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Home Properties, Inc. (NYSE:HME)

Q4 2012 Earnings Call

February 08, 2013, 11:00 am ET

Executives

Charis Warshof - VP, Investor Relations

Ed Pettinella - President & CEO

David Gardner - EVP & CFO

Analysts

Gaurav Mehta - Cantor Fitzgerald

Rich Anderson - BMO Capital Markets

David Bragg - Zelman & Associates

Jana Galan - Bank of America-Merrill Lynch

Eric Wolfe - Citi

Ray Huang - Green Street Advisors

Michael Salinsky - RBC Capital Markets

Paula Poskin - Robert W. Baird

Karin A. Ford - KeyBanc Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Home Properties Fourth Quarter 2012 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) And as a reminder, this conference is being recorded, Friday, February, 08, 2013.

I would now like to turn the conference over to Charis Warshof, Vice President of Investor Relations. Please go ahead, ma'am.

Charis Warshof

Hi, this is Charis Warshof. Good morning and thank you for joining us on the call today. Our speakers today are Ed Pettinella, President and CEO and David Gardner, Executive Vice President and Chief Financial Officer.

You can listen to the call and view slides on our website at homeproperties.com. We also have posted the earnings news release, supplemental schedule and a PDF of the slides on the website in the Investors section under the heading News & Market Data. The call replay and script will be posted later.

I would like to remind you that some of our discussion this morning will involve forward-looking statements. Please refer to the disclosure statement on Slide Two and the Safe Harbor language included in our news release, which describes certain risk factors that may affect our future results. Each slide is numbered in the lower right corner.

Now, David will discuss our financial results for the quarter.

David Gardner

Thanks, Charis. Good morning, everyone. I understand some of you maybe bundling up for the storm coming and you maybe not in your normal office situation, but hopefully we are all going to get through this. We obviously have some properties in Boston that are gearing up for this, but we are always pretty well prepared, so I am sure we will be fine.

The first chart I will discuss is on slide three. This chart shows our fourth quarter 2012 funds from operations per share of $1.09, up 17.1% from the prior year fourth quarter. Operating FFO, which adds back acquisition cost was also a $1.09 since we had very minor acquisition costs. OFFO was up 14.1% from the fourth quarter of 2011 which had significantly higher acquisition expenses.

Turning now to the full year results on slide four; FFO per share for 2012 was $4.13 with Operating FFO at $4.17 compared to 2011 FFO of $3.54 and Operating FFO was $3.60 per share. The differences between FFO and Operating FFO are due solely to acquisition related costs, which are excluded from OFFO. The 2012 increase over the prior year in FFO per share was 16.6% and in OFFO was 15.9%, the highest year-over-year growth since the company’s IPO in 1994 and something we're particularly proud of considering the comparison is much tougher now than in the company’s early growth years.

Slide five shows our core property performance for the quarter on a number of metrics, both year-over-year and sequentially. We define core properties as same-store properties owned since January, 01, 2011. On a sequential basis, compared to the third quarter of 2012, average monthly rental rates were up 0.4% in the fourth quarter, with an increase in economic occupancy of 0.3%, rental income was up 0.7% and total revenues were up 1.3%.

NOI was up 0.9% sequentially. If we adjust fourth quarter results to remove the seasonality of natural gas reimbursement income and winter expenses, NOI would have been up 2.6%. Comparing the results for the quarter to the fourth quarter a year ago, base rent was up 4%, which as a result of the 3.6% increase in average monthly rental rates, plus 0.4% increase in economic occupancy.

We experienced a 0.7% increase in operating and maintenance expenses, primarily from higher water and sewer, personnel costs and property insurance which were partially offset by decreases in repairs and maintenance and real estate taxes. The various income and expense changes resulted in a 6.4% increase in NOI compared to last year’s fourth quarter.

Here are few additional details. For the 2012-2013 heating season, we now have 99.5% of natural gas heating cost fixed at an all-in weighted average cost of $5.05 per decatherm, which compares to a cost for the 2011-2012 heating season of $5.70 per decatherm. For the 2013-2014 heating season, we have 99.1% fixed for weighted average cost of $4.68. Going out even further, currently we have 65.7% of costs for the 2014-2015 heating season also locked in at very favorable weighted average cost of $4.37.

Slide six shows our current capital structure. With the stock price of $61.31 at the end of the 2012 fourth quarter, leverage was 42.2% on a total market cap of $6.6 billion with approximately 87% of debt at fixed rates.

Turning now to guidance. First, I wanted to briefly review how we did in the fourth quarter compared to our expectations. For the quarter at $1.09 per share, FFO and OFFO were $0.05 above the midpoint of guidance we provided. Core Property NOI was $2.04 better than anticipated, primarily from better expense performance largely due to warmer weather which reduced heating, personnel and snow removal costs. Our recently acquired properties and development properties continue to outperformed adding another $2.05 with various other small positive changes we reported FFO $0.05 higher than the guidance midpoint.

