 per unit. A gain on sale of approximately
$451, net of minority interest, was reported in the first quarter from these
transactions and is reflected in discontinued operations. Due to the prepayment
of debt associated with the sale of Candlewood Apartments in Indiana, a $1,349
charge was recorded during the first quarter.
During the first quarter of 2003, the Company listed for sale a 120-unit
property located in Detroit. The book value of the property was in excess of the
projected sale proceeds by approximately $423. Therefore, an impairment of real
property has been recorded for that amount. This property is not reflected in
discontinued operations as the Company believes it has not yet met the criteria
to classify the property as held for sale.
Subsequent to the end of the second quarter, the Company sold a 212 unit
community located in Pennsylvania. The total sales price of $10.5 million
equates to $50 per apartment unit. The Company expects to record a loss on sale
in the third quarter, net of minority interest of approximately $240. This
property has not been reflected in discontinued operations at June 30, 2003 as
all significant contingencies surrounding the sale had not been resolved.
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 June 30, 2003 and December 31, 2002 are
summarized as follows (in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Fixed rate mortgage notes payable $1,312,056 $1,279,752
Variable rate mortgage notes payable 6,055 21,055
---------- ----------
Total mortgage notes payable 1,318,111 1,300,807
Variable rate line of credit facility 39,000 35,000
---------- ----------
Total mortgage notes payable and line of credit facility $1,357,111 $1,335,807
========== ==========
Mortgage notes payable are collateralized by certain apartment communities and
mature at various dates from November, 2003 through June, 2036. The weighted
average interest rate of the Company's variable rate notes and credit facility
was 2.35% and 2.83% at June 30, 2003 and December 31, 2002, respectively. The
weighted average interest rate of the Company's fixed rate notes was 6.47% and
6.50% at June 30, 2003 and December 31, 2002, 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. At June 30, 2003,
future minimum rental payments required under the lease are $70 per year until
the lease expires. The lease also provides for contingent rental payments based
on collected rents. The contingent rent expense for the six-month period ended
June 30, 2003 amounted to $70.
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 $597 of debt
associated with two of partnerships, b) guarantee of the low income housing tax
credits to the limited partners for a period of five years in 75 partnerships
totaling approximately $63.8 million, and c) the obligation to advance funds to
meet partnership operating deficits for a five year period 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.
Capital Improvements
The Company's policy is 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, revenue generating capital
improvements include, among other items: community centers, new windows, and
kitchen/ bath apartment upgrades. Revenue generating capital improvements will
directly result in rental earnings or expense savings. 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 six-month period ended June
30, 2003 approximately $131 and $262 per unit was estimated to be spent on
recurring capital expenditures. The table below summarizes the actual total
capital improvements incurred by major categories for the three and six-month
periods ended June 30, 2003 and 2002 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 six-month period ended
June 30, 2003 as follows:
For the three-month period ended June 30,
(in thousands, except per unit data)
2003 2002
-------------------------------------------------------------- ------------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvement Unit(a) Improvements Unit(a)
------ ------- ------ ------- ----------- ------- ------------ -------
New Buildings $- $- $496 $12 $496 $12 $1,546 $40
Major building
improvements 945 23 5,516 133 6,461 156 5,228 137
Roof replacements 361 9 684 16 1,045 25 1,819 48
Site improvements 346 8 1,708 41 2,054 49 3,905 102
Apartment upgrades 681 16 7,788 188 8,469 204 7,776 204
Appliances 566 14 667 16 1,233 30 1,039 27
Carpeting/Flooring 1,777 43 1,269 31 3,046 74 2,666 70
HVAC/Mechanicals 523 12 2,772 67 3,295 79 3,247 85
Miscellaneous 233 6 943 23 1,176 29 1,146 30
------ ---- ------- ---- ------- ---- ------- ----
Totals $5,432 $131 $21,843 $527 $27,275 $658 $28,372 $743
======= ==== ======= ==== ======= ====== ======= ======
(a) Calculated using the weighted average number of units outstanding,
including 36,736 core units, 2002 acquisition units of 4,492 and 2003
acquisition units of 280 for the three-month period ended June 30, 2003 and
36,736 core units and 2002 acquisition units of 1,467 for the three-month
period ended June 30, 2002.
