Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Charis W. Warshof - Vice President of Investor Relations

David P. Gardner - Chief Financial Officer and Executive Vice President

Edward J. Pettinella - Chief Executive Officer, President, Director and Member of Real Estate Investment Committee

Analysts

Nicholas Joseph - Citigroup Inc, Research Division

Robert Stevenson - Macquarie Research

Ross T. Nussbaum - UBS Investment Bank, Research Division

Jane Wong

Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division

Joshua Patinkin

David Bragg - Green Street Advisors, Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Home Properties (HME) Q1 2013 Earnings Call May 3, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Home Properties First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, May 3, 2013.

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

Charis W. Warshof

Thank you, Luis. Good morning, everyone. 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 schedules and a PDF of the slides on the website in the Investor section, under the heading News and Market Data. The call replay and script will be posted later.

You may notice a new look to our supplemental information this quarter. While the information in the package remains essentially unchanged, we hope you will find the new presentation format more user-friendly. Please let me know if you have any comments.

I'd like to remind you that some of our discussion this morning will involve forward-looking statements. Please refer to the disclosure statement on Slide 2 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 hand corner.

Now David will discuss our financial results for the quarter.

David P. Gardner

Thanks, Charis. Good morning, everyone. The first chart I'll discuss is on Slide 3. This chart shows our first quarter 2013 Funds From Operations per share of $1.05, up 7.5% from last year's first quarter. Operating FFO per share was the same for both periods presented.

Slide 4 shows our core property performance for the quarter at a number of metrics, both year-over-year and sequentially. We defined core properties as same-store properties owned since January 1, 2012.

On a sequential basis, compared to the fourth quarter of 2012, revenues were up 1.8% and expenses were up 5.1%, producing flat NOI growth. Physical occupancy of 95.7% was up 20 basis points. Comparing the results for the quarter to the first quarter a year ago, base rent was up 4.2%, which is the result of a 3.3% increase in average monthly rental rates, plus a 0.9% increase in economic occupancy. Total same property revenue was up 3.7%. Weighted average rent per unit is now $1,277 per month. Physical occupancy was up 80 basis points from the year-ago quarter.

We experienced a 90-basis-point increase in operating and in maintenance expenses, primarily as a result of higher natural gas heating cost from greater usage and higher personnel expense, real estate taxes and snow removal cost, which were partially offset by a decrease in office and telephone, legal and professional costs and property insurance.

The various income and expense changes resulted in a 5.4% increase in NOI compared to last year's first quarter. Some of our same-property NOI reflects incremental investments in our communities above and beyond normal CapEx. After charging ourselves a 6% cost of capital on these expenditures, adjusted NOI for the first quarter of 2013 was 4.7%.

Here are some additional details. The all-in weighted average natural gas cost for the 2012/2013 heating season was $5.05 per decatherm, which compares to the cost for the 2011/2012 heating season of $5.70. For the upcoming 2013/2014 heating season, we have 99% fixed for weighted average cost for fixed and floating of $4.69 per decatherm. So they keep coming down nicely year-over-year.

Turnover for the quarter was 8%, down from 8.1% in the first quarter of 2012 and down from the 8.6% we experienced last quarter. The reason for move-out related to employment was 14.7%, up slightly from the fourth quarter level of 14.1%. Move-outs due to rent level were 9.9%, down from the 10.5% from the fourth quarter.

Bad debt at 91 basis points was down from 96 basis points in the first quarter last year. This is the lowest level we have seen for bad debts since before the recession.

Looking now at capital market activities on Slide 5. You'll see that in 2013, we issued shares through our ATM program for net proceeds of $29 million, which was used for our rehab and repositioning activities and development needs. We repaid $60 million of mortgages, adding 2.9% to our unencumbered asset pool. Our lower leverage provides another benefit, which is a 15-basis-point reduction in the spread on both of our line of credit, which has $169 million outstanding today, and on the $250 million bank term loan. In addition, it reduces our annual facility fee by 7.5 basis points. The combination of these reductions will produce over $800,000 or $0.013 per share in annual run rate savings in interest expense starting this month.

Slide 6 shows our current capital structure. With the stock price of $63.42 at the end of the 2013 first quarter, leverage was 40.3% on a total market cap of $6.6 billion, with approximately 87% of debt at fixed rates.