Now I will turn to 2013 guidance. I would suggest you look at our supplemental where we provide a couple of pages of more detail assumptions that are in the earning news release. For 2013, we expect FFO to be in the range of $4.28 to $4.44 or midpoint of $4.36. This will produce FFO growth of 5.7% in the midpoint compared to 2012. Operating FFO is expected to be $4.31 to $4.47 or $4.39 at the midpoint. The difference between FFO and Operating FFO is solely due to expensed acquisition cost assumed at $0.03 per share.

We expect same-store revenue growth to be 3.5% to 4.5% for the year. Those regions expecting revenue growth at or above the average are Washington DC, Philadelphia and Boston with most others bunched levels only slightly less than the 4% midpoint.

Expense growth is projected to be 3.5% at the midpoint. This is coming off four consecutive years of year-over-year reductions in operating and maintenance expenses. We expect to see above average increases in natural gas heating costs, real estate taxes, personnel costs, property insurance and snow removal costs. Many a line items we expect to see higher levels and are either directly or indirectly affected by weather.

The winter in 2012 was extremely mild and we always budget for tip of the year. Growth rates for other expense category are provided in the supplemental. Same-store NOI growth is projected to be in the range of 3.5% to 4.5%. Both acquisitions and dispositions are assumed to be in a range of $200 million to $300 million in 2013.

Unlike 2012, dispositions are expected to occur earlier in the year than acquisitions, so we won't be able to fully offset the dilution incurred from paying down low interest rate debt from disposition properties with investments in the acquisition scheduled in the latter half of the year.

This is a key reason for the lower level FFO growth in 2013. We estimate that the early timing of dispositions cost us about $0.06 per share or 1.5% in FFO growth. For development, we are projecting we will spend about $120 million for the ongoing construction of 1155 Ripley and the Courts at Spring Mill Station. Please go to the next slide number eight and I'll now turn it over to Ed.

Ed Pettinella

Thanks David. As you heard from David’s review of our numbers, 2012 was another great year for Home Properties. Operating FFO growth was the highest in the company's history. On the heels of 2011’s result which when reported was the second highest. NOI growth of 8.1% was our third highest ever. Apartment markets and fundamentals are still healthy and I'm pleased with the solid results our team has continued to achieve in a relatively rocky economic recovery.

Turning to transactions and development activity on slide eight, while we had no acquisition activity during the quarter, during 2012 we purchased three properties with 2,018 units for $298 million. During the fourth quarter, we completed four sale transactions. We sold two properties in our Philly region and two in Baltimore a total of 1,172 units for $118 million. That brings total dispositions for 2012 to six properties with 1,596 units for $160 million.

For 2013, as our guidance reflects at the midpoint, we are expecting to complete $250 million each in purchases and sales. As David discussed in his earnings guidance, we are anticipating a head start in disposition activity which will produce some short-term dilution.

Turning to development on slide nine, in 2012, we completed the apartments at Cobblestone Square in Fredericksburg, Virginia, which has been a great success for us. It is 97% occupied and was leased out months ahead of schedule with negligible concessions that were well below budget.

The Courts at Spring Mill Station, in Conshohocken, Pennsylvania was started in 2012 when we expect to have initial occupancy and construction completed in 2014. Also under construction is 1155 Ripley and Silver Spring Maryland with initial occupancy this year and completion anticipated in 2014.

Now some brief comments on our markets. Each quarter we ranked our markets from high to low based on property management’s perception of current market strengths. While this quarter it is tough to differentiate among the markets since their good performance was relatively tightly bunched, we ranked the suburban New York region as strongest with high occupancy, strong revenue growth and while it controls expenses.

The suburban New York region is followed by Boston, Philly, Baltimore, DC, Florida and Chicago. Boston and Philly are benefiting from rent increases associated with the increased upgrading that we're doing now, that these markets are much stronger.

Apartments available to rent or ATR which is usually a good indicator of future occupancy at the end of January was 6.1% of the core properties, identical to the ATR at the end of October. If you have any questions about specific records, I would be happy to provide more color during the Q&A.

And on slide 11, I showed the average rent to income ratio for the company. New [residents] ability to pay remain strong. You can see that while the ratio of rent to income has remained relatively steady over the last three years. The household income of our applicants has increased.

Income grew more than 6% for applicants in 2012 compared to ‘11. So even with increased rent levels, the ratio of rent to income declined from 17.6% last year to 17.1% in 2012. This compares to a high of 20.2% in 2007, which would suggest we have considerable room to further increase rents. This needs to be balanced against rental fatigue. So we keep plugging away with without getting overly aggressive.

