UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2010

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 1-13136

HOME PROPERTIES, INC.

(exact name of registrant as specified in its charter)

MARYLAND		16-1455126
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
850 Clinton Square, Rochester, New York		14604
(Address of principal executive offices)		(Zip Code)

(585) 546-4900

N/A

Indicate by check mark whether the 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock		Outstanding at July 31, 2010
$.01 par value		37,493,719

 

 

HOME PROPERTIES, INC.

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — June 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations — Three months ended June 30, 2010 and 2009			4
Consolidated Statements of Operations — Six months ended June 30, 2010 and 2009			5
Consolidated Statements of Equity — Six months ended June 30, 2010 and year ended December 31, 2009			6
Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009			7
Notes to Consolidated Financial Statements			8-15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 6. Exhibits			32
Signatures			33
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOME PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND DECEMBER 31, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

		2010				2009
ASSETS
Real estate:
Land		$	526,478			$	508,087
Construction in progress			177,622				184,617
Buildings, improvements and equipment			3,332,582				3,223,275
			4,036,682				3,915,979
Less: accumulated depreciation			(793,652	)			(733,142	)
Real estate, net			3,243,030				3,182,837
Cash and cash equivalents			8,455				8,809
Cash in escrows			31,463				27,278
Accounts receivable			13,396				14,137
Prepaid expenses			11,280				16,783
Deferred charges			12,578				13,931
Other assets			6,385				4,259
Total assets		$	3,326,587			$	3,268,034
LIABILITIES AND EQUITY
Mortgage notes payable		$	2,136,742			$	2,112,645
Exchangeable senior notes			137,162				136,136
Line of credit			9,000				53,500
Accounts payable			20,121				19,695
Accrued interest payable			10,680				10,661
Accrued expenses and other liabilities			29,526				27,989
Security deposits			19,507				19,334
Total liabilities			2,362,738				2,379,960
Commitments and contingencies
Equity:
Common stock, $0.01 par value; 80,000,000 shares authorized; 37,481,406 and 34,655,428 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			375				347
Excess stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding			—				—
Additional paid-in capital			1,029,975				922,078
Distributions in excess of accumulated earnings			(295,503	)			(261,313	)
Total common stockholders’ equity			734,847				661,112
Noncontrolling interest			229,002				226,962
Total equity			963,849				888,074
Total liabilities and equity		$	3,326,587			$	3,268,034

The accompanying notes are an integral part of these consolidated financial statements.

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

		2010				2009
Revenues:
Rental income		$	116,624			$	116,125
Property other income			9,350				8,895
Interest income			7				6
Other income			23				90
Total revenues			126,004				125,116
Expenses:
Operating and maintenance			50,632				50,968
General and administrative			7,110				6,249
Interest			29,927				30,257
Depreciation and amortization			30,964				29,848
Other expenses			623				—
Total expenses			119,256				117,322
Income from continuing operations			6,748				7,794
Discontinued operations:
Income from discontinued operations			33				504
Loss on disposition of property			(2	)			(16	)
Discontinued operations			31				488
Net income			6,779				8,282
Net income attributable to noncontrolling interest			(1,611	)			(2,262	)
Net income attributable to common stockholders		$	5,168			$	6,020
Basic earnings per share:
Income from continuing operations		$	0.14			$	0.17
Discontinued operations			—				0.01
Net income attributable to common stockholders		$	0.14			$	0.18
Diluted earnings per share:
Income from continuing operations		$	0.14			$	0.17
Discontinued operations			—				0.01
Net income attributable to common stockholders		$	0.14			$	0.18
Weighted average number of shares outstanding:
Basic			36,795,326				32,868,812
Diluted			37,247,152				32,919,406
Dividends declared per share		$	0.58			$	0.67

The accompanying notes are an integral part of these consolidated financial statements.

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

		2010				2009
Revenues:
Rental income		$	230,939			$	231,500
Property other income			21,971				21,089
Interest income			11				14
Other income			77				368
Total revenues			252,998				252,971
Expenses:
Operating and maintenance			107,689				107,399
General and administrative			12,668				12,138
Interest			60,361				60,810
Depreciation and amortization			61,359				59,502
Other expenses			623				—
Total expenses			242,700				239,849
Income from continuing operations			10,298				13,122
Discontinued operations:
Income (loss) from discontinued operations			5				(3,274	)
Gain (loss) on disposition of property			(13	)			13,493
Discontinued operations			(8	)			10,219
Net income			10,290				23,341
Net income attributable to noncontrolling interest			(2,485	)			(6,419	)
Net income attributable to common stockholders		$	7,805			$	16,922
Basic earnings per share:
Income from continuing operations		$	0.22			$	0.29
Discontinued operations			—				0.23
Net income attributable to common stockholders		$	0.22			$	0.52
Diluted earnings per share:
Income from continuing operations		$	0.21			$	0.29
Discontinued operations			—				0.23
Net income attributable to common stockholders		$	0.21			$	0.52
Weighted average number of shares outstanding:
Basic			35,894,052				32,777,001
Diluted			36,304,286				32,811,374
Dividends declared per share		$	1.16			$	1.34

The accompanying notes are an integral part of these consolidated financial statements.