On Slide 7, the chart shows our progression on key debt and credit metrics over the last 5 years, as a result of various capital market initiatives. These have resulted in the stronger metrics you see on the chart. Debt to total value is down to 43% and secured debt to value to 33%, all calculated based on our conservative line of credit valuation metrics.

The unencumbered asset pool has increased from 20% to 42%. We improved net debt to EBITDA to 6.9x and both our interest coverage and fixed charge coverage ratios increased. These improvements give us more financial flexibility and continued to put us in better position to pursue at an investment-grade rating from S&P or Moody's later this year to complement the Fitch investment-grade rating we have currently.

Turning now to guidance. First, I want to briefly review how we did in the first quarter compared to our expectations. For the quarter, at $1.05 per share, FFO and OFFO were $0.02 above the midpoint of guidance we provided. The slight miss in revenue was a result of a milder winter compared to expectations. This produces expense savings in utilities but also lower utility reimbursement revenue. Core property NOI was $0.017 better than anticipated, primarily from a better expense performance, largely due to favorable insurance cost experience and other across-the-board savings. With various other small changes, we reported FFO $0.02 higher than the guidance midpoint.

Now I'll turn to guidance for the balance of the year. I would suggest you look at our supplemental, where we provide a couple of pages of more detailed assumptions that are in the earnings news release. We have left future guidance mostly unchanged, tweaking a few items. Similar to the last few years, we are waiting for the end of the second quarter and the results from the very important spring leasing season before we make changes.

For 2013, we expect FFO to be in the range of $4.32 to $4.44 or a midpoint of $4.38, $0.02 higher than our previous guidance based solely on the $0.02 beat in the first quarter. This will produce FFO growth of 6.2% at the midpoint compared to 2012.

Operating FFO is expected to be $4.35 to $4.47 or $4.41 at the midpoint. The difference between FFO and operating FFO is solely due to expensed acquisition cost assumed at $0.03 per share.

The range of same-store revenue growth remains unchanged from the original guidance at 3.5% to 4.5% for the year. The range for expense growth has been reduced from the original 3% to 4% range to reflect the first quarter's favorable result. The new expense growth range is 2.5% to 3.5%. Same-store NOI growth remains unchanged at 3.5% to 4.5%.

We have decreased the range for acquisitions from $200 million to $300 million to a range of $150 million to $250 million for the year. The dispositions range was increased from $200 million to $300 million to now a range of $250 million to $350 million. Essentially, we feel with our strong start in dispositions, we should be at the high end of our original range, with acquisitions coming at the low end of the original range.

For development, we are projecting we will spend about $115 million for the ongoing construction of Eleven55 Ripley and the Courts at Spring Mill Station.

Please go to the next slide, #9, and I'll now turn it over to Ed.

Edward J. Pettinella

Thanks, David. As you heard from David's review of our numbers, the first quarter of 2013 was slightly better than we had anticipated, with growth continuing at a good pace although not at the dramatic levels of the year ago. Apartment markets and fundamentals are still healthy, and I am pleased with the solid results our team has delivered.

Turning to transaction activity on Slide 9, we had no acquisitions during the quarter. For 2013, as our guidance reflects, we expect asset purchases of $200 million at the midpoint and sales of $300 million. The pipeline of new acquisition deals in the first quarter was less than half of previous years' averages. Brokers are suggesting deal flow is weak in the CBS at Class World. It's possible that post-recession surge in sales activity has peaked for a while, plus there seems to be an ever-increasing investor pool chasing fewer available deals. Owners, rather than selling, are taking advantage of continued low interest rates and locking in debt for 5 to 10 years, enhancing their cash flows while extracting cash now.

On the disposition side, we have completed 3 sales year-to-date, one in D.C., Philly and Long Island, with almost 80% of the value of sales coming from D.C. The sales totaled 669 units for a total sales price of $124 million. Remaining sales will likely be in the mid-Atlantic region, where we currently have 2 properties in our D.C. region listed for sale. After those are sold, our D.C. concentration will be reduced to approximately 28% of units and 31.6% of the company's NOI.