On slide 12, we have a chart of our progression and key debt and credit metrics over the last few years as a result of various capital market initiatives. These have resulted in a stronger metrics you see on the chart. Debt to total value is down 45.5% and secured debt to value was 35.3%, all calculated based on our conservative line of credit valuation metrics.

We improved net debt to EBITDA to 7. 2 times as well as our interest coverage and fixed charge coverage ratios while increasing the unencumbered growth of 20% to 38.4%. These improvements clearly give us more of financial flexibility and put us in better position to pursue an investment grade rating from S&P and Moody’s to complement the Fitch investment grade ratings we currently enjoy.

Just a few comments on the decision to increase the dividend. The dividend of $0.70 for the quarter ended December 31, 2012 that we announced Monday is an increase of $0.04 per share or 6.1% from the prior quarterly dividend grade. The annualized dividend of $2.80 per share represents a yield of 4.6% based on the February 1, closing price of $60.90 which was the closing price to-date prior to the board’s decision to increase the dividend.

This continues to put Home at the high end for dividend yield among the apartment group. The board’s decision to increase the dividend reflects the outstanding operating results we achieved in ‘12 and what we see as another good year in 2013. Although, not quite as robust as ‘12 and also is consistent with our commitment to raise the dividend level as operating results warrant which has been our long held dividend philosophy.

My last chart on slide 14 shows return on invested capital is published by KeyBanc on February 1, 2013. This metric calculates the relationship between recurring EBITDA and average assets before depreciation. We have been asked many times before to include this type of information on the call to better explain the value of our capital expenditures and what they had to our bottom line.

As you can see Home is near the top of the chart, showing that our assets are able to generate superior earnings and same-store NOI comparison appears we acknowledge receive a benefit from upgrading and repositioning, but return on invested capital should be consider as apples-to-apples comparison due to the fact that all of the excess CapEx spend is also included in the denominator. This also was not a one-year abrasion.

Looking back to past six years on this metric; we have been in the upper cortile the entire period of time. So in conclusion, we are very pleased with our full cycle performance, our core properties recently acquired properties and newly developed properties are producing well.

Occupancy is high, lower interest rates, planning for capital, modest GDP growth and longer term demographics all are helping us. I want to thank all the Home Properties employees for their results; their hard work has produced and for their continued dedication of the company's future success.

That concludes our formal presentation, now Dave and I will be happy to answer any questions you may have. So we can get to everyone’s questions. Please limit your question to one and the follow-up.

Charis Warshof

[William] we can take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald. Please go ahead with your question.

Gaurav Mehta - Cantor Fitzgerald

First question that I have is on the transaction market. In your prepared remarks you mentioned that you are expecting to sell assets earlier in the year and acquire later in the year. Can you provide us certain details on that and what's driving the timing?

David Gardner

Well, I think we generally don't like providing any specific details on specific assets being sold until there's absolute certainty or closing that doesn't do us any good to publicly have discussions there. The timing is I think more of an acknowledgement of a process that we started later last year where we've had closings that occurred in the fourth quarter and some properties that we certainly expect to close in the very near future, properties that have already been identified and heavily marketed for sale. So the anticipation is that process will continue in a heavier fashion early. Typically historically if you look back at our acquisition activity, it’s tended to occur mid-year to fall period. So I think as our guidance is supposed, we are trying to indicate a balance over the year is expected but certainly based on what's in the pipeline today on both sides we expect just a lot more early activity on sales versus acquisitions.

Gaurav Mehta - Cantor Fitzgerald

Okay, and a follow-up question on the CapEx side, it looks like you adjusted your 2012 CapEx, and it’s partly driven by inflation, can you talk about your inflation expectations for 2013?

David Gardner

For modeling purposes for 2013 we are assuming CPI moves approximately 2%. And you are right, I think they only adjustment on our CapEx has been just inflation related. I think most of our expense line changes are much more driven by timing comparisons and expectations for weather known issues relative to tax increases and so. For so many of the line items you throw CPI out the door, but on CapEx that's a more routine expenditure that normal inflationary increases is warranted there.

Gaurav Mehta - Cantor Fitzgerald

So it’s the inflation expectations that you have its pretty much in line with what you have been seeing in the last couple of years, right.

David Gardner

Yes.

Gaurav Mehta - Cantor Fitzgerald

Nothing out of ordinary.

David Gardner

No, no.

Operator

Our next question comes from the line of Rich Anderson with BMO Capital Markets.

Rich Anderson - BMO Capital Markets

So it looks like we might have $0.05 of snow today up there, are you are going to be okay not exceeding your number by $0.05 in the first quarter.