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND THE YEAR ENDED DECEMBER 31, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

														Distributions
										Additional				in Excess of
		Common Stock								Paid-In				Accumulated				Noncontrolling
		Shares				Amount				Capital				Earnings				Interest				Totals
Balance, January 1, 2009			32,431,304			$	324			$	857,415			$	(206,961	)		$	260,754			$	911,532
Comprehensive income:
Net income			—				—				—				34,419				12,659				47,078
Issuance of common stock, net			1,234,816				12				53,927				—				—				53,939
Repurchase of common stock			(97,304	)			—				(2,935	)			—				—				(2,935	)
Conversion of UPREIT Units for common stock			1,086,612				11				21,321				—				(21,332	)			—
Adjustment of noncontrolling interest			—				—				(7,650	)			—				7,650				—
Dividends and distributions paid			—				—				—				(88,771	)			(32,769	)			(121,540	)
Balance, December 31, 2009			34,655,428			$	347			$	922,078			$	(261,313	)		$	226,962			$	888,074
Comprehensive income:
Net income			—				—				—				7,805				2,485				10,290
Issuance of common stock, net			2,572,193				26				118,214				—								118,240
Repurchase of common stock			(46,711	)			(1	)			(2,247	)			—								(2,248	)
Conversion of UPREIT Units for common stock			300,496				3				5,807				—				(5,810	)			—
Issuance of UPREIT Units associated with property acquisition			—				—				—				—				4,845				4,845
Adjustment of noncontrolling interest			—				—				(13,877	)			—				13,877				—
Dividends and distributions paid			—				—				—				(41,995	)			(13,357	)			(55,352	)
Balance, June 30, 2010			37,481,406			$	375			$	1,029,975			$	(295,503	)		$	229,002			$	963,849

The accompanying notes are an integral part of these consolidated financial statements.

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(DOLLARS IN THOUSANDS)
(UNAUDITED)

		2010				2009
Cash flows from operating activities:
Net income		$	10,290			$	23,341
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			64,121				61,426
Amortization of debt discount			1,026				970
Loss (gain) on disposition of property			13				(13,493	)
Issuance of restricted stock, compensation cost of stock options and deferred compensation			4,347				3,444
Changes in assets and liabilities:
Cash in escrows, net			(1,551	)			(254	)
Other assets			4,225				8,226
Accounts payable and accrued liabilities			(1,750	)			(4,825	)
Total adjustments			70,431				55,494
Net cash provided by operating activities			80,721				78,835
Cash flows from investing activities:
Purchase of properties, net of mortgage notes assumed and UPREIT Units issued			(30,941	)			—
Additions to properties			(38,083	)			(38,437	)
Additions to construction in progress			(23,645	)			(35,274	)
Proceeds from (payments for) sale of properties, net			(13	)			66,900
Additions to cash in escrows, net			(2,632	)			(226	)
Net cash used in investing activities			(95,314	)			(7,037	)
Cash flows from financing activities:
Proceeds from sale of common stock, net			113,893				1,525
Repurchase of common stock			(2,248	)			(1,683	)
Proceeds from mortgage notes payable			121,454				12,600
Payments of mortgage notes payable			(117,595	)			(56,598	)
Proceeds from line of credit			111,500				164,500
Payments on line of credit			(156,000	)			(131,500	)
Payments of deferred loan costs, net			(1,411	)			(7	)
Additions to cash in escrows, net			(2	)			(10	)
Dividends and distributions paid			(55,352	)			(60,719	)
Net cash provided by (used in) financing activities			14,239				(71,892	)
Net decrease in cash and cash equivalents			(354	)			(94	)
Cash and cash equivalents:
Beginning of year			8,809				6,567
End of period		$	8,455			$	6,473
Supplemental disclosure of non-cash investing and financing activities:
Mortgage loans assumed with property acquisitions		$	20,238			$	—
Issuance of UPREIT Units associated with property acquisition			4,845				—
Exchange of UPREIT Units for common stock			5,810				9,725
Additions to properties included in accounts payable			5,798				2,615
Mortgage note premium write-off			—				615

The accompanying notes are an integral part of these consolidated financial statements.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

1. Unaudited Interim Financial Statements

The interim consolidated financial statements of Home Properties, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures that would accompany annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement 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, 2009.

2. Organization and Basis of Presentation

Organization

The Company was formed in November 1993, as a Maryland corporation and is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast and Mid-Atlantic regions of the United States. The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership. As of June 30, 2010, the Company operated 111 apartment communities with 37,597 apartments. Of this total, the Company owned 110 communities, consisting of 36,729 apartments, and managed as general partner, one partnership that owned 868 apartments.

The Company elected to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code, as amended, for all periods presented. A corporate REIT is a legal entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, the Company generally will not be subject to corporate level tax on taxable income it distributes currently to its stockholders. The Company distributed in excess of 100% of its taxable income for the periods presented. Therefore, no provision has been made for federal income taxes.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its ownership of 76.5% of the limited partnership units in the Operating Partnership (“UPREIT Units”) at June 30, 2010 (74.7% at December 31, 2009). The remaining 23.5% is reflected as noncontrolling interest in these consolidated financial statements at June 30, 2010 (25.3% at December 31, 2009). The Company owns a 1.0% general partner interest in the Operating Partnership and the remainder indirectly as a limited partner through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, which is the limited partner. 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.

The accompanying consolidated financial statements include the accounts of Home Properties Resident Services, Inc. (“HPRS” or the “Management Company”). The Management Company is a wholly owned subsidiary of the Company. In addition, the Company consolidates one affordable housing limited partnership in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance for the consolidation of variable interest entities. All significant inter-company balances and transactions have been eliminated in these consolidated financial statements.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

3. Recently Adopted Accounting Standards

Effective January 1, 2010, the Company adopted the amended guidance related to the consolidation of variable interest entities (Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities). The Company’s adoption of this authoritative guidance did not have any impact on its financial position and results of operations.

4. Earnings Per Common Share

Basic earnings per share (“EPS”) is computed as net income attributable to common stockholders 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 (using the treasury stock method) and the conversion of any exchangeable senior notes. The exchange of an UPREIT Unit for common stock will have no effect on diluted EPS as unitholders and common stockholders effectively share equally in the net income of the Operating Partnership. Income from continuing operations and discontinued operations is the same for both the basic and diluted calculation.

