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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): October 26, 2000
HOME PROPERTIES OF NEW YORK, INC.
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(Exact name of registrant as specified in its charter)
Maryland 1-13136 16-1455126
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
850 Clinton Square, Rochester, New York 14604
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (716)546-4900
Not Applicable
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(Former name or former address, if changed since last report.)
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Item 7. FINANCIAL STATEMENTS AND EXHIBITS
c. Exhibits
Exhibit 99.1 Press Release
Exhibit 99.2 Supplemental Information
Item 9. Regulation FD
On October 26, 2000, the Registrant issued a press release announcing
its results for the third quarter of 2000. The related press release is
attached hereto as Exhibit 99.1.
Attached as Exhibit 99.2 is information supplemental to the financial
information contained in the October 26, 2000 press release.
On October 26, 2000, the Registrant held its third quarter 2000 investor
conference call. The following is the script from that conference call:
THIRD QUARTER, 2000 EARNINGS RELEASE
CONFERENCE CALL TRANSCRIPT
OCTOBER 26, 2000, 11:00 AM ET
(DAVID)
Good morning. Thank you for participating in our Third Quarter
earnings release conference call. Here with me are Norman Leenhouts,
Chairman and Co-Chief Executive Officer, and Amy Tait, Executive Vice
President.
Before we begin, I would like to remind you that some of our
discussions this morning will involve forward-looking statements. Please
refer to the safe-harbor language included in our press release, which
describes certain risk factors that may impact our future results. Also,
please be aware that this call is being recorded and members of the press
may be participating.
I will assume that all of you have already seen our earnings press
release, which was issued early this morning. We also have made
available several pages of supplemental schedules. If you didn't receive
this information and would like to get on our fax list, give us a call.
The press release and supplemental schedules are also available today on
our web site at www.homeproperties.com.
Well, we had another great quarter. Our total FFO increased 31%,
while per-share results were up 5.5%, at 77 CENTS on a diluted basis.
These results slightly exceeded analysts' consensus estimates for the
quarter by one penny.
During the quarter, we achieved 6.0% growth in core property rental
revenues, consisting of a combination of rental rate increases, which
averaged a record-tying 5.6%, plus occupancy gains of .3%.
Other property income at our core communities increased by a record-
breaking 30% this quarter, reflecting our ongoing successful efforts to
increase ancillary income. Most of these additional revenues have come
from a broad mix of fees and charges, including laundry, cable, and net
furniture rentals from corporate apartments.
Expenses at our core properties increased by 3.8% this quarter. A
breakdown of these expenses is included in our supplemental schedules.
The major areas of increase occurred in personnel expense, advertising,
real estate taxes, utilities, and office & telephone. These expense
increases were offset in part by savings in repairs and maintenance.
The increased personnel costs reflect a higher percentage of
property-level compensation tied to growth in rental revenue and NOI.
With our continued exceptional results for core properties, site
personnel have enjoyed a well-deserved increase in payouts under the
incentive bonus component of their compensation package.
The increase in the gas utility line item is not a significant
dollar amount, but the percentage increase of 23% is an early indicator
of things to come. I will discuss our exposure to rising heating costs
later in this call.
Some of the recent technological initiatives we have rolled out at
our sites have required increased expenditures affecting the office &
telephone line item. A part of this negative variance is merely a timing
difference. The true increase has resulted from things like additional
phone lines, as well as rolling out Safe Rent, an Internet-based
applicant screening service. As discussed during this conference call
last quarter, Safe Rent has made the screening process much more
efficient but does carry a higher direct fee, which offsets the indirect
costs we used to incur under the more labor intensive manual process we
used previously.
The savings from repairs and maintenance expenses represent a timing
difference as to when planned maintenance projects will be made this year
versus any indication of a trend. This positive variance, for the most
part, offsets a negative variance experienced during the first six months
of the year. The year-to-date negative variance of 1.9% is more
reflective of an expected run rate for this line item.