David Gardner

Well we had a good January, so that's helping us out. And it’s only blossomed you know it’s only a little part of our portfolio. So seriously it’s the hardest thing to predict, if it’s going to be cold, if it’s going to be warm, if it’s going to have storms or not. We are looking out the window now with.

Ed Pettinella

Plus a little blizzard here

David Gardner

Pretty much a blizzard. So you just never know, and certainly when you are talking about 20 inches, now you are talking about loaders, you know you are not talking about just pushing it, you are talking about actually lifting it up and taking it out. So it is the most difficult thing we run in to when we are projecting our results and we had some good luck last year.

Rich Anderson - BMO Capital Markets

Okay. You know, I couldn’t let you off the hook on that issue. Yeah, the definition of FFO and operating FFO but you add back, I think you add back early termination of debt cost. Is that right?

David Gardner

Yes. Historically, we've always distinguished debt extinguishment cost incurred strictly from a sale transaction. We've viewed that differently than - let’s say, I just decide, hey I have a mortgage and its high rate and I really don’t like it. I think I can pay it off early, incur some expense and then I can get much more competitive rate today, and I think that makes economic sense to do that. If we did that and incurred that expense like anybody else, you would expect to see that prepayment penalty in normal interest expense, and as part of your FFO calculation. When the expense is triggered because the debt is paid off, strictly because it's a secured debt, you are selling the property, you don’t have a choice. It's not a decision you are making because the rate is too high and you want to replace it. It's totally triggered from a sale event. We always grouped that in number one, that obviously ends up in discounts; but we’ve also grouped it in as basically as an adjustment to gain on sell and therefore we have excluded it in our defined FFO.

Rich Anderson - BMO Capital Markets

Okay, and then last question from me is on the rent to income data that you provide. I am curious the decline from ‘07 to 2012, do you know what the average number of people per unit was in 2007 versus what it is today at the year-end 2012 and how that might have impacted that ratio?

David Gardner

We certainly don’t have specific detailed information on that. We would accept the notion that back in the periods where the income levels were lower, that it’s probably more a reflection of - it’s a combination of reflection of some normal appreciation in the wage base, but also recognition that back then may be a single person felt more confident in renting a unit versus people doubling up or having more bodies that are on a lease and therefore the income is a little higher. It’s more anecdotal, we don’t measure that specifically so we can’t really answer a detailed answer to that. But I think at the end of the day we like the fact that, whoever is signing the lease there’s more income there to service the rent and we think that one way or the other puts us in a better position.

In a really expanding economy may be the opposite starts happening and people split up and that ratio goes down a little bit, but we think right now with the kind of the rocky recovery we are still in a very good position.

Rich Anderson - BMO Capital Markets

Do you know what the average person per unit is today, 1.5 people?

David Gardner

No, I don’t.

Operator

Our next question comes from the line of David Bragg with Zelman & Associates. Please go ahead with your question.

David Bragg - Zelman & Associates

Can you talk about the potential use of the ATM this year? Is the fourth quarter and taking into more restraint on this front now that you are more actively selling assets?

David Gardner

Yeah, Dave I think its shows two factors, one is just, I hope that it shows that we are selective in discipline in our approach to the ATM. If you specifically look at 2012, the quarters that we sold in the ATM were quarters where we could be selective and the stock price was higher. If you look at the fourth quarter specifically, the weighted average closing stock price for the quarter was below $60.

The average for our sales is to the ATM was close to 60 to 50. So we are in when it makes more sense when the price is relatively higher. Also in addition your comment is warranted, we started to see, we started to have closing mostly late third quarter into the fourth quarter of $160 million. This year we are projecting the much more balanced approach between buys and sales. So the need to as concerned about equity issuance is certainly is great as maybe it had been the couple of years ago. Dave, are you still there?

David Bragg - Zelman & Associates

Yes, I am here, sorry; David by the end 2013 where would you like the unencumbered ports to be?

David Gardner

It’s like slightly over 38% today. I think we see a couple of opportunities, number one we have more secured debt coming due this year, I mean this past year in 2012 we only had about $39 million coming due, so it didn't give me a lot of opportunities to kind of just naturally grow that, we have a $190 million coming due this year, all probably fairly low loan to value. So I think I have a lot of flexibility there. We also have identified some handful of variable rate loans that have much more nominal 1% prepayment penalties. We could target paying some of those off and not incur significant you know not at an exorbitant cost where a fixed debt would make whole provisions would be cost prohibitive. So between those two we think there is an opportunity to start approaching maybe 45%, and I could possibly see if everything falls right being higher than that, approaching between 45% to 50% but I think getting to 45% is a reasonable goal to Q4.

David Bragg - Zelman & Associates

Okay, thanks. And the last question is on your new move in gains in the fourth quarter, well, your renewals hold up pretty well as compared to the prior year. You had a deceleration of new move in gains and it seems pretty broad based, can you talk about what happened there and the potential strategy behind that?