The reconciliation of the basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009 follows:

		Three Months								Six Months
		2010				2009				2010				2009
Numerator:
Income from continuing operations		$	6,748			$	7,794			$	10,298			$	13,122
Less: Income from continuing operations attributable to noncontrolling interest			(1,604	)			(2,129	)			(2,488	)			(3,600	)
Income from continuing operations attributable to common stockholders		$	5,144			$	5,665			$	7,810			$	9,522
Discontinued operations		$	31			$	488			$	(8	)		$	10,219
Less: Discontinued operations attributable to noncontrolling interest			(7	)			(133	)			3				(2,819	)
Discontinued operations attributable to common stockholders		$	24			$	355			$	(5	)		$	7,400
Denominator:
Basic weighted average number of common shares outstanding			36,795,326				32,868,812				35,894,052				32,777,001
Effect of dilutive stock options			396,835				37,199				369,871				28,728
Effect of phantom and restricted shares			54,991				13,395				40,363				5,645
Diluted weighted average number of common shares outstanding			37,247,152				32,919,406				36,304,286				32,811,374
Earnings per common share:
Basic earnings per share:
Income from continuing operations		$	0.14			$	0.17			$	0.22			$	0.29
Discontinued operations			—				0.01				—				0.23
Net income attributable to common stockholders		$	0.14			$	0.18			$	0.22			$	0.52
Diluted earnings per share:
Income from continuing operations		$	0.14			$	0.17			$	0.21			$	0.29
Discontinued operations			—				0.01				—				0.23
Net income attributable to common stockholders		$	0.14			$	0.18			$	0.21			$	0.52

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

4. Earnings Per Common Share (continued)

Unexercised stock options to purchase 1,786,663 and 3,142,548 shares of the Company’s common stock for the three months ended June 30, 2010 and 2009, respectively, and 1,795,301 and 3,142,548 shares of the Company’s common stock for the six months ended June 30, 2010 and 2009, respectively, were not included in the computations of diluted EPS because the effects would be antidilutive. Also, in conjunction with the issuance of the Senior Notes (as defined in Note 7), there were 331,257 and 334,188 potential shares issuable under certain circumstances, of which all are considered antidilutive as of June 30, 2010 and 2009, respectively.

5. Variable Interest Entities

The Company is the general partner in one variable interest entity (“VIE”) syndicated using low income housing tax credits under Section 42 of the Internal Revenue Code. As general partner, the Company manages the day-to-day operations of the partnership for a management fee. In addition, the Company has an operating deficit guarantee and tax credit guarantee to the limited partners of that partnership (as discussed in Note 14). The Company is responsible for funding operating deficits to the extent there are any and can receive operating incentive awards when cash flows reach certain levels. Included in the Consolidated Balance Sheet for the VIE as of June 30, 2010 are total assets of $10,259, total liabilities of $16,699 and partners’ deficit of $6,440, respectively. Of the $16,699 in total liabilities, $15,858 represents non-recourse mortgage debt.

6. Acquisitions and Development

Acquisitions

On April 1, 2010, the Company acquired two communities located in Westminster, Maryland from the same seller. Middlebrooke Apartments and Westbrooke Apartments, with 208 units and 110 units, respectively, were purchased for $17,350 and $6,350, respectively. In connection with these acquisitions, closing costs of $248 were incurred and are reflected in other expenses for the second quarter of 2010. The purchase price and closing costs were initially funded with the Company’s line of credit.

On June 17, 2010, the Company acquired Annapolis Roads Apartments in Annapolis, Maryland, a property it had managed for the prior owner since 2000. The total purchase price for the 282 unit property of $32,500 included the assumption of an existing $20,043 fixed rate mortgage at an interest rate of 5.95% maturing on January 5, 2011 (fair market value of $20,238), $7,521 in cash and $4,845 in 98,728 UPREIT Units. Closing costs of $350 were incurred and included in other expenses for the second quarter of 2010.

Development

During the second quarter of 2010, construction activities on a project in Silver Spring, Maryland, 1200 East West Highway, a 14-story high rise with 247 apartment units, neared completion and the project experienced initial occupancy. The costs associated with construction in progress for this development were $53,292 as of June 30, 2010.

During the second quarter of 2010, construction activities on the first phase (two buildings with 202 units) of a project in Alexandria, Virginia, the Courts at Huntington Station, consisting of four four-story buildings with 421 apartment units, progressed to the stage of initial occupancy. Construction on the second phase (two buildings with 219 units) has commenced and construction is scheduled to be completed in the second quarter of 2011. The costs associated with construction in progress for this development were $90,678 as of June 30, 2010.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

7. Exchangeable Senior Notes

In October 2006, the Company issued $200,000 of exchangeable senior notes under an Indenture Agreement (the “Indenture”), with a coupon rate of 4.125% (“Senior Notes”). In the fourth quarter of 2008, the Company repurchased $60,000 principal amount of the Senior Notes, leaving $140,000 outstanding. The Senior Notes are exchangeable into cash equal to the principal amount of the notes and, at the Company’s option, cash or common stock for the exchange value, to the extent that the market price of common stock exceeds the initial exchange price of $73.34 per share, subject to adjustment. The exchange price is adjusted for payments of dividends in excess of the reference dividend per the Indenture of $0.64 per share. The notes are not redeemable at the option of the Company for five years, except to preserve the status of the Company as a REIT. Holders of the notes may require the Company to repurchase the notes upon the occurrence of certain designated events. In addition, prior to November 1, 2026, the holders may require the Company to repurchase the notes on November 1, 2011, 2016 and 2021. The notes will mature on November 1, 2026, unless previously redeemed, repurchased or exchanged in accordance with their terms prior to that date. The notes are structurally subordinated to the secured indebtedness of the Company. The Company is not subject to any financial covenants under the Indenture. In addition, the Indenture will not restrict the ability to pay distributions, incur debt or issue or repurchase securities.