Our net operating income growth is running at 8.8% for the quarter
and 8.2% year-to-date, well ahead of our expectations of 6% at the
beginning of the year. As we have explained before, some of this growth
reflects a return on incremental investments in our communities above and
beyond normal capital replacements. After charging ourselves a 10% cost
of capital on these additional expenditures, the ADJUSTED NOI growth that
has fallen to the bottom line so far is a little north of 4%.
All of the property results discussed so far have pertained to the
23,530 apartment units owned since the beginning of 1999. We continue to
have exciting news concerning the over 13,000 units in communities
recently acquired. These acquisitions continue to surpass our
expectations, generating average returns of 10.5% for the first nine
months of 2000.
Occupancy levels throughout our portfolio remain quite healthy,
averaging 96.0% as a result of a strong summer leasing season. On a
same-property comparison, I am happy to say that we currently are 0.7%
ahead on occupancies and have about 0.8% fewer apartments available to
rent today than we did a year ago. This is true even though we are
aggressively pushing rents as we implement our repositioning strategies -
- evidenced by the record tying rental-rate growth of 5.6% that we have
now achieved two quarters in a row.
"Other corporate income" of $305,000 during the third quarter
reflects the net results from our management and development activities.
Detailed information on the breakdown of this income is included in your
supplemental packets. This is a somewhat lumpy line item that continues
to fluctuate from quarter to quarter. However, for the quarter,
development fee revenues were down 6%; and management fee revenues were
up 5% compared to last year. Year-to-date, the net contribution from
this line item is a negative variance compared to last year of over
$1.8 million. We have explained previously our more conservative
approach this year concerning development fee revenue recognition, in
addition to higher carrying costs for recently-acquired land and
increased G & A costs.
With a stock price of $29.88 per share at the end of the quarter,
leverage was 37% on our total capitalization of $2.1 billion. Ninety-
nine percent of our debt was at fixed interest rates, with weighted
average maturities of about eleven years and average interest rates of
7.4%. Our $100 million unsecured revolving credit facility was all
available, in addition to having $47 million of cash on hand. Our
interest coverage ratio was 3.4 times for the quarter; and our fixed
charge ratio, which includes preferred dividends, averaged 2.6 times. I
have just seen a posting on an Internet message board which indicated a
much lower fixed charge coverage ratio, which, I believe, has been
calculated in error. I think our ratios are at very comfortable levels.
As anticipated, our leverage, which remained pretty constant at 37%
during the quarter, was below our target of 40%. In addition, we started
AND ended the quarter with over $40 million of cash on hand. Both of
these factors contributed to expected short-term dilution to FFO for the
quarter of $.01 per share. We expect activity from acquisitions in the
fourth quarter will utilize our cash on hand and bring leverage back
towards 40% by year-end.
With Regulation FD now in place, our press release was expanded to
include a discussion on earnings guidance. As mentioned in our press
release, two factors are contributing to our expectation that we will
fall slightly short of First Call consensus estimates for the fourth
quarter and 2001. They are rising utility costs and the sale of our
affordable housing development activity.
The rising cost of natural gas has been highly publicized. Market
traditions in the Northeast have led to Home Properties including heat in
the monthly rent at approximately 70% of our units. This makes sense,
since we are able to purchase gas in bulk at a much lower cost than
individual consumers. This leaves us open, however, to temporary short-
term exposure during periods of rising natural gas rates.
Our natural gas exposure is not completely subject to the volatility
seen in the natural gas commodity markets. During the 1999 winter
heating season, approximately 50% of our heating expense represented
delivery and overhead charges. This component of the pricing has been
very stable the last couple of years. The remaining half of our gas
expenditure is the actual cost of the commodity itself. Based on current
NYMEX future prices, the commodity cost has increased about 80%. With no
other protections in place, it would appear that our expense would be up
40% when you work through the math.