Turning to development on Slide 10. Construction continues on Eleven55 Ripley, with initial occupancy expected in the fall. At the Courts at Spring Mill Station in Conshohocken, Pennsylvania, the foundations for building 1 are substantially completed, and the construction of the precast garage for building 2 has begun.

Also, during the quarter, we completed the purchase of entitled land for development in Tysons Corner, Virginia for $27 million. This project, known as Westpark Tysons, was previously listed on the development supplemental as under contract because it had not yet closed.

Slide 11 shows the monthly changes in new and renewal lease pricing compared to the expiring lease. It also shows the occupancy for each month. In the first and fourth quarters during the winter months, new lease and renewal rent increases typically are not as robust as they are in the prime spring leasing period.

For the first quarter, the increase in the new lease rents was 1.3%, and renewals were up 3.6%. In April, results show new lease rents were up 2.3% from the 1.7% we previously experienced in March. April renewals were 3.6%, up from 3.5% in March. Very, very preliminary results for the first few days of May show a continuation of this positive upward monthly trend. We expect to see higher renewal increases in the coming months, and we were more aggressive with renewal rent notices on leases expiring from June on. With strong occupancy in the greatest number of leases expiring in the third quarter, we expect to see substantial upturn.

Looking forward, we are sending out renewal notices for July with increases in the range of 4% to 8%, with the average closer to 4% to 6%. Experience in our Washington, D.C. market during the first quarter was mixed, with new leases down 0.3% and renewal leases, the highest of any of our main regions, at 4.1%. D.C. renewal increases continue to be the highest among our regions in April with results of 3.9%. New lease April increases in D.C. were up 0.8%. Currently, new supply does not seem to be a major issue for us in our submarkets and at our price point.

On Slide 12, I show the average rent to household income ratio for the company. New residents' ability to pay remain strong. Household income was 84,200 in the first quarter. The ratio of rent to income increased slightly to 17.5%, compared to 17.1% in all of '12. This compares to a high of 20.2% in 2007, which will suggest we are okay with future rent increases. This needs to be balanced against renter fatigue. But in the first quarter, the reason for move-out due to the rent level was actually at the lowest level in the last 2 years. We will continue to monitor that trend.

On Slide 13, we show the same-store revenue growth in our D.C. region in the first quarter compared to all the other multifamily REITs with the assets in D.C., which happens to be 8 out of the 12 public companies in our sector. Our 4% revenue growth compares favorable with average of 3.4%. Based on early indicators in the second quarter for renewal and new lease increases and the first quarter results, D.C.'s performance continues to be positive and stable. I intend to talk more about the D.C. region during the Q&A.

Now some brief comments on our markets in general. Each quarter, we ranked in our markets from high to low based on property management's perception of current market strength. All the markets are performing well, so it is a little tough to really differentiate at this point in the cycle. Nevertheless, we ranked our strongest markets as Boston, followed by suburban New York region, D.C., Philly, Baltimore, Florida and Chicago.

Apartments available to rent, or AATR, which is usually a good indicator of future occupancy, at the end of April was 5.9% at the core properties, down from 6.1% at the end of January.

If you have any questions about specific markets, I will be glad to provide more color during the Q&A, and there is more market-specific information in the supplemental.

That concludes our formal presentation. Now David and I will be happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Nick Joseph with Citi.

Nicholas Joseph - Citigroup Inc, Research Division

Can I get your thoughts on that D.C. market? And now that sequestration has taken effect, have you seen any impact?