For the six-month period ended June 30,
(in thousands, except per unit data)
2003 2002
-------------------------------------------------------------- ------------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit(a) Cap Ex Unit(a) Improvement Unit(a) Improvements Unit(a)
------ ------- ------ ------- ----------- ------- ------------ -------
New Buildings $- $- $883 $21 $883 $21 $3,128 $83
Major building
improvements 1,886 46 8,029 194 9,915 240 10,125 269
Roof replacements 721 17 618 15 1,339 32 2,091 56
Site improvements 691 17 2,139 52 2,830 69 5,556 148
Apartment upgrades 1,360 33 14,831 358 16,191 391 14,964 398
Appliances 1,130 27 1,158 28 2,288 55 1,957 52
Carpeting/Flooring 3,548 86 1,809 44 5,357 130 4,865 129
HVAC/Mechanicals 1,045 25 4,525 109 5,570 134 4,773 127
Miscellaneous 463 11 1,581 38 2,044 49 2,210 59
------ ---- ------- ---- ------- ---- ------- ----
Totals $10,844 $262 $35,573 $859 $46,417 $1,121 $49,669 $1,321
======= ==== ======= ==== ======= ====== ======= ======
(a) Calculated using the weighted average number of units outstanding,
including 36,736 core units, 2002 acquisition units of 4,492 and 2003
acquisition units of 215 for the six-month period ended June 30, 2003 and
36,736 core units and 2002 acquisition units of 906 for the six-month
period ended June 30, 2002.
The schedule below summarizes the breakdown of total capital improvements
between core and non-core as follows:
For the three-month period ended June 30,
(in thousands, except per unit data)
2003 2002
------------------------------------------------------------- ----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvement Unit Improvements Unit
------ ---- ------ ---- ----------- ---- ------------ ----
Core Communities $4,807 $131 $16,651 $453 $21,458 $584 $27,063 $737
2003 Acquisition
Communities 37 131 3 12 40 143 - -
2002 Acquisition
Communities 588 131 5,189 1,155 5,777 1,286 1,309 892
------ ---- ------- ---- ------- ---- ------- ----
Sub-total 5,432 131 21,843 527 27,275 658 28,372 743
2003 Disposed
Communities - 131 - - - - 263 477
2002 Disposed
Communities - - - - - - 655 2,324
Corporate office
expenditures (1) - - - - 339 - 676 -
------ ---- ------- ---- ------- ---- ------- ----
$5,432 $131 $21,843 $527 $27,614 $658 $29,966 $750
======= ==== ======= ==== ======= ====== ======= ======
For the six-month period ended June 30,
(in thousands, except per unit data)
2003 2002
------------------------------------------------------------- ----------------------
Non- Total Total
Recurring Per Recurring Per Capital Per Capital Per
Cap Ex Unit Cap Ex Unit Improvement Unit Improvements Unit
------ ------- ------ ------- ----------- ------- ------------ -------
Core Communities $9,614 $262 $26,756 $728 $36,370 $990 $48,334 $1,316
2003 Acquisition
Communities 56 262 - - 56 262 - -
2002 Acquisition
Communities 1,174 262 8,817 1,963 9,991 2,225 1,335 1,473
Sub-total 10,844 262 35,573 859 46,417 1,121 $49,669 1,319
------ ---- ------- ---- ------- ---- ------- ----
2003 Disposed
Communities 5 262 - - 5 262 483 875
2002 Disposed
Communities - - - - - - 1,002 1,987
Corporate office
expenditures (1) - - - - 796 - 1,884 -
------ ---- ------- ---- ------- ---- ------- ----
$10,849 $262 $35,573 $859 $47,218 $1,121 $53,038 $1,322
======= ==== ======= ==== ======= ====== ======= ======
(1) No distinction is made between recurring and non-recurring expenditures for
corporate office.
Results of Operations
Summary of Core Properties
The Company had 129 apartment communities with 36,736 units which were owned
during the six-month period being presented (the "Core Properties"). The Company
has acquired an additional 22 apartment communities with 4,772 units during 2002
and 2003 (the "Acquired Communities"). In addition, the Company also disposed of
14 properties with a total of 2,276 units during 2002 and 2003 (the "Disposition
Communities"). These dispositions have been classified as discontinued
operations. The inclusion of the Acquired Communities generally accounted for
the significant changes in operating results for the six-months ended June 30,
2003.