David Gardner

Well, I don't think we are dissimilar to a lot of our peers which are expecting certainly some slowdown in pricing power. We are very pleased with as you mentioned renewals holding up very well, I mean it’s only 10 basis points lower than renewals a year ago and certainly for us it’s important to remember that 62% of our residents renew. So lion’s share of our activity is going to be at that higher level.

With that said, we are feeling a little less pricing power at this time and therefore we are going to, you know, certainly during the end of the fourth quarter and the beginning of this quarter we are being a little bit more conservative. We need to get through this winter season, where there is not as much traffic and that's leading to our guidance which suggests on average where looking at maybe 50 bps or a little bit more of less revenue growth. So we are starting at little lower level than we were a year ago, but we don't see it really, we don't see it getting away from us; January was actually a little better than December was in new leases in concessions, I am sorry in renewals staying basically where they were. So what we think that we've hit that low point already.

Operator

Our next question comes from the line of Jana Galan with Bank of America-Merrill Lynch. Please go ahead with your question.

Jana Galan - Bank of America-Merrill Lynch

Thank you, good morning. Maybe following up on the new leases, can you maybe discuss what happened in Philadelphia, because that had been pretty strong all year and it looks like you expected to be one of your better markets next year?

David Gardner

I don't know if there's anything particularly, I do know there is two properties and specifically, I know that it didn’t sound like a lot, but there is one property that we've had, the main direct road accesses was down for a number of months in the middle to late summer and our occupancy dropped about 5%. So we’ve been trying to fill that up and get ready for the fall leasing season, I am sorry getting ready for the winter. So we were not very aggressive at all if rental increases there. It's the lowest bunch in rental rates; they are only a little bit over breakeven and actually rental revenue was negative at that property. And we have another property that was held for sale and sometimes you know, when you have property held for sale, the staff at the property losses their, they take their eye off the ball a little bit. They are a little bit concerned where they are going to end up; are they going to end up with home or they going to end up with a new buyer and I know one of those properties got a little bit weaker and then also some times it's been Philly especially is timing of upgrades.

Ed Pettinella

I think I want to interject, I think that said, first of all, the 6.4 in the fourth quarter, 6.2 NOI is close to the company’s average and for the full-year Philly was 9.8 near the top and considerably above the average for the year at 8.1. Keep in mind too that if you look at and stick with NOI, this could be second, projected to be the second best market beyond DC in ‘13.

Jana Galan - Bank of America-Merrill Lynch

Thank you. And then next I think is very interesting, you have DC as one of your best markets. I am just curious if you could may be comment on what you are seeing in terms of direct new supply leasing up near you and may be some comments on what will be opening up when you are expecting could be leasing your repeat project?

David Gardner

I will just give you a few general comments and then Ed could may be get into the more of your specific question. But I think we are just seeing lately DC is holding up a little bit better and in the fourth quarter it was number one for renewals, it was number two for new leases. There is another little quirkiness with DC, every year we reset our definition of core properties, so all of our 2011 acquisitions are now going into the core bucket; a lot of those properties were DC located. So they actually are outperforming the rest of the DC portfolio and if I didn’t have those in the core properties, and would actually be down 50 bps for revenue growth in DC but those properties are like I said they are outperforming, so that’s holding up that market a little better. I don’t know if you have any supply comments…

Ed Pettinella

I think well supply, I have been beating the drum for a couple of years now, DC issue since we have a high concentration, so supply is not a factor for us; we were not in the district to, we are not seeing any adverse impact supplying on us where we are located and so forth. Then you drill down even coming into this year and I think just keen the renewal lease basis DC is still one of our strongest markets. Another point I would like to make is when the pace of acceleration of rent growth slows down, our delta changes smaller; we get down to a base which I think we are getting close to now or the ace may have more of a adverse delta change than we do because they are coming from a more lofty position. Unemployment is around 5.5% in DC, I would say there hasn’t been spending cuts that we thought that may come, but so far we feel very optimistic about our CB properties in DC for ‘13, and rolling into the first part of the year there is nothing we see that would materially change that opinion.

David Gardner

And I think you mention Ripley specifically, I mean we are projecting initial leasing activity in the third quarter and certainly that will continue for a number of quarters. I think we are hitting the really good window there, there was a property I think, it was almost literally across the street from us, that has already gone through lease up phase and they are basically over. So I think we are hitting a really good window at least in that submarket of not any new things that we’re competing against. So obviously new construction here, other than Cobblestone where we didn't gave concessions, we are always expecting to go a month or so concession and I don't think Ripley probably will be any different, but I think we are hitting a good opportunity there.

Operator

Our next question comes from the line of Eric Wolfe with Citi. Please go ahead with your question.