We have reduced this exposure by establishing contracts through new
providers, rather than just using the local utilities. Many properties
are master metered, or are being converted to master meters, which
reduces costs versus using individual meters for each unit. In the
process of upgrading our apartment communities, we have also implemented
many energy-saving improvements. Based on an analysis using a grid
spreadsheet, taking into account each individual utility provider,
contracts in place, renewal dates, and NYMEX future prices predicted for
the heating season, we feel it would be prudent to increase our budgets
for utility costs, which will reduce FFO estimates by 2 cents for the
fourth quarter of 2000, and 6 cents for 2001, which will show up largely
in the first quarter of next year. Our expectation is that full year
2001 natural gas expense will exceed 2000 by 23%.
We do believe that if higher utility costs persist, we will be able
to pass this cost on to residents in the form of further rent increases
as leases are renewed. We have an educated customer, who is aware of the
publicity surrounding this issue, making it easier to support a larger
than normal rent increase. As most of our residents have a one-year
lease term, there is a lag effect before we can pass on these higher
increases. This will not help us much in the short-term - thus the
suggested dilution.
Finally, we are pleased with the plan of action we now have for our
affordable housing operations. We have an agreement in principle to sell
our affordable housing development operation, including a development
pipeline in excess of 30 properties, to a management team led by
employee-director Richard Crossed at an amount which approximates book
value. Existing general partnership interests and management contracts
on 8,225 apartment units in 161 existing or soon-to-be completed
affordable communities will be retained by Home Properties.
As we have just reached this agreement within the last couple days,
with the need to document with a contract, we are not in a position to
discuss details of the arrangement. We will issue a separate press
release later this quarter. We do anticipate a smaller yield on
reinvesting proceeds than originally contemplated, as well as some timing
delays. While there are many benefits, as previously discussed, to
exiting this business, there will be some short-term dilution estimated
to be an additional 2 cents per share in 2001.
Also in response to Reg FD, we thought it would be appropriate to
begin publishing our internal model estimating the net asset value of the
Company. This calculation is included as one of the supplemental
schedules which accompany our press release, and will be updated on a
quarterly basis.
As this is the first time we have published this calculation, I
wanted to take a few moments to walk through our assumptions and
methodology. We first look at our current quarterly property net
operating income and make adjustments for any acquisitions or
dispositions during the quarter to arrive at a "run-rate." With our
Northeast locations and the impact of winter on our operating results, a
seasonality factor must be taken into account when annualizing NOI.
Two additional adjustments are made before "capitalizing" the
results. A growth factor of 4% is applied, as we have used a cap rate
that reflects a "look forward" over the next twelve months. Even though
we have been achieving growth well in excess of 4% - this level seems
appropriate in estimating our ADJUSTED net operating income growth, as
well as being what we feel is a conservative estimate. In addition, we
deduct a management fee equal to 3% of gross revenues. The value of our
real estate is determined by capitalizing this adjusted NOI at 9.5%.
Finally, certain adjustments are made for other balance sheet items to
arrive at our current Net Asset Value which we estimate to be above $31
per share.
Now, I will turn the discussion over to Amy to discuss capital
markets highlights.
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(AMY)
Thank you, David.
From a capital markets perspective, the month of October has been
very frustrating for us. Our stock price is down over $4 (or nearly 15%)
over the past four weeks. I will attempt to outline, first of all, what
we believe contributed to this decline; how this decline has or has not
affected us; and finally, what we are doing in response to this decline.
The first trading day of the month opened with devastating news from
Post Properties regarding the status of their development pipeline and
future earnings outlook. Although Post operates in markets that are
substantially different from ours and focuses on a product type which is
also different, their announcement triggered a negative sentiment for the
NAREIT conference that kicked off that same day in Washington, D.C.
As we met with analysts during the conference, there were three
issues that were raised repeatedly. The biggest concern seemed to be the
impact of rising fuel prices on our future earnings outlook. Thanks to
the new SEC regulations relating to fair disclosure, we did not feel that
it was appropriate to give specific guidance to analysts until our energy
consultants were able to complete their study and we were prepared to
share the results of that study with the entire investment community as a
part of this quarterly earnings release and conference call. I believe
that we have now addressed that issue thoroughly.