A summary of the Core Properties net operating income is as follows (in
thousands):
Six Months Three Month
------------------------------- ----------------------------
2003 2002 %Chg 2003 2002 %Chg
---- ---- ---- ---- ---- ----
Rental income $176,832 $171,731 3.0% $89,534 $86,801 3.1%
Property other income 7,214 6,480 11.3% 3,823 3,354 14.0%
-------- -------- ---- ------- ------- ----
Total income 184,046 178,211 3.3% 93,357 90,155 3.6%
Operating and
Maintenance (83,566) (77,313) (8.1%) (39,942) (36,799) (8.5%)
-------- -------- ---- ------- ------- ----
Net operating income $100,480 $100,898 (0.4%) $53,415 $53,356 0.1%
======== ======== ==== ======= ======= ===
Comparison of six-months ended June 30, 2003 to the same period in 2002
Of the $28,269 increase in rental income, $23,171 is attributable to the
Acquired Communities. The balance of this increase, which is from the Core
Properties, was the result of an increase of 3.2% in weighted average rental
rates, offset by a decrease in occupancy from 91.7% to 91.5%. Occupancy is
defined as total possible rental income, net of vacancy and bad debt expense as
a percentage of total possible rental income. Total possible rental income is
determined by valuing occupied units at contract rates and vacant units at
market rents.
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, and
miscellaneous charges to residents increased by $1,193. Of this increase, $459
is attributable to the Acquired Communities and $734 represents an 11.3%
increase from the Core Properties.
Interest and dividend income decreased $496 due to decreased levels of financing
to affiliates and a lower interest rate environment.
Of the $16,057 increase in operating and maintenance expenses, $9,804 is
attributable to the Acquired Communities. The balance, a $6,253 increase, is
attributable to the Core Properties and is primarily due to an increase in
personnel expense, repairs and maintenance, property insurance, utilities and
snow removal costs. The increase in personnel and snow removal costs of $2,505
are significantly related to weather conditions. The regions in which the
Company operates, received higher than normal snowfall, and many regions that
get very little snow were hit with unusual snow storms. A significant amount of
overtime was incurred clearing and shoveling.
General and administrative expense increased in 2003 by $3,780, or 63.8%.
General and administrative expenses as a percentage of total revenues were 4.5%
for 2003 as compared to 3.2% for 2002. The increase primarily is attributed to
the consolidation of the Management Companies in 2003 which added an additional
$2,270 to this line item. Previously such expenses were allocated and charged to
the Management Companies and were included in the equity in earnings (losses) of
unconsolidated affiliates. Of the remaining $1,510 variance, $409 is related to
the expensing of stock options for the first time in both of the first two
quarters of 2003 and a $318 increase in incentive compensation costs compared to
the same period a year ago. The balance of this increase is attributable to
incremental increases in general and administrative costs related to the 2002
Acquisition Communities.
Interest expense increased $6,221 due to the increase in the amount of debt
outstanding associated with the Acquired Communities offset in part by lower
interest rates.
Due to the prepayment of debt associated with the sale of Candlewood Apartments
in Indiana, a $1,349 charge was recorded during the first quarter.
Depreciation and amortization expense increased $7,821 due to the depreciation
on the Acquisition Communities, the additions to the Core Properties, net of the
Disposition Communities.
The impairment of real property of $423 relates to an apartment community in
Detroit currently under contract to be sold. As a result of tests performed in
accordance with SFAS No. 144, it was determined that the book value of this
property was in excess of the estimated undiscounted cash flows. This property
is not reflected in discontinued operations as all significant contingencies
surrounding the sale have not been resolved.
In the fourth quarter of 2002, the Company announced its intention to sell
virtually all of the assets associated with its general partner interests in the
affordable properties to focus solely on the direct ownership and management of
market rate apartment communities. At that time, the Company announced its
intention to sell the assets, which include principally loans, advances and
management contracts.