Edward J. Pettinella

I think the impact -- first, I'll start with renewal has been relatively strong. I think we had some people look at us cross-eyed back when we came out with our guidance for the year and we said D.C. was still going to be a strong market for us. I think the fact that there is not a lot of our residents directly impacted and we're not in the district at all, we're benefiting from that. If you look at that one slide, we tried to put together since we're last to report, we seem to be holding up. I think we're third in terms of how we're performing of the 8. I think there'll be a continuation of that. Here's my feeling. The noise about D.C. started almost 2 years ago. I think it was last July, August of 2011. But we've continued to hold up well. It's our #1 market. I think it's -- I keep saying each quarter that ticks by, we're more protected, more insulated because of our locations and our resident base. And we still -- after the first quarter, we feel even more strongly about it for us, even though our rent and our NOI is not as strong as others right now this deep into the cycle, the up cycle. We still think it will perform quite well for us. So we're not -- I guess, more walking around kind of testing, we have asked our property managers in D.C., which we have about 12,000 units tied to that region, they do not seem to think that there's a lot of impact. There is a submarket in Bel Air and Baltimore that we might say has a little more impact to it. I was talking to our head of property management just this morning. But other than that, from a broader perspective, we have not seen much impact. If you look at our results quarter after quarter, they've been incredibly stable on the renewal side, and we're seeing a nice pickup in second half of April and coming into early May. On the new side for D.C., we're seeing the annual big pickup that we're expecting over the next couple of months. I don't know if that starts to answer how we feel about it?

Nicholas Joseph - Citigroup Inc, Research Division

Yes, it does. And then in terms of the transaction market, you mentioned that there's not a lot on the market and there's an increase in number of people chasing the deals. So could this be an opportunity to sell additional assets? And could you see yourself exceeding the top end of the guidance?

Edward J. Pettinella

It's possible. We've done about $120 million with the one in Long Island and certainly Falkland in D.C. The 2 that we referred who were about another $188 million, quite frankly, those closed in the second or third or third and fourth quarter, that those deals -- 4 deals I just mentioned will add up to the $300 million. It is conceivable given -- it's kind of strange out there. We like the fact that we're one of the few publics playing in the CB market. But at the same time, the 3.5% money is kind of hard to resist by the existing owners. So when they try to make that decision to sell, it's hard. And since that shrinks the universe where we believe right now the volume is down about 56% from a year ago in terms of the CB deals we typically look at and the ones that we liked. And I do think it's -- what I said in the script, that they are electing not to sell or they're electing to refinance, take cash out. We also thought, for us, we are the major OP unit player on East Coast. What is really unusual is with the capital gains going from 15% to just under 24%. Traditionally, we have seen people come to us with OP Units, but I believe it's the unprecedented low interest rates that has almost completely curbed that process for us. But at some point, I believe when interest rates start to rise and if capital gains and other taxes keep rising, you'll probably see that pick up a little bit. But the actual pie, so look out for deals that actually work, is shrinking. And of the ones we're looking at, we just don't seem to see anything that pencils out from a pro forma basis, Nick.

Operator

And our next question comes from the line of Rob Stevenson with Macquarie.

Robert Stevenson - Macquarie Research

Dave, when you think about the reduction in the same-store expense guidance over the remainder of the end of year and how that sort of plays out, how much of that is lower expected energy cost at the back end of the year when it starts getting cold? How much of that is other items and what's the sort of major change from here? Obviously, you ran substantially better than your guidance in the first quarter. But over the rest of the year, what continues to run better and what starts to revert back to a higher level?

David P. Gardner

Well, I don't want to mislead. Technically, I made the change in the annual guidance but it was 100% based on the fact that we came in at 0.9% versus I think we were projecting and I think it was 3.6% that we were projecting expense increases to be. So it's not -- in my mind, I'm not changing second, third or fourth quarters. I'm just kind of capturing the beat I had in the first. And I think the beat we had in the first, certainly some of that was winter-related. I mean, obviously, we had a winter versus a year ago, where we basically didn't even see winter. So we knew expenses are going to be higher, but it still came in better than a typical normal winter for us. We always budget for normalcy and it was a little warmer, a little less snow, so we definitely had some savings there. I'm not really anticipating a lot of the positives to carry forward necessarily in the second, third or fourth quarter. So I mean, again, we could get lucky and have another better winter in the fourth quarter and that could create some savings because, again, we always budget for what we would call a normal typical 30-year average snowfall in temperatures.

Robert Stevenson - Macquarie Research

Okay. And then are you seeing -- I mean, you guys have historically been a big user of Fannie and Freddie financing. Have you seen any changes at the margin yet from the prospective changes going on there in the future?