The following table provides additional information about the Senior Notes as of June 30, 2010 and December 31, 2009:

		2010				2009
Principal amount of liability component		$	140,000			$	140,000
Unamortized discount			(2,838	)			(3,864	)
Carrying amount of liability component		$	137,162			$	136,136
Carrying amount of equity component		$	13,950			$	13,950

The following table provides additional information about the Senior Notes for the three and six months ended June 30, 2010 and 2009:

		Three Months								Six Months
		2010				2009				2010				2009
Coupon interest		$	1,444			$	1,444			$	2,887			$	2,887
Amortization — issuance costs			137				137				273				273
Discount amortization			518				490				1,026				970
Total interest expense — Senior Notes		$	2,099			$	2,071			$	4,186			$	4,130
Effective interest rate			5.75	%			5.75	%			5.75	%			5.75	%
Conversion price per share, as adjusted		$	72.87			$	72.98			$	72.87			$	72.98

8. Line of Credit

As of June 30, 2010, the Company had a $175,000 unsecured line of credit agreement which expires August 31, 2011, with an optional one-year extension. The Company had $9,000 outstanding under the credit facility on June 30, 2010. Borrowings under the line of credit bear interest at rates ranging from 2.50% to 3.25% over the one-month LIBOR rate, increasing at higher levels of outstanding indebtedness, with a LIBOR floor of 1.50%. The one-month LIBOR was 0.35% at June 30, 2010, resulting in an effective rate of 4.50% for the Company.

The credit agreement relating to this line of credit requires the Company to maintain certain financial covenants. The Company was in compliance with these financial covenants for the six months ended June 30, 2010.

The Company’s line of credit agreement provides the ability to issue up to $20,000 in letters of credit. While the issuance of letters of credit does not increase borrowings outstanding under the line of credit, it does reduce the amount available. At June 30, 2010, the Company had outstanding letters of credit of $4,911 and the amount available on the credit facility was $161,089.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

9. Fair Value of Financial Instruments

The Company follows the authoritative guidance for fair value measurements (“ASC 820-10”), when valuing its financial instruments for disclosure purposes. The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company determined the fair value of its mortgage notes payable and line of credit facility using a discounted future cash flow technique that incorporates a market interest yield curve with adjustments for duration, loan to value, and risk profile (level 2 inputs, as defined by ASC 820-10). In determining the market interest yield curve, the Company considered its BBB credit rating. The Company based the fair value of its Senior Notes using quoted prices (level 1 inputs, as defined by ASC 820-10).

At June 30, 2010 and December 31, 2009, the fair value of the Company’s total debt, including the Senior Notes and line of credit, amounted to a liability of $2,382,746 and $2,337,866, respectively, compared to its carrying amount of $2,282,904 and $2,302,281, respectively.

10. Interest Capitalized

Capitalized interest associated with communities under development or rehabilitation totaled $2,745 and $2,076 for the three months ended June 30, 2010 and 2009, respectively; $5,561 and $3,870 for the six months ended June 30, 2010 and 2009, respectively.

11. Stockholders’ Equity

At-the-Market Equity Offering Program

On December 3, 2009, the Company initiated an “At-the-Market” (“ATM”) equity offering program through which it was authorized to sell up to 3.7 million shares of common stock (not to exceed $150,000 of gross proceeds), from time to time in ATM offerings or negotiated transactions. The following are issuances of common stock through this program since inception through the completion of the program on May 11, 2010:

		Number of				Gross								Average Sales
Period		Shares Sold				Proceeds				Net Proceeds				Price
Fourth quarter 2009			871,600			$	39,830			$	38,916			$	45.70
First quarter 2010			1,285,700				60,092				58,856				46.74
Second quarter 2010			1,021,400				50,078				49,273				49.03
Total			3,178,700			$	150,000			$	147,045			$	47.19

Dividends Per Common Share

On May 27, 2010, the Company paid a dividend in the amount of $0.58 per share of common stock to stockholders and a distribution of $0.58 per UPREIT Unit to unitholders of record as of the close of business on May 17, 2010.

12. 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, net operating income, and assets of the combined reported operating segments and meets all of the aggregation criteria under authoritative guidance. The operating segments are aggregated as Core and Non-core properties.

Non-segment revenue to reconcile to total revenue consists of interest income and other income. Non-segment assets to reconcile to total assets include cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, deferred charges and other assets.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

12. Segment Reporting (continued)

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, 2009. Non-core properties consist of the VIE and apartment communities acquired or developed during 2009 and 2010, such that full year comparable operating results are not available.

The Company assesses and measures segment operating results based on a performance measure referred to as net operating income. Net operating income is defined as total revenues less operating and maintenance expenses. The accounting policies of the segments are the same as those described in Notes 1, 2 and 3 of the Company’s Form 10-K for the year ended December 31, 2009.

The revenues and net operating income for each of the operating segments are summarized for the three and six months ended June 30, 2010 and 2009 as follows:

		Three Months								Six Months
		2010				2009				2010				2009
Revenues:
Apartments owned
Core properties		$	123,600			$	123,888			$	249,383			$	250,276
Non-core properties			2,374				1,132				3,527				2,313
Reconciling items			30				96				88				382
Total revenues		$	126,004			$	125,116			$	252,998			$	252,971
Net operating income:
Apartments owned
Core properties		$	74,754			$	73,821			$	144,604			$	144,859
Non-core properties			588				231				617				331
Reconciling items			30				96				88				382
Net operating income, including reconciling items			75,372				74,148				145,309				145,572
General and administrative expenses			(7,110	)			(6,249	)			(12,668	)			(12,138	)
Interest expense			(29,927	)			(30,257	)			(60,361	)			(60,810	)
Depreciation and amortization			(30,964	)			(29,848	)			(61,359	)			(59,502	)
Other expenses			(623	)			—				(623	)			—
Income from continuing operations		$	6,748			$	7,794			$	10,298			$	13,122

The assets for each of the reportable segments are summarized as follows as of June 30, 2010 and December 31, 2009:

		2010				2009
Assets:
Apartments owned
Core properties		$	2,953,418			$	2,975,642
Non-core properties			289,612				207,195
Reconciling items			83,557				85,197
Total assets		$	3,326,587			$	3,268,034

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

13. Disposition of Property and Discontinued Operations

The Company reports its property dispositions as discontinued operations as prescribed by the authoritative guidance. Pursuant to the definition of a component of an entity, assuming no significant continuing involvement by the former owner after the sale, the sale of an apartment community is considered a discontinued operation. In addition, apartment communities classified as held for sale are also considered discontinued operations. The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date.