The impairment of assets held as General Partner of $520, represents advances
made to certain of the affordable property limited partnerships during the first
six months of 2003 which the Company believes will not be repaid upon the sale
of the loans.
The equity in earnings (losses) of unconsolidated affiliates of $1,184 is
primarily the result of the general partner recording a greater share of the
underlying investment's losses due to the loans and advances to certain of the
affordable property limited partnerships where the limited partner has no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses."
Minority interest decreased $635 due to the impairment of real property and
assets held by the General Partner recorded in the first six months of 2003
together with an overall reduction in income from operations as a result of
increased interest and depreciation costs as compared to the previous period.
Both of these items were offset by the impact of the premium paid on the
repurchase of the Series B Convertible Cumulative Preferred Stock which had been
treated as a charge to net income available to common shareholders in the
previous year.
Included in discontinued operations for the six-month period ended June 30, 2002
are fourteen apartment community dispositions (two and twelve sold in 2003 and
2002, respectively) and two properties sold in 2003 for the six-months ended
June 30, 2003. The operations of these fourteen properties have been reflected
on a comparative basis for the period ended June 30, 2002.
The Company reported a $245 loss, net of minority interest, on disposition of
property in the first quarter of 2002 relating to additional expenses incurred
in the same quarter for a sale which closed in the fourth quarter of 2001. These
costs represented a change in estimate from those accrued at the time of sale.
Comparison of the three-months ended June 30, 2003 to the same period in 2002
Of the $12,432 increase in rental income, $9,699 is attributable to the Acquired
Communities. The balance of this increase, which is from the Core Properties,
was the result of an increase of 3.1% in weighted average rental rates.
Occupancy reflected no change and was 92.3% for each of the quarters ended June
30, 2003 and 2002. Occupancy is defined as total possible rental income, net of
vacancy and bad debt expense as a percentage of total possible rental income.
Total possible rental income is determined by valuing occupied units at contract
rates and vacant units at market rents.
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, and
miscellaneous charges to residents increased by $681. Of this increase, $212 is
attributable to the Acquired Communities and $469 represents a 14% increase from
the Core Properties.
Interest and dividend income decreased $313 due to decreased levels of financing
to affiliates and a lower interest rate environment.
Of the $7,352 increase in operating and maintenance expenses, $4,209 is
attributable to the Acquired Communities. The balance, a $3,143 increase, is
attributable to the Core Properties and is primarily due to an increase in
repairs and maintenance, personnel expense, utilities, and property insurance,
offset by a decrease in real estate taxes. The increase in utilities is a
combination of a colder spring than usual, as well as renewal of certain
contracts during the 2003 current quarter at higher rates compared to the year
ago quarter. The increase in repairs and maintenance reflects the Company's
continual focus on properly maintaining the communities. Property insurance
expenses in 2002 continued to benefit from the legal settlement received a
couple of years ago. The increase in personnel costs reflects efforts to
increase occupancy. The property management teams have been challenged to
increase occupancy while selectively giving up some rental rate growth.
Additional staffing, plus overtime hours to improve the Company's capture rate,
contributed to the increased personnel costs.
General and administrative expense increased in 2003 by $1,760, or 62%. General
and administrative expenses as a percentage of total revenues were 4.2% for 2003
as compared to 2.9% for 2002. The increase primarily is attributed to the
consolidation of the Management Companies in 2003 which added an additional
$1,113 to this line item. Previously such expenses were allocated and charged to
the Management Companies and were included in the equity in earnings (losses) of
unconsolidated affiliates. Of the remaining $647 variance, $207 is related to
the expensing of stock options for the first time in the second quarter of 2003
and a $63 increase in incentive compensation costs compared to the same period a
year ago. The balance of this increase is attributable to incremental increases
in general and administrative costs related to the 2002 Acquisition Communities.
Interest expense increased $2,725 due to the increase in the amount of debt
outstanding associated with the Acquired Communities offset in part by lower
interest rates.
Depreciation and amortization expense increased $3,202 due to the depreciation
on the Acquisition Communities, the additions to the Core Properties, net of the
Disposition Communities.