The uncertainty over the future of our affordable housing operations
has also provided a distraction for both our employees and investors so
far this year. As David outlined, we now have a plan of action, which we
believe will be completed by the end of the year. The projected FFO
impact is minimal, compared to the stability and focus that it will
return to our organization.
The third issue of succession planning has been raised as a result
of my announced semi-retirement. I can assure you that a smooth
transition of leadership over the coming years at Home Properties is of
the utmost importance to our entire family and to the board of directors.
Our Chairman will comment further on this in a few moments.
Independent of these issues, one of our largest institutional
shareholders was forced to liquidate some REIT holdings this month to
meet fund redemptions. While we are not privy to exactly how many shares
were sold or by whom, we have had approximately 1.3 million shares traded
in large blocks this month, which is highly unusual for us. We recognize
that this volume of selling just before earnings can spook prospective
buyers. We both thank and congratulate those who were ready to jump in
and benefit from this tremendous buying opportunity.
Unfortunately, since this downward pricing pressure occurred after
the end of our third quarter but before our earnings release, we were
placed in an awkward position. We could not actively approach investors
or give them assurances. Also, our policy regarding share repurchases
prevents us from buying shares in the open market during this blackout
period.
The good news, is that we did not plan to raise any equity or price
any OP units for UPREIT transactions during this period anyway. So, this
did not adversely affect our cost of capital for any pending
transactions. As David mentioned earlier, our balance sheet is strong,
with ample capital resources to fund our anticipated acquisition
pipeline, and then some. Therein lies the opportunity.
This week, our board of directors unanimously voted to expand
management's authorization to repurchase Home Properties common shares.
Some of you may recall that we were among the first REITs to implement a
share buyback program as early as May of 1997. Unfortunately, this was
such a unique concept to our industry at that time, that upon the
announcement, trading in our stock was halted on the New York Stock
Exchange. Our share price then went up before we had a chance to
actually repurchase many shares. Later, it seemed that every time we
became anxious to repurchase shares, we were in the position of
possessing material inside information or were in the process of valuing
OP units for some acquisition. These situations resulted in legal
constraints, which meant that we were unable to utilize the program to
any great extent.
Of the original one million shares authorized for repurchase,
approximately 795,000 shares remain available. Once we are able to get
back in the market buying, we may again encounter some of these same
challenges in executing our repurchase program. However, if we do have
the opportunity to repurchase a substantial number of our shares at a
reasonable discount to our net asset value, our board did not want us to
be constrained by the amount of remaining shares that they authorized
back when we were a much smaller company. So, we now have the
authorization and the financial capacity to buy back up to 1,795,000
shares, which represents approximately 8.5% of our common shares
currently outstanding. This leaves us with mixed emotions as to whether
we want our stock price to remain low or recover. Either way, we will
look to add value for our long-term shareholders.
NOW, I WILL TURN THE DISCUSSION OVER TO OUR CHAIRMAN.
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(NORMAN)
THANK YOU, AMY. GOOD MORNING EVERYONE!
This is our first conference call since Amy announced in late August
her modified role at Home Properties. To recap, Amy will wrap up her day-
to-day responsibilities as a full-time employee by the middle of
February. Starting in February, she has been engaged as a consultant for
one additional year and will remain as a non-employee Director.
This was a very difficult personal decision for Amy, strongly
influenced by her desire to spend more quality time with her husband and
young children (my grandchildren!) The majority of her net worth
continues to be invested in Home Properties.
Amy's decision has led to numerous inquiries as to succession
planning, as Amy had been seen as the logical choice for CEO after Nelson
and I slow down.
Amy had already started to spread her day-to-day duties to others -
mainly David - in anticipation of taking on higher responsibilities.
David, who has delegated many of his day-to-day activities to our
treasurer and others, has well established relationships with sell-side
and buy-side analysts, so they shouldn't miss a beat with Amy's
departure. We will need to work hard, however, to maintain the
longstanding relationships and credibility that Amy has cultivated with
investors over these past six years.