Included in discontinued operations for the three and six months ended June 30, 2009 are the operating results of five apartment communities sold in three separate transactions during 2009 (the “2009 Disposed Communities”). Included in discontinued operations for the three and six months ended June 30, 2010 are the operating results of the wind-up activities for the 2009 Disposed Communities. For purposes of the discontinued operations presentation, the Company only includes interest expense and losses from early extinguishment of debt associated with specific mortgage indebtedness of the properties that are sold or held for sale.

The operating results of discontinued operations are summarized for the three and six months ended June 30, 2010 and 2009 as follows:

		Three Months								Six Months
		2010				2009				2010				2009
Revenues:
Rental income		$	16			$	1,432			$	15			$	3,531
Property other income			11				105				21				378
Total revenues			27				1,537				36				3,909
Expenses:
Operating and maintenance			(6	)			638				31				1,897
Interest expense, including prepayment penalties			—				—				—				4,497
Depreciation and amortization			—				395				—				789
Total expenses			(6	)			1,033				31				7,183
Income (loss) from discontinued operations		$	33			$	504			$	5			$	(3,274	)

14. Commitments and Contingencies

Letters of Credit

As of June 30, 2010, the Company had issued $4,911 in letters of credit, which were provided under the Company’s $175,000 unsecured line of credit agreement. The letters of credit were required to be issued under certain tax escrow agreements, workers compensation and health insurance policies, and construction projects.

Debt Covenants

The line of credit agreement contains restrictions which, among other things, require maintenance of certain financial ratios.

HOME PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

14. Commitments and Contingencies (continued)

Tax Protection Obligations

In connection with various UPREIT transactions, the Company has agreed to maintain certain levels of nonrecourse debt for a period of 5 to 10 years associated with the contributed properties acquired. In addition, the Company is restricted in its ability to sell certain contributed properties (23% by number of apartment communities of the owned portfolio) for a period of 7 to 15 years except through a tax deferred like-kind exchange. The remaining terms on the sale restrictions range from 2 months to 7 years.

Limited Partnership

The Company, through its general partnership interest in an affordable property limited partnership, has guaranteed certain low income housing tax credits to limited partners for a remaining period of six years totaling approximately $3,000. As of June 30, 2010, there were no known conditions that would make such payments necessary relating to these guarantees. In addition, the Company, acting as general partner in this partnership, is obligated to advance funds to meet partnership operating deficits.

Contingencies

The Company is not a party to any legal proceedings which are expected to have a material adverse effect on the Company’s liquidity, financial position or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of employment and resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

15. Subsequent Events

On July 29, 2010, the Company acquired a 168 unit community in Columbia, Maryland for a total purchase price of $25,600. Consideration for the purchase included the assumption of an existing $9,596 fixed-rate mortgage at an interest rate of 4.93%, maturing in August 2014. In connection with this acquisition, closing costs of approximately $300 were incurred and will be reflected in other expenses for the third quarter of 2010. The net purchase price and closing costs were funded with the Company’s line of credit.

On August 4, 2010, the Board of Directors declared a dividend of $0.58 per share on the Company’s common stock and approved a distribution of $0.58 per unit on the UPREIT Units for the quarter ended June 30, 2010. This is the equivalent of an annual distribution of $2.32 per share/unit. The dividend and distribution is payable August 26, 2010, to stockholders and unitholders of record on August 16, 2010.

On August 5, 2010, the Company acquired a 247 unit apartment community located in Sterling, Virginia for a total purchase price of $38,500. In connection with this acquisition, closing costs of approximately $180 were incurred and will be reflected in other expenses for the third quarter of 2010. The purchase price and closing costs were funded with the line of credit.

HOME PROPERTIES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(UNAUDITED)

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. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. The Company considers portions of the information to be “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Some examples of forward-looking statements include statements related to acquisitions (including any related pro forma financial information), future capital expenditures, potential development and redevelopment opportunities, projected costs and rental rates for development and redevelopment projects, financing sources and availability, and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon 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 and development within anticipated budgets, the actual pace of future development, acquisitions and sales, and continued access to capital to fund growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact should be considered to be forward-looking statements. Some of the words used to identify forward-looking statements include “believes”, “anticipates”, “plans”, “expects”, “seeks”, “estimates”, and any other similar expressions. Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect the Company’s actual results, performance or achievements.

Liquidity and Capital Resources

General

In 2000, the Company obtained an investment grade rating from Fitch, Inc. The rating in effect at June 30, 2010 (no change from initial rating) is a corporate credit rating of “BBB” (Triple B).

The Company’s principal liquidity demands are expected to be distributions to the common stockholders and holders of UPREIT Units, capital improvements and repairs and maintenance for its properties, acquisition and development of additional properties and debt repayments. The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities.

The Company intends to meet its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank line of credit, described below. The Company considers its ability to generate cash to be adequate to meet all operating requirements, including availability to pay dividends to its stockholders and make distributions to its unitholders in accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.

Cash Flow Summary

The Company’s net cash flow from operating activities increased from $79 million in 2009, to $81 million in 2010. The $2 million increase was primarily due to timing differences in cash disbursements between periods.

Cash used in investing activities was $95 million during 2010 compared to $7 million in 2009. The $88 million swing between periods is primarily due to the 2009 period receiving the benefit of $67 million proceeds from the sale of properties, while the 2010 period realized no property sales. There were $31 million cash outflows for the purchase of properties in 2010 compared to none in 2009. Cash outflows for capital improvements were $38 million during 2010 and 2009. The consistent outflow in both periods reflects management’s conscious efforts to continually perform selective rehabilitation in markets that are able to support rent increases. Cash outflows for additions to construction in progress were $24 million in 2010 as compared to $35 million in 2009. The lower spending on development in 2010 reflects the completion of one major project during 2010 compared to the construction of two communities in 2009.