Eric Wolfe - Citi

Hey, guys. First question, and you talked a little bit about this in your remarks, but it looks like you spend about $150 million in revenue enhancing CapEx this past year. Can you just tell us how that spend breaks down by geography; I am just wondering whether you know the majority of it was concentrating in DC or Baltimore or some other region?

David Gardner

I don't have a list in front of me but I know for fact that Boston and Philly both enjoyed relative to their base of properties, a higher level of upgrade spend there and it was kind of obvious our performance I mean I think the markets held up well anyway, but I think they got a little bigger boost from some of that CapEx.

I think Long Island, New Jersey is probably a region where typically a lot of the heavy lifting and upgrades has already been done, that's one reason when I look at that region in 2013, we are not expecting as high growth. In DC, remember I told you that the 2013 core is including some recently acquired properties but guess what a lot of those have a lot of operating potential behind it. So I think we see a lot of opportunities specifically in the DC market for adding some upgrades.

Eric Wolfe - Citi

And those upgrades I mean would that impact 2013 growth because also I'm just looking at the growth and DC is the best among all your regions. I am just wondering whether you think that is just something that's natural that's happening whether you think its partly because of some of the work that you are doing there, and also if you could just tell us just kind of just a general rent bumps that you are getting and how much that would improve the NOI at a given property?

David Gardner

Sure. Well specific to DC remember I said that DC is about 50 beeps better than it would be, there would have been if I didn't include the 2011 acquisitions in the formula. So with those being core properties and those being the properties have more opportunities for upgrades. I think you can easily see, I would say in general for doing a decent amount of upgrades in the market that probably 75 beeps in revenue growth and up to 150 beeps to maybe 200 beeps in NOI growth is from the upgrade program.

Obviously, it’s a little heavier in markets that have more activity going on. We are targeting slightly less upgrades this year. I think in 2012 we just saw many more opportunities and we had, I think we had slowed down a little bit during the recession. So we felt 2012 there was a little more pent up ability to do more upgrades and its kind of getting to be a more natural level now.

No, I think it’s a combination of clearly seeing renewals hanging in there. For the most part renewals are not going to be upgrades. They are going to be just stay in path. So healthy renewals, a little bit of upgrades, and not much hanging in there, where occupancy is leading to just a slightly less robust year than we had in 2012.

Operator

Our next question comes from the line of Andrew McCulloch with Green Street Advisors. Please go ahead with your question.

Ray Huang - Green Street Advisors

It's actually Ray Huang here with Andy. The first follow-up on the CapEx question, looking at your disclosure on page 28 states that CapEx, kind of (inaudible) to the NOI growth by about 2%, given that you are going to spend about similar amount in 2013, should we assume organic growth was actually closer to 2% versus your 4% guidance?

David Gardner

Well, that one quarter was probably a little higher than, I would anticipate 2013 benefit from CapEx to be more, say between 1.5% to 2%. So I won't give a full 2% benefit for 2013. Probably like 1.75%. So, looking at our NOI growth, it's reasonable to suggest that it would be 1.15% to 1.75% the last, if not for the CapEx activity going on.

Ray Huang - Green Street Advisors

Okay, and then if you could just walk us through how you expect to fund the redevelopment activity in 2013, is it going to be ATM, is it going to be unsecured debt offering?

David Gardner

Sure, with acquisitions and dispositions offsetting each other, I mean there are two main uses of cash. One is the $100 million or so of upgrading and repositioning dollars and $120 million of development. So $220 million altogether. You know, it's important to remember to note that those are both adding value to the balance sheet and I wouldn’t in general, it's not a perfect science but we're targeting staying pretty similar to what our balance sheet is today. So, like a 60-40 split equity and debt. So you know, you could anticipate maybe, you know, $130 million of ATM usage and the rest coming in debt but a lot plays into that, how well our disposition is doing? How well our acquisition is going to be a little less than we anticipate. Those things will change that a little bit.

Certainly, my hope and we may not be able to achieve it but I would love to get through a third-year in a row without placing any new secured financing. 2011 and 2012, the only new secured debt I had was a small loan that had to be assumed on an acquisition. Otherwise, I had placed no new secured financing. I didn’t anything that came to I saw the way to get a payoff.

I think targeting much more of the unsecured market will still be preferred but again with a $190 million of secured coming due, I certainly could see the need to end up placing some of those back into secured market, but my first preference will be to continue to go unsecured and continue to drive down that relationship of our secured debt to total value.

I think we have done great strides in improving a lot of metrics and we are not interested in resting on those, we are interested in continuing to make some improvements on those. But again, I don’t see a significant need of equity to reach our objectives.

Ray Huang - Green Street Advisors

Again what do you think you can borrow in the unsecured market today?