In the fourth quarter of 2002, the Company announced its intention to sell
virtually all of the assets associated with its general partner interests in the
affordable properties to focus solely on the direct ownership and management of
market rate apartment communities. At that time, the Company announced its
intention to sell the assets, which include principally loans, advances and
management contracts.
The impairment of assets held as General Partner of $93, represents advances
made to certain of the affordable property limited partnerships during the
second quarter of 2003 which the Company believes will not be repaid upon the
sale of the loans.
The equity in earnings (losses) of unconsolidated affiliates of $444 is
primarily the result of the general partner recording a greater share of the
underlying investment's losses due to the loans and advances to certain of the
affordable property limited partnerships where the limited partner has no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses."
Minority interest increased $1,171 as a result of the reduced level of gains on
disposition of real property reflected in discontinued operations in 2003 as
compared to the same period one year ago, offset by an overall reduction in
income from operations as a result of increased interest and depreciation costs
as compared to the previous period. In addition, these items were offset by the
impact of the premium paid on the repurchase of the Series B Convertible
Cumulative Preferred Stock which had been treated as a charge to net income
available to common shareholders in the previous year.
Included in discontinued operations for the three-month period ended June 30,
2002 are fourteen apartment community dispositions (two and twelve sold in 2003
and 2002, respectively) and two properties sold in 2003 for the three-months
ended June 30, 2003. The operations of these fourteen properties have been
reflected on a comparative basis for the period ended June 30, 2002. During the
second quarter, the Company reported a $131 loss, net of minority interest,
relating to additional expenses incurred in the same quarter for sales which
took place during 2002. These costs represent a change in estimate from those
accrued at the time of sale.
Funds From Operations
Pursuant to the revised definition of Funds From Operations ("FFO") adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), FFO is defined as net income (computed in accordance with
accounting principles generally accepted in the United States of America
("GAAP")) excluding gains or losses from sales of property, minority interest
and extraordinary items plus depreciation from real property including
adjustments for unconsolidated partnerships and joint ventures less dividends
from non-convertible preferred shares. The Company considers debt extinguishment
costs which are incurred as a result of repaying property specific debt and
non-cash real estate impairment charges, as a component of the gain or loss on
sale of the property. Because of the limitations of the FFO definition as
published by NAREIT as set forth above, the Company has made certain
interpretations in applying the definition. The Company believes all adjustments
not specifically provided for are consistent with the definition.
Management believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, FFO should be considered
in conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management believes that by excluding
gains or losses related to dispositions of property and excluding real estate
depreciation (which can vary among owners of similar assets in similar condition
based on historical cost accounting and useful life estimates), FFO can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs. Cash
provided by operating activities was $76,303 and $73,148 for the six-month
period ended and $42,794 and $43,832 for the three-month period ended June 30,
2003 and 2002, respectively. Cash used in investing activities was $56,707 and
$174,345 for the six-month period ended and $25,850 and $115,954 for the
three-month period ended June 30, 2003 and 2002, respectively. Cash (used in)
and provided by financing activities was ($21,668) and $103,217 for the
six-month period ended and ($19,033) and $24,130 for the three-month period
ended June 30, 2003 and 2002, 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 and reconciliation to GAAP net income available to common
Shareholders for the six and three-months ended June 30, 2003 and 2002 are
presented below (in thousands):
Six Months Three Months
-------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income available to common shareholders $12,813 $16,311 $8,942 $10,201
Convertible preferred dividends 4,010 5,779 1,842 2,502
Minority interest 7,111 7,746 5,174 4,003
Minority interest - income from discontinued operations 60 1,001 - 584
Depreciation from real property 37,377 31,606 18,933 16,611
Depreciation from real property from unconsolidated entities 1,113 437 564 65
Impairment of real property 423 - - -
Loss on disposition of property 10 245 10 16
Prepayment penalty from early extinguishment of debt in
connection with sale of Candlewood Apartments 1,349 - - -
(Gain) loss on disposition of discontinued operations, net of
minority interest (320) (2,689) 131 (2,729)
-------- -------- -------- --------
FFO as defined above 63,946 60,436 35,596 31,253
Premium on Series B preferred stock repurchase - 5,025 - 5,025
-------- -------- -------- --------
FFO as adjusted by the Company $63,946 $65,461 $35,596 $36,278
Weighted average common shares/units outstanding:
- Basic 44,044.6 41,422.5 44,473.7 42,013.0
======== ======== ======== ========
- Diluted 47,417.2 46,384.0 47,693.2 46,664.5
======== ======== ======== ========
On May 24, 2002 the Company repurchased the 1.0 million shares outstanding of
the Series B preferred stock at an amount equivalent to 839,772 common shares
(as if the preferred shares had been converted). The stock had a liquidation
preference of $25.00 per share, a conversion price of $29.77 per share, and a
five-year, non-call provision. 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.