David P. Gardner

Well, first, I'll say, we certainly still stay up to speed on what's going on with Fannie and Freddie. I will also acknowledge that we have not placed a new Fannie and Freddie loan for I think it's almost 2 years now. We assumed one small GSE loan last year with an acquisition. Otherwise, every loan that has matured, we've paid off. But certainly, we do stay in touch with them. We keep great relationships with them. We're not seeing really any changes, and I know they a few months ago announced that they we're going to reduce some of their volume by 10%. But I think that's going to come more in maybe players that are of lesser caliber. I mean, somebody like us, we're not A properties but we're good, solid B properties. They know that we're going to put significant dollars into those properties. So somebody -- a player like us is, I think, always going to have access to Fannie and Freddie would seem similar underwriting. I think more of the moms-and-pops, the one-offs, maybe they're going to be the ones that are going to not have as much availability, but we don't really see any changes yet at all.

Robert Stevenson - Macquarie Research

Okay. And then, Ed, Florida has been relatively a source of strength for you guys over the last few quarters, I mean, both on new and renewals much better than the overall company. You guys have talked about before exiting that market. You still think that, that's a longer-term exit? Is it now the time with the strength? Is it a market that you're thinking about adding to? Where are you in the thought process on Florida these days?

Edward J. Pettinella

You know I feel like a drug addict. I've been asked that a lot lately. I'm trying to get off the drug -- the Florida drug program. No, we only have the 800 units down there. We're steadfast in our thinking that property is going to disappear in the third quarter of 2015 when the prepayment -- large prepayment penalty burns off. What we've learned while we're down there, and you're right, we're doing -- we're basking in the sun literally and figuratively right now. But it's too volatile. We can't get another 19 to 23 properties to join what we have down there now to turn it to a full-fledged region. When we work our CapEx, we need to have the economies of scale to hit the efficient frontier of making money in the rehab business. So for a number of reasons, we're on a plan to exit down there. It's just it doesn't fit the beta, the volatility of the rest of our portfolio. Especially when the markets turn south, home always excels, and I think Florida works directly against us. And I don't -- in my heart and mind, I don't believe I can get those other 20-plus properties anytime soon at the levels we'd like to see.

Robert Stevenson - Macquarie Research

Okay. And then just one quick housekeeping question. On Slide 12 of the presentation, on the average rent to lease income, are those numbers based on a same-store portfolio? Or is that what the company's portfolio look like in '07 and '08? and not adjusted for the current market?

Edward J. Pettinella

Well, it's basically the same-store pool in that year. So whatever was considered same-store in '08 or '09 or whatever is what's in there. And as a reminder, these are always numbers that reflect the people that are applying for leases and going far enough in the process where we're familiar with their earnings. So it's not necessarily 100% reflective of even the same-store pool this year. So it's only new lease applicants that we're collecting that data on.

Operator

And our next question comes from the line of Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Question with regarding the turnover -- rather the traffic in the first quarter. I see it was down 5.3% year-over-year, and it was really sort of varied across the portfolio, where you had Boston and Long Island quite strong but weakness in Washington, Florida and Baltimore. Can you comment a little bit on those traffic trends and perhaps some steps you're taking to try to drive some stronger traffic in those markets where weakened?

Edward J. Pettinella

Yes, I think one of the -- it's hard to read into how much of this is from our higher occupancy. But if you remember, we have -- our occupancy is depending on if it's economic or physical, it's like 80 to 90 bps higher than it was a year ago. Sequentially, we picked up some occupancy. So it's -- we're seeing levels that are historically very high for us. Anytime we're at or near 96%, that's a pretty significant level, and I think it just reduces the ultimate available units that are coming available to rent. And it kind of has a governor effect on how much traffic. If you look at years where we had much higher traffic, I think you'll see that occupancy was just -- it's surprising how 1% or 1.5% lower occupancy has such a -- it can drive the amount of traffic. So I think we're pleased where also turnover is down slightly, so more people are deciding to stay and renew. So we have that many more or less new leases that we're renting for new folks. So we're not reading anything "negative" in this that we have to work on. I think it's just reflective mostly of the occupancy levels that we're at.

Ross T. Nussbaum - UBS Investment Bank, Research Division

And do you think the negative 13% you had in D.C. during the quarter is really not attributable at all to sequestration or what's going on in D.C. economy?