Net cash provided by financing activities totaled $14 million in 2010. Cash flows from net proceeds of the ATM common stock offering of $108 million, proceeds from stock option exercises of $6 million and net proceeds from mortgage financing of $4 million were more than offset by distributions paid to stockholders and UPREIT Unitholders of $55 million, and a net paydown of $44 million on the line of credit. Net cash used in financing activities totaled $72 million for 2009, primarily as a result of net borrowing under our line of credit of $33 million and proceeds from stock option exercises of $2 million being more than offset by paydown on mortgage notes of $44 million, distributions paid to stockholders and UPREIT Unitholders of $61 million, and common stock repurchases of $2 million.

Line of Credit

As of June 30, 2010, the Company had a $175 million unsecured line of credit agreement with M&T Bank, as administrative agent and lead bank, which expires August 31, 2011, with an optional one-year extension. The Company had $9.0 million outstanding under the credit facility on June 30, 2010. The line of credit agreement provides the ability to issue up to $20 million in letters of credit. While the issuance of letters of credit does not increase the borrowings outstanding under the line of credit, it does reduce the amount available. At June 30, 2010, the Company had outstanding letters of credit of $4.9 million and the amount available on the credit facility was $161.1 million. Borrowings under the line of credit bear interest at rates ranging from 2.50% to 3.25% over the one-month LIBOR rate, increasing at higher levels of outstanding indebtedness, with a LIBOR floor of 1.50%. The one-month LIBOR was 0.35% at June 30, 2010, resulting in an effective rate of 4.50% for the Company.

Accordingly, increases in the one-month LIBOR above 1.50% will increase the Company’s interest expense and as a result will affect the Company’s results of operations and financial condition.

Exchangeable Senior Notes

In October 2006, the Company issued $200 million of exchangeable senior notes with a coupon rate of 4.125% (“Senior Notes”), which generated net proceeds of $195.8 million. The net proceeds were used to repurchase 933,000 shares of common stock for a total of $58 million, pay down $70 million on the line of credit, with the balance used for redemption of the Series F Preferred Shares and property acquisitions. During the fourth quarter of 2008, the Company repurchased $60 million of the Senior Notes for $45.4 million. The exchange terms and conditions are more fully described under “Contractual Obligations and Other Commitments”, below.

Indebtedness

As of June 30, 2010, the weighted average interest rate on the Company’s total indebtedness of $2.3 billion was 5.49% with staggered maturities averaging approximately six years. Approximately 89% of total indebtedness is at fixed rates. This limits the exposure to changes in interest rates, minimizing the effect of interest rate fluctuations on the Company’s results of operations and cash flows.

As of June 30, 2010, the Company has refinanced $86 million of the $146 million in debt maturing in 2010, leaving only $60 million to refinance for the balance of the year. In addition, $186 million of the $299 million which matures in 2011 can be refinanced in the fourth quarter of 2010 without prepayment penalty. The Company is currently in discussions with the Government Sponsored Entities (“GSEs”) relative to such transactions. The Company will continue to take advantage of its relationships with the GSEs and the low interest rate environment to further its refinancing of existing debt obligations.

Unencumbered Assets

The Company increased the percentage of unencumbered assets of the total property pool from 20% at the end of 2009, to 22% as of June 30, 2010. Higher levels of unsecured assets add borrowing flexibility because more capacity is available for unsecured debt under the terms of the Company’s unsecured line of credit agreement.

UPREIT Units

The Company believes that the issuance of UPREIT Units for property acquisitions will continue to be a potential source of capital for the Company. During the first six months of 2010, the Company issued $4.8 million in 98,728 UPREIT Units as consideration for one acquired property.

Property Dispositions

During 2009, the Company sold five communities, with a total of 1,333 units, for $108.3 million. A gain on sale of approximately $24.3 million was realized from these sales.

Management has not specifically targeted additional communities for sale in 2010 but will continue to evaluate the sale of its communities.

Universal Shelf Registration

On March 3, 2010, the Company filed a Form S-3 universal shelf registration statement with the SEC that registers the issuance, from time to time, of common stock, preferred stock or debt securities. The Company may offer and sell securities issued pursuant to the universal shelf registration statement after a prospectus supplement, describing the type of security and amount being offered, is filed with the SEC. Sales of common stock under the Company’s At-the-Market offering described below were made under this registration statement.

At-the-Market Equity Offering Program

On December 3, 2009, the Company initiated an “At-the-Market” (“ATM”) equity offering program through which it was authorized to sell up to 3.7 million shares of common stock (not to exceed $150 million of gross proceeds), from time to time in ATM offerings or negotiated transactions. During December 2009, the Company issued 871,600 shares of common stock at an average price per share of $45.70, for aggregate gross proceeds of $39.8 million. Aggregate net proceeds from such issuances, after deducting commissions and other transaction costs of $0.9 million were $38.9 million. During the six months ended June 30, 2010, the Company issued 2,307,100 shares of common stock at an average price per share of $47.75, for aggregate gross proceeds of $110.2 million. Aggregate net proceeds from such issuances, after deducting commissions and other transaction costs of $2.1 million were $108.1 million. In summary, the Company’s completed ATM equity offering program resulted in the sale of 3,178,700 shares of common stock at an average price per share of $47.19, for aggregate gross proceeds of $150.0 million. Aggregate net proceeds from such issuances, after deducting commissions and other transaction costs of $3.0 million were $147.0 million.

Dividend Reinvestment and Direct Stock Purchase Plan (“DRIP”)

The Company’s DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in additional shares of common stock. In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock. The maximum monthly investment permitted without prior Company approval is currently $10,000. The Company meets share demand under the DRIP through stock repurchases by the transfer agent in the open market on the Company’s behalf or new stock issuances. Management monitors the relationship between the Company’s stock price and its estimated net asset value (“NAV”). During times when the difference between these two values is small, resulting in little dilution of NAV by common stock issuances, the Company can choose to issue new shares. At times when the gap between NAV and stock price is greater, the Company has the flexibility to satisfy the demand for DRIP shares with stock repurchased by the transfer agent in the open market. In addition, the Company can issue waivers to DRIP participants to provide for investments in excess of the $10,000 maximum monthly investment. No such waivers were granted during 2009 and through June 30, 2010.