While Amy's importance in the management of this company had
increased to the point that she had become like a partner to my brother
and I, I want to stress that we will have a complete and strong team in
place to execute our growth and business strategy when Amy leaves. We
also want to assure you all that neither of us plans to hold out as long
as Milton Cooper.
Nelson and I are having the time of our lives, and plan to remain
fully active for three more years. We are, however, already starting to
groom candidates for the COO and CEO positions, and we plan to strengthen
our management team and list of candidates with at least one new hire.
We are now interviewing a number of strong outside candidates who have
contacted us as a result of Amy's announcement. We take the issue of
succession planning very seriously. Our board and management team will
continue to focus on this important issue over the coming months.
Earlier this week, we announced a dividend increase of 7.5%,
effective with our dividend to be paid a few weeks from now. We plan to
remain aggressive in implementing dividend increases, despite the limited
access our industry has to raise equity. We are comfortable with our
payout ratio in the low 70% range, which provides an ample cushion for
replacement reserves, property upgrades and contingencies. We are
particularly confident in the sustainability and growth of our dividends,
since our leverage is low, our debt is almost entirely at fixed rates of
interest (with very little maturing over the next few years), and our
markets are not prone to over-building. Maintaining a healthy dividend
yield also provides us with a competitive advantage when negotiating
acquisitions which utilize operating partnership units as part of the
consideration.
It is not necessary for us to retain substantial levels of current
cash flow to fund external growth, as we are willing to adhere to the
discipline of the capital markets in order to justify new investments.
We expect additional acquisitions of about $100 million before year-end
using available resources, which will result in a total for the year of
about $320 million. Next year's pace will be dependent upon our cost of
capital, which, of course, will be heavily influenced by our stock price.
While we are optimistic that our stock price will recover, if it
stays low, we will consider selling assets with lower growth potential to
help fund the repurchase of stock and the acquisition of properties.
Today we announced that we have reached a preliminary agreement to
sell our affordable development operations. We would have preferred to
wait until a contract was final before announcing this transaction,
however, we felt that it was important to begin communicating with our
employees as soon as possible. David was also anxious to share our
preliminary estimate regarding this transaction's impact on funds from
operations, before analysts make their quarterly revisions to their
earnings model.
Since announcing last March that we would be pursuing strategic
alternatives for our affordable housing operations, we and our investment
bankers at Mercury Partners have met with many prospective investors and
purchasers. In the end, we concluded that the group most capable of
understanding and properly valuing our development pipeline, was the
management team that has worked to create this portfolio of development
opportunities. They also have the passion and the vision to see each
project through to its completion.
This solution offers our shareholders the best of both worlds. It
will allow us to separate ourselves from the complex and volatile
affordable housing development business, while allowing us to keep the
stable income stream from managing 161 completed affordable housing
communities which we control as the general partner.
We are also pleased to have the prolonged process of selling the
affordable housing development business behind us with an outcome that is
beneficial to our employees and shareholders. When this transaction
closes, our business will be easier to explain and manage, and we will be
more focused.
With that, I'd like to open up the phone lines for questions.
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(AFTER Q&A, NORMAN CONTINUES.)
I will close by again reviewing a list of accomplishments during the
quarter:
* We achieved same-store NOI growth of 8.8%!
* The $690 million of investments made in acquisitions since
January, 1999 outperformed expectations, with unleveraged yields
averaging 10.5% during the first nine months of 2000.
* We are well positioned to fund our substantial pipeline of
acquisitions as well as share repurchases. Leverage is only 37%,
our $100 million line of credit is available with nothing
outstanding at the end of the quarter, and we have cash reserves in
excess of $45 million.
* Altogether, our accomplishments resulted in per share FFO
growth of 5.5%, after reflecting a reduced contribution from our
affordable development activities and short-term dilution from
deleveraging.
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(DAVID)
We'd like to thank you all for your continued interest and
investment in Home Properties. Have a great day!
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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.
Dated: October 26, 2000 HOME PROPERTIES OF NEW YORK, INC.
(Registrant)
By:
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David P. Gardner,
Senior Vice President