Edward J. Pettinella

Our turnover is down 5%. More people are staying. Occupancy is pretty high there. We're still getting over 4% renewal increases. It doesn't -- it certainly doesn't feel like that. I mean, if you're looking for an indicator, I can understand how you may go there. But any other indicators we're looking at that reflect the reality of the kind of rents we're getting, we're not really seeing a reduction. And if anything, the last few months have increased. April is better than March. May, so far, it's just early but it's better than April. So things continue to improve in D.C. as expected.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Okay, yes, it sounds that way just from your renewal increases because ordinarily, I think, the revenue management software would tell you to lower rents if your traffic was down, but that doesn't seem to be the case.

David P. Gardner

I think I'm looking right in through early May. D.C. is really -- is holding up. It's right at the top, and Baltimore has bounced back towards the top 2. So we're -- we maybe an enigma, but we feel pretty good about the next 4 to 5 months that we see. We look at our hot sheets. I'm looking at the vacancy levels. D.C. is down in the very low 4s. So we're -- there's no indicators to us to think that we're going to get dinged incrementally any more than what we've seen in the heart of the winter. So we're partly optimistic in the next few months.

Operator

And our next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

Jane Wong

This is Jane for Jana. I Was just wondering on the new development in Tysons, I know it's been in the supplemental for a couple of years now. Can you just remind us how the deal came in place and why the decision to move forward there, given all the new supply that's going to come online in Tysons Corner? And with your core portfolio being more of the B-C assets outside the beltway, those won't be impacted as much by the new supply, but this would be a new development.

Edward J. Pettinella

I think we always knew development is something on the margin that we think we can add value. I mean, our long term -- we're not kidding ourselves. We know that we're a B-C player. That's going to be our major focus. But in situations where we think we can add value and produce a yield that exceeds greatly the kind of cap rate deals that you're seeing on new, I think we'll take advantage of that. Tysons, you got to remember, we're not even starting construction till the second half of '14. It's -- that 694 units is the combination of mid and high rise. It's going to take a while. You're looking at 2016 until we're doing our first leases. And I think it's way off from worrying about right now any kind of higher level of extra supply. Tysons is -- it's a very significant area with significant amount of growth projected in the next 5, 10 years. And we think it's one of the greatest places to be.

David P. Gardner

And I just want to add because this is a key topic in D.C. We turn the spigot off on new a while ago. This is when Ripley gets leased up later this year in Silver Spring. The only one that's on the docket at all of ones we've gone on and bought entitled land is Tysons. But we think it's a market that will -- that has done traditionally very well. But we're probably not seeing a lease up, like David said, till 2016. But leasing -- or development, in general, has been scaled down for us. So we just don't see a lot of activity in between '14 to '16 at this point.

Operator

And our next question comes from the line of Tom Lesnick with Robert W. Baird.

Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division

I'm standing in for Paula. I just wanted to follow up on your commentary on development real quick. How are you guys adjusting your underwriting expectations, given rising construction costs?

Edward J. Pettinella

Yes, to confer a couple of things, the construction costs are more in the lumber area pretty much tied to single-family homes; on the concrete side of the business, where we live and especially with the towers, not as much. I just asked our head of development yesterday, he sees expenses going up 5% to 7% range manageable. The good news for us, the 2 we're working on, Courts at Spring Mill in Philly and Ripley in Silver Spring, the good news there is all the cost structure has been laid in place and predetermined where we feel pretty good about that. So we're not really exposed to anything else other than those 2, which were put the bed at the moment. So that I think -- is that your question, how are we dealing with that in D.C. with development?

Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division

Yes, and have you adjusted your underwriting expectations in terms of yields at all?

Edward J. Pettinella

Well, for us going forward, we really won't look at anything. We're basically not bringing anything new right now. But if we were, it would be tripping over a yield of 7% and un-levered IRR certainly in the 12% to 15% range. Remember, too, we only deal in entitled land or possibly if we do a density play with one of our existing properties. So the risk we were taking is considerably less but still we think we're looking for an initial yield hurdle that would be pretty attractive, given the constraints we've put on what we'll do going forward.

Operator

[Operator Instructions]. And our next question comes from the line of Josh Patinkin with BMO Capital Markets.

Joshua Patinkin

A few on the transactions market. You mentioned the attractive secured financing on C and B assets. Would you mind describing the terms you're seeing or whose lending, is underwriting criteria loosening?