David Gardner

We haven’t been in that market in a bit now. You are looking at I guess two different avenues. One would be going back to our friendly bankers and our line facility where we have been successful in having sub 2% variable rate transactions. If you are looking at the more typical unsecured bond market somewhere in the 3% to 4% range. I think right now [absent] the Moody’s or an S&P, we are going to pay a little more than if we have that rating but I think we are still probably not going to top over 4% at all, we have hopefully no (inaudible).

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please go ahead with your question.

Michael Salinsky - RBC Capital Markets

First question relates to talk with [Jason] I think in the quarter you talked about, you are expecting to close that one fourth quarter early first quarter, can you kind of give us an update where that stands and whether you expect to sell that property just given the (inaudible) rights and everything you guys looked on?

David Gardner

I mean, kind of like we said earlier into a question, we really hate to get into any specifics on the property that is under negotiations in the pipeline. We continue to have discussions on that property and we have high hopes that something will happen soon, but it’s tough to get into any specifics on it.

Michael Salinsky - RBC Capital Markets

Okay, as you think about the development pipeline for ‘13, the one part it doesn’t look like it starts till kind of a ‘14 start there, should we expect any additional development starts in ‘13 maybe buying at a (inaudible) before starts, what is the theory in that?

Ed Pettinella

No, we [broke] round in the one project in Philly. We will start leasing up 5511 and that’s basically in ‘13.

Michael Salinsky - RBC Capital Markets

Okay, third question just in terms of the transaction market, specifically if you could talk a little bit about DC. Can you tell us what you are seeing in terms of asset pricing, whether the supply is starting to come online is impacting if you are seeing any impact to cap rates thus far or growth expectations.

Ed Pettinella

We are not heavily focused on DC at the moment, mainly because we are trying to maintain or lower percentage of concentration in the DC region. There's not a lot, our acquisition team is not seeing a tremendous amount coming through in mid-Atlantic region in the beginning part of this year although this is hard to get a good beat and the level of acquisitions based on January. Cap rates are relatively stable for what we would be looking at say 5.75, to 6.10, 6.20, that would be more our sweet spot for a typical low B, high C type deal in DC today. But we are just that, and have seen a lot and we are not going out of our way to load up on anymore. We are more focused on a couple of sales, one you mentioned already in your first question and the acquisition if we are fortunate enough to bring another product outside their region we will.

Michael Salinsky - RBC Capital Markets

That's helpful. Then just in light of the asset sales kind of planned in the DC area and your comments about reducing exposure, where do you expect to be as a percentage of NOI in the DC region, kind of what's the target versus 34% today.

Ed Pettinella

So we would like to drop it certainly a few percent, anything would be or take a little air out of the tire, 32% to 30% is a guide post we are looking at right now.

David Gardner

But its also not necessarily going to happen in six months, I mean its more of a longer term strategy of getting down to that maybe 30%.

Ed Pettinella

And Mike quite frankly we've been the ones out there for many quarters now and I think its proving out. We said we would hold up well especially against other players, public and private in the DC market. Our product line seems to be more insulated. Number two, in our guidance through fourth quarter, DC continues to hold up extremely well. So it’s a tough decision for us but we think just a pure concentration level in DC for us and for reverses the dozen of us that are public, it would warrant a slight reduction in percentage and that's pretty much the levels I gave you.

Operator

Our next question comes from the line of Paula Poskin with Robert W. Baird.

Paula Poskin - Robert W. Baird

Following up on the development dialogue, how are you thinking about backfilling the development pipeline at this point in the cycle?. Are you seeing as many opportunities in the markets you would favor development in or are you stepping off the accelerator?

Ed Pettinella

First I would say of the 10 or so of us on a public side that are in the development game. I would put us in the fourth quartile in terms of how much we are trying to do and what do I mean by that? Our strategic plan would suggest that bringing on 200 to 300 units of new per year would be all we are looking for. So something in the $50 million to $75 million range roughly for us. We only want to put out closer to 400 units or a 100 million give or take per year.

Now you might say why the difference between what you are putting in the front side. We have a few density plays. Our own properties where there is ability to do incremental development. Those are sitting out there. There’s two or three that could happen over the next couple years, but certainly not in 2013. Lastly, we just feel like a few other CEOs that have commented in this quarter. I don't believe it's prudent in the DC region for us to keep looking for new deals right now. We're actually looking for deals outside of DC and that coupled with the prior comments about our overall concentration in DC. For those reasons, we're just looking, we're looking elsewhere but in a very small scale basis.

Paula Poskin - Robert W. Baird

Thank you very much and just a question on guidance. Apologies if I miss this in your prepared remarks. What is driving the reduction in your G&A assumption for 2013 versus 2012?