Stock Repurchase Program

In 1997, the Company’s Board of Directors (the “Board”) approved a stock repurchase program under which the Company may repurchase shares of its common stock or UPREIT Units (“Company Program”). The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management. The Board’s action did not establish a target stock price or a specific timetable for repurchase. There were no repurchases under the Company Program during 2009 and through June 30, 2010. The remaining authorization level as of June 30, 2010 is 2,291,160 shares. The Company will continue to monitor stock prices relative to the NAV to determine the current best use of capital among our major uses of capital: stock buybacks, debt paydown to increase the unencumbered pool, acquisitions, rehabilitation and/or redevelopment of owned properties and development of new properties. At the present time, the Company has no intention of buying any stock back during the remainder of 2010.

Variable Interest Entities

The Company is the general partner in one variable interest entity (“VIE”) syndicated using low income housing tax credits under Section 42 of the Internal Revenue Code. As general partner, the Company manages the day-to-day operations of the partnership for a management fee. In addition, the Company has an operating deficit guarantee and tax credit guarantee to the limited partner of that partnership. The Company is responsible to fund operating deficits to the extent there are any and can receive operating incentive awards if cash flows reach certain levels. Included in the Consolidated Balance Sheet for the VIE as of June 30, 2010 are total assets of $10.3 million, total liabilities of $16.7 million and partners’ deficit of $6.4 million. Of the $16.7 million in total liabilities, $15.9 million represents non-recourse mortgage debt. The VIE is included in the Consolidated Statement of Operations for the three and six months ended June 30, 2010 and 2009.

The Company, through its general partnership interest in the VIE, has guaranteed the low income housing tax credits to the limited partners for a remaining period of six years totaling approximately $3 million. Such guarantee requires the Company to operate the property in compliance with Internal Revenue Code Section 42 for a total of 15 years. The Company believes the property’s operations conform to the applicable requirements as set forth above. In addition, as the general partner in this partnership, the Company is obligated to advance funds to meet partnership operating deficits.

Acquisitions and Development

Acquisitions

On April 1, 2010, the Company acquired two communities, Middlebrooke and Westbrooke, located in the Baltimore region from the same seller with a total of 318 units for $23.7 million. In connection with these acquisitions, closing costs of $0.2 million were incurred and are reflected in other expenses. The purchase price and closing costs were funded with the line of credit. Middlebrooke was built between 1974 and 1977, and consists of 168 garden units in nine three-story buildings and 40 townhomes. Westbrooke was built between 1961 and 1970, and contains five buildings, each with 22 units. The weighted average first year capitalization rate projected by the Company on these acquisitions was 6.3% after allocating 3% of rental revenues for management and overhead expenses and before normalized capital expenditures.

On June 17, 2010, the Company acquired Annapolis Roads, a 282 unit community in Annapolis, Maryland, which it had managed for the prior owner since 2000. The total purchase price of $32.5 million included the assumption of an existing $20.0 million fixed rate mortgage, $7.5 million in cash and $4.8 million in UPREIT Units. Closing costs of $0.4 million were incurred and included in other expenses. The property was built in three phases between 1974 and 1979 and consists of eleven residential buildings. The weighted average first year capitalization rate projected by the Company on this acquisition was 6.6%.

On July 29, 2010, the Company acquired The Greens at Columbia, a 168 unit community in Columbia, Maryland for a total purchase price of $25.6 million. Consideration for the purchase included the assumption of an existing $9.6 million fixed-rate mortgage and $16.0 million in cash. Closing costs of approximately $0.3 million were incurred and will be reflected in other expenses for the third quarter of 2010. The property, built in 1986 and 1987, includes fourteen, three-story, brick, garden style buildings. The weighted average first year capitalization rate projected by the Company on this acquisition was 6.1%.

On August 5, 2010, the Company acquired Village at Potomac Falls, a 247 unit apartment community located in Sterling, Virginia for a total purchase price of $38.5 million which was funded with the line of credit. Closing costs of approximately $0.2 million were incurred and will be reflected in other expenses for the third quarter of 2010. The garden style property, completed in 1999, consists of ten, three- and four-story buildings. The weighted average first year capitalization rate projected by the Company on this acquisition was 5.6%.

On a year to date basis, through August 5, 2010, the Company has acquired five communities with 1,015 units for a combined purchase price of $120.3 million.

Development

The Company has two projects currently under construction: 1200 East West Highway located in Silver Spring, Maryland, a 14-story high rise with 247 apartment units; and, the Courts at Huntington Station, located in Alexandria, Virginia, consisting of four four-story buildings with 421 apartment units.

During the second quarter of 2010, construction activities on 1200 East West Highway neared completion and the project experienced initial occupancy. As of June 30, 2010, all 247 units were available to rent, with 119 units occupied and another 34 units pre-leased. Full stabilization is anticipated by year-end.

During the second quarter of 2010, construction of the 202 units in Phase One of the Courts at Huntington Station neared completion. Initial occupancy was experienced in May 2010. As of June 30, 2010, there were 202 units available to rent, with 38 units occupied and another 30 units pre-leased. The lease-up period is projected to last eleven months. Construction on Phase Two, consisting of 219 units, has commenced and is scheduled to be complete in the second quarter of 2011, reaching stabilized occupancy approximately one year later.

Contractual Obligations and Other Commitments

The primary obligations of the Company relate to its borrowings under the line of credit, Senior Notes and mortgage notes payable. The Company’s line of credit matures in August 2011 (not including a one-year optional extension) and had $9.0 million in loans and letters of credit totaling $4.9 million outstanding at June 30, 2010. The $2.1 billion in mortgage notes payable have varying maturities ranging from 1 month to 25 years. The weighted average interest rate of the Company’s secured debt was 5.48% at June 30, 2010. The weighted average rate of interest on the Company’s total indebtedness of $2.3 billion at June 30, 2010 was 5.49%.