In the adjusted presentation above, the Company excluded the premium on the
Series B preferred stock. The Company believes that this calculation is more
reflective of continuing operations as the premium was considered a one time
charge. 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 four 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.
Calculation Presented for Series F Covenants
Three-months ended
------------------
June 30 Mar. 31 Dec. 31 Sept. 30
2003 2003 2002 2002
---- ---- ---- ----
EBITDA
Total revenues $109,713 $106,955 $105,715 $102,184
Net operating income from discontinued operations - 196 299 618
Operating and maintenance (46,040) (49,772) (44,199) (40,598)
General and administrative (4,582) (5,119) (3,891) (2,837)
Impairment of assets held as General Partner (93) (427) (3,183) -
Equity in earnings (losses) of unconsolidated
affiliates (444) (740) (16,085) (308)
-------- -------- -------- --------
$58,554 $51,093 $38,656 $59,059
Fixed Charges
Interest expense $21,634 $21,300 $20,350 $19,990
Interest expense on discontinued operations - 33 - -
Preferred dividends 3,192 3,518 3,717 3,793
Capitalized interest 230 230 230 230
-------- -------- -------- --------
$25,056 $25,081 $24,297 $24,013
(1)
Times Coverage ratio: 2.34 2.04 1.59 2.46
(1) Results for the quarter reflect impairment and other charges relating to
certain government assisted properties ("affordable properties") in which
the Company is a general partner as described in more detail in the notes
to the Company's annual report filed on form 10K. Excluding the impairment
and other charges of $18,074, the fixed charge coverage ratio would have
been 2.34.
Economic Conditions
Substantially all of the leases at the Company's apartment communities are for a
term of one year or less, which enables the Company to seek increased rents upon
renewal of existing leases or commencement of new leases. These short-term
leases minimize the potential adverse effect of inflation on rental income,
although residents may leave without penalty at the end of their lease terms and
may do so if rents are increased significantly.
Historically, real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing intensities and at different times. In 2002 and continuing into 2003
many regions of the United States have experienced varying degrees of economic
recession and certain recessionary trends, such as the cost of obtaining
sufficient property and liability insurance coverage, short-term interest rates,
and a temporary reduction in occupancy. In light of this, we will continue to
review our business strategy however, we believe that given our property type
and the geographic regions in which we are located, we do not anticipate any
changes in our strategy or material effects in financial performance.
Declaration of Dividend
On August 5, 2003, the Board of Directors approved a dividend of $.61 per share
for the quarter ended June 30, 2003. This is the equivalent of an annual
distribution of $2.44 per share. The dividend is payable August 28, 2003 to
shareholders of record on August 18, 2003.
On August 5, 2003 the Company also declared a regular dividend of $0.5625 per
share on its Series F Cumulative Redeemable Preferred Stock, for the quarter
ending August 31, 2003. The dividend on the preferred shares is payable on
September 2, 2003, to shareholders of record on August 18, 2003. This dividend
is equivalent to an annualized rate of $2.25 per share.
Contingency
In 2001, the Company underwent a state tax audit. 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 years through December 31, 2001, the assessment would be
$1.3 million. At the time, the Company believed the assessment and the state's
underlying position was not supportable by the law nor consistent with
previously provided interpretative guidance from the office of the State
Secretary of Revenue. After two subsequent enactments by the state legislature
during 2002 affecting the pertinent tax statute, the Company has been advised
that its filing position for 1998-2001 should prevail. Based upon this
information as of June 30, 2003, the Company has recorded an accrual of $525,
representing only its 2002 liability. Effective January 1, 2003, the Company
reorganized the ownership of Home Properties Trust, subjecting the Company to a
much lower level of tax going forward.