David Gardner

Sure, there is actually a few different things happening there. One is just a recognition that 2012 was a record year, was our best FFO growth year ever and obviously I think it was like the third highest same store NOI growth. So instead of comp levels based on formula driven metrics was you know, higher than normal. I think we're projecting 2013 to be a more normal year for that.

We also had an executive officer departure in 2012 where there was some accelerated expense that is not expected to be repeated, and finally about a year and a half ago we’ve switched over from just typical vesting equity grant such as best over time to those that are performance based on a three year measurement period and then that transition that was kind of unusual timing issue that ended up 2012 getting some doubling up of accounting expense on the equity grant side that will not repeat in 2013. So they are all kind of different unusual one-time things that occur that we are expecting the much more normalcy in 2013.

Operator

Our next question comes from the line of Karin A. Ford with KeyBanc Capital Markets. Please go ahead with your question.

Karin A. Ford - KeyBanc Capital Markets

Can you please remind us again, what percentage of your residence are government employees and specifically can you just talk about what exposure you have in your DC portfolio to people who work at the Pentagon at the Department of Defense?

Ed Pettinella

About this DC it’s here under 5%, Karin and Baltimore just a little less. So it’s a pretty small in terms of our total resident base in DC. In front of me I don’t have those two or three facilities you talked about I don’t know the …

David Gardner

I wasn’t very involved when we first did that study, and essentially we looked at anything that was a government entity, it could be social security, it could be Department of Defense, it could be whatever. My memory says that it was across the board. Certainly it wasn't heavily weighted towards defense spending versus education or something around, and it was very widely spread out?

Ed Pettinella

I know this statistic, this is a SAT question for you Karin. When we look at the data 40% of the residence and that were and government related. They were not to or like or as I am trying to think --.

David Gardner

It was not a government related job.

Ed Pettinella

There was no exposure on the type of company, it was pretty well dispersed. But specifically with the Pentagon and a few others, we don’t know, but my overall guess, I will take a stab at it, it will not and I will be surprised if its even approaching 1%, I will say far less and then just in those couple facilities. If you would like that data we can try to go back to some and see we have, but its very small.

Karin A. Ford - KeyBanc Capital Markets

Same question just on move out to home purchases was up about 200 basis points sequentially year-over-year. I know that was pretty uniformly seen by most of your appears this quarter, but given the nature of your rental base and the fact that they tend not to be home purchasers were you surprised with that tick up?

David Gardner

I would say we are little surprise especially since it came in the fourth quarter that wouldn’t be a normal typical quarter that you would expect people running out for home purchases, but it’s also. I mean, one thing to remember is the fourth quarter probably has a smallest amount of move outs. So on an absolute basis, the higher percentage is coming off of a lower absolute number of move outs. So it may not be a larger number of absolute people to move down the fourth quarter compared to the second or third. It’s just on a percentage basis if it’s up a little. If you look back historically, last time we ticked over up to that 13% level in 2009 and the 20, it was the fourth quarter in that year that it ticked up a little higher and then in ’07 we had every single quarter was higher than that.

So I think it’s a little early to suggest there is any pattern there and again based on the fact that it’s a lower amount of turnover. And rev level ticked down a little bit. So certainly it doesn't seem like the residents are kicking and screaming that rents getting too wild and crazy.

Karin A. Ford - KeyBanc Capital Markets

And then just last question is M&A and privatization has been a hot topic for the apartments this quarter, just to add a few wouldn't mind waiting in on your thoughts, given what the stocks have done and all the discussion around that topic where you think M&A activity might be this year?

Ed Pettinella

I really don't think in ’13 in the apartment sector, there is going to be much in the way of M&A activity. I have been saying it for a couple of years since the great recession until Wall Street comes back and they can supply literally the billions that will be needed to make a non-stock to stock transaction fly. I don't see that right now, so that leaves strong privates that want to buy one of the 12 or public to public. And I think there's a feeling, now the second thought I would say is the markets are strong, you are looking at Geometrics to come out with their economic forecast, they think the apartment sector could do well through 2017 and beyond.

That may not create the breeding ground for CEOs or the Boards to want to throw in the towel and sell out. They feel like there's continued good times ahead. Generally if you look at from my experience in banking, generally people reality to sell at the pinnacle. I don't think it is to say March of ’07, but I don't sense that people think they were at the pinnacle right now so what's the rush. It could be multiple year good time scenarios. So there's a number of factors that would tell me that its probably not going to be robust M&A market for the apartment sector today.

David Gardner

I think two of the elephants in the room are digesting a lot already needs to delever their balance sheet, so those are two potential candidates that would certainly feel like they wouldn't be in the market.

Operator

(Operator Instructions) there are no further questions at this time.

David Gardner

Well, if there are no further questions, we would like to thank you all for your continued interest investing in Home Properties and everybody be safe tonight. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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