In October 2006, the Company issued $200 million of Senior Notes with a coupon rate of 4.125%. During 2008, the Company repurchased and retired $60 million principal amount of its Senior Notes and $140 million remain outstanding at June 30, 2010. The notes are exchangeable into cash equal to the principal amount of the notes and, at the Company’s option, cash or common stock for the exchange value, to the extent that the market price of common stock exceeds the initial exchange price of $73.34 per share, subject to adjustment. The exchange price is adjusted for payments of dividends in excess of the reference dividend set in the indenture of $0.64 per share. The adjusted exchange price at June 30, 2010 was $72.87 per share. Upon an exchange of the notes, the Company will settle any amounts up to the principal amount of the notes in cash and the remaining exchange value, if any, will be settled, at the Company’s option, in cash, common stock or a combination of both. The notes are not redeemable at the option of the Company for five years, except to preserve the status of the Company as a REIT. Holders of the notes may require the Company to repurchase the notes upon the occurrence of certain designated events. In addition, prior to November 1, 2026, the holders may require the Company to repurchase the notes on November 1, 2011, 2016 and 2021. The notes will mature on November 1, 2026, unless previously redeemed, repurchased or exchanged in accordance with their terms prior to that date.

The Company leases its corporate office space from an affiliate and the office space for its regional offices from non-affiliated third parties. The rent for the corporate office space is a gross rent that includes real estate taxes and common area maintenance. The regional office leases are net leases which require an annual base rent plus a pro-rata portion of real estate taxes.

Capital Improvements (dollars in thousands, except unit and per unit data)

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 and bath cabinets, new roofs, site improvements and various exterior building improvements. Non-recurring, revenue generating upgrades include, among other items community centers, new windows, and kitchen and bath apartment upgrades. Revenue generating capital improvements are expected to directly result in increased 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 $800 per unit is spent on recurring capital expenditures in 2010 and 2009. During the three months ended June 30, 2010 and 2009, approximately $200 per unit was spent on recurring capital expenditures; and for the six months ended June 30, 2010 and 2009, approximately $400 per unit was spent on recurring capital expenditures.

The table below summarizes the actual total capital improvements incurred by major categories for the three and six months ended June 30, 2010 and 2009 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 months ended June 30, 2010 as follows:

		For the three months ended June 30,
		2010																								2009
										Non-								Total								Total
		Recurring				Per				Recurring				Per				Capital				Per				Capital				Per
		Cap Ex				Unit(a)				Cap Ex				Unit(a)				Improvements				Unit(a)				Improvements				Unit(a)
New buildings		$	—			$	—			$	36			$	1			$	36			$	1			$	74			$	3
Major building improvements			1,139				32				2,573				71				3,712				103				3,601				101
Roof replacements			398				11				376				10				774				21				1,054				29
Site improvements			398				11				1,853				51				2,251				62				1,300				36
Apartment upgrades			1,169				32				6,340				176				7,509				208				5,240				146
Appliances			1,307				36				—				—				1,307				36				986				28
Carpeting/flooring			1,998				55				502				14				2,500				69				2,477				69
HVAC/mechanicals			642				18				3,696				102				4,338				120				1,974				55
Miscellaneous			181				5				336				9				517				14				580				16
Totals		$	7,232			$	200			$	15,712			$	434			$	22,944			$	634			$	17,286			$	483

		For the six months ended June 30,
		2010																								2009
										Non-								Total								Total
		Recurring				Per				Recurring				Per				Capital				Per				Capital				Per
		Cap Ex				Unit(a)				Cap Ex				Unit(a)				Improvements				Unit(a)				Improvements				Unit(a)
New buildings		$	—			$	—			$	84			$	2			$	84			$	2			$	596			$	18
Major building improvements			2,267				63				2,758				77				5,025				140				6,309				176
Roof replacements			594				17				375				10				969				27				1,437				40
Site improvements			792				22				2,682				75				3,474				97				1,690				47
Apartment upgrades			2,808				78				9,752				271				12,560				349				11,684				326
Appliances			2,319				64				—				—				2,319				64				2,184				61
Carpeting/flooring			3,976				111				510				14				4,486				125				5,051				141
HVAC/mechanicals			1,277				35				5,835				162				7,112				197				3,834				107
Miscellaneous			360				10				512				14				872				24				1,277				36
Totals		$	14,393			$	400			$	22,508			$	625			$	36,901			$	1,025			$	34,062			$	952

The schedule below summarizes the breakdown of total capital improvements between core and non-core as follows:

		For the three months ended June 30,
		2010																								2009
										Non-								Total								Total
		Recurring				Per				Recurring				Per				Capital				Per				Capital				Per
		Cap Ex				Unit(b)				Cap Ex				Unit(b)				Improvements				Unit(b)				Improvements				Unit(b)
Core Communities		$	7,160			$	200			$	15,689			$	438			$	22,849			$	638			$	17,286			$	483
2010 Acquisition Communities			72				200				23				63				95				263				—				—
Sub-total			7,232				200				15,712				434				22,944				634				17,286				483
2009 Disposed Communities			—				—				—				—				—				—				149				252
Corporate office expenditures(1)			—				—				—				—				1,065				—				452				—
Totals		$	7,232			$	200			$	15,712			$	434			$	24,009			$	634			$	17,887			$	479

		For the six months ended June 30,
		2010																								2009
										Non-								Total								Total
		Recurring				Per				Recurring				Per				Capital				Per				Capital				Per
		Cap Ex				Unit(b)				Cap Ex				Unit(b)				Improvements				Unit(b)				Improvements				Unit(b)
Core Communities		$	14,321			$	400			$	22,485			$	628			$	36,806			$	1,028			$	34,062			$	952
2010 Acquisition Communities			72				400				23				128				95				528				—				—
Sub-total			14,393				400				22,508				625				36,901				1,025				34,062				952
2009 Disposed Communities			—				—				—				—				—				—				492				688
Corporate office expenditures(1)			—				—				—				—				1,975				—				761				—
Totals		$	14,393			$	400			$	22,508			$	625			$	38,876			$	1,025			$	35,315			$	946