New Accounting Standard
In January 2003, the FASB issued Interpretation No. 46 - "Consolidation of
Variable Interest Entities", an interpretation of ARB No. 51 - "Consolidated
Financial Statements." The interpretation addresses consolidation by businesses
of special purpose entities (variable interest entities, "VIE"). This
interpretation addresses consolidation by business enterprises of variable
interest entities in which the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties or in which the equity investors do not
have the characteristics of a controlling financial interest. This
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The interpretation also requires disclosures
about variable interest entities that the company is not required to consolidate
but in which it has a significant variable interest. The consolidation
requirements of this interpretation apply immediately to variable interest
entities created after January 31, 2003, and in the first fiscal year or interim
period beginning after June 15, 2003, to existing variable interest entities.
Management is uncertain but is assuming it is reasonably possible that each of
the limited partnerships in which it holds the general partnership interest
would be considered a VIE where the Company is the primary beneficiary, and as a
result the Company would consolidate all or a certain number of the limited
partnership's assets and liabilities.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003. The provisions of FAS 149 are not expected to
have a material impact on the Company's financial statements.
In May 2003, FASB issued SFAS 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company is still in the process of evaluating the potential impact
of this standard on its financial statements.
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 June 30,
2003 and December 31, 2002, approximately 97% and 96%, respectively, of the
Company's debt bore interest at fixed rates with a weighted average maturity of
approximately 8 years and a weighted average interest rate of approximately
6.47% and 6.50%, respectively. The remainder of the Company's debt bears
interest at variable rates with a weighted average maturity of approximately 4
and 2 years, respectively, and a weighted average interest rate of 2.87% and
2.83%, respectively, at June 30, 2003 and December 31, 2002. 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 June 30, 2003 and December 31, 2002, the interest rate risk on $25.2 million
of such variable rate debt has been mitigated through the use of interest rate
swap agreements (the "Swaps") with major financial institutions. The Company is
exposed to credit risk in the event of non-performance by the counter-parties to
the Swaps. The Company believes it mitigates its credit risk by entering into
these Swaps with major financial institutions. The Swaps effectively convert an
aggregate of $25.2 million in variable rate mortgages to fixed rates of 5.91%,
8.22% and 8.40%.
For both June 30, 2003 and December 31, 2002, 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 $1.5 billion compared to its carrying amount of $1.3
billion. The Company estimates that a 100 basis point decrease in market
interest rates at June 30, 2003 would have changed the fair value of the
Company's fixed rate debt to a liability of $1.6 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 June
30, 2003, the Company had no other material exposure to market risk.
HOME PROPERTIES OF NEW YORK, INC.
ITEM 4. INTERNAL CONTROLS
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to the Company's Co-Chief
Executive Officers and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Also, the Company has
investments in certain unconsolidated entities. As the Company does not control
these entities, the disclosure controls with respect to such entities are
necessarily substantially more limited than those maintained with respect to the
Company's consolidated subsidiaries.
The Co-Chief Executive Officers and Chief Financial Officer have, as of the end
of the period covered by this quarterly report, evaluated the effectiveness of
the disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) and have
determined that such disclosure controls and procedures are adequate. In
connection with the evaluation, no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) was identified that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
HOME PROPERTIES OF NEW YORK, INC.
Item 6. Exhibits and Reports or Form 8-K
(a) Exhibit 31.1 Section 302 Certifications of Chief Executive Officers
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certifications of Chief Executive Officers
Exhibit 32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
- Form 8-K was filed on August 8, 2003, date of report August 8, 2003,
as amended by Form 8-K/A filed on August 14, 2003, with respect to
Items 7 and 12 disclosures regarding the Registrant's press release
announcing its results for the second quarter of 2003 and the second
quarter 2003 investor conference call.
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: August 14, 2003
By: /s/ Norman P. Leenhouts
-----------------------
Norman P. Leenhouts
Chairman and
Co-Chief Executive Officer
Date: August 14, 2003
-----------------------
By: /s/ David P. Gardner
David P. Gardner
Senior Vice President and
Chief Financial Officer