David P. Gardner

Well, again, as I said earlier, we haven't been in that market for almost 2 years now. But I mean, the only people that we've been dealing with is Fannie and Freddie. I mean, we're touching -- we're continuing relationship with insurance companies. But Fannie and Freddie are really the game to consider if you're looking at secured. And I wouldn't say underwriting standards have changed. I don't think they're loosening, but I don't think they're getting that much more difficult. And you're seeing 10-year deals in the, say, mid-3.5, 3.6 range, something like that. So it certainly continues to be very favorable financing on the secured market. But again, we're targeting more unsecured in our future in trying to reduce the amount of secured that we have out there.

David P. Gardner

And I guess the most...

Joshua Patinkin

Sorry, go ahead.

Edward J. Pettinella

I was just saying the most lenient player underwriter out there has been the GSE since the great recession started. So it's continued that way. But as David said, we're just -- we're trying to focus on our ratings, and we're trying to move away from secured lending at this point.

Joshua Patinkin

Right. On the land deals, given the supply dynamics, is there more eagerness for owners to sell entitled land today?

Edward J. Pettinella

No, I would -- that's a good question. I was -- I don't sense in the mid-Atlantic region a pent-up demand of deals on the market or my development head would be probably banging at my door more. No, I would say what we're looking for, I have not seen materially pick up. On the other hand, I need to tell you, we're really not looking. So based on the question earlier, we're not looking to do a lot if any new deals in the D.C. region now. We'll look at Northern Jersey, Philadelphia, Long Island. Those are other markets that we feel comfortable with and -- but small scale. And lastly, for us, we're a relatively small player out of the 10 of 12 that are in this business. We're only looking to trying to bring on 400 units new in the pipeline per year, which is pretty small.

Joshua Patinkin

Okay. And lastly, and not specifically on home, but just given the discounts spend you've used across the sector and the transaction market, is this a good time for a public to private M&A in your opinion?

Edward J. Pettinella

It's hard to say. In our sector, it's been years since anything has been consummated. So I guess until some more activity occurs within the multifamily arena, it's hard to say from our perspective.

Operator

And our next question comes from the line of Dave Bragg with Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

Just on your shift in your plans to be a net seller now for the year, will this mitigate your equity needs? I believe, last quarter, you referenced about $130 million in activity on the ATM has been likely for this year.

David P. Gardner

Well, yes. I mean, I think our plan is still to continue to take advantage of upswings in our stock price to tap the ATM program to offset our upgrade CapEx needs. And you got to remember, we're producing 10-plus percent returns on that. But certainly with an excess right now we're projecting of $100 million of excess proceeds, it will certainly -- obviously, it's another source of great capital. And it will allow us to continue to improve some of our debt metrics and such without necessarily having to tap the equity markets.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And on the supply-demand imbalance in your markets that you mentioned earlier, what is the resulting impact on cap rates for Bs and Cs?

Edward J. Pettinella

I would say there's almost no impact right now, David. It's been incredibly stable. And for the types of deals we're looking at, it's in the high-5s to very low 6s. I was just looking at the first quarter number of deals we've looked but turned down. The average was around 605, and that's just a sample in our regions over the first quarter. And why is that? Well, interest rates are -- short rates are near 0 and long rates are a few percent, and it's just stable. But we have not, from our end, from our acquisitions department, seen almost no movement whatsoever from quarter-to-quarter.

David Bragg - Green Street Advisors, Inc., Research Division

That's interesting. And did I hear you start to say earlier that's conceivable, that you could go over your disposition guidance range?

Edward J. Pettinella

I don't know if I said -- yes, I guess I did say that. Damn, I got to watch out what I say, David. We were at the -- the reason I said that is when you add up what we sold and what we're going and pretty sure we're going to do, we're at $300 million. It's -- there's that possibility. And that kind of ties back into what Dave -- what you asked David about, the need of equity. We think we're in a good position right now, we think, with stable cap rates, low stable cap rates. There is chance that we might be able to sell a little bit more. You know I'm on a major kick to get our -- continue to get our concentration down in the D.C. region. So it is conceivable that we could do more, but we're not actively planning to do more than that. We might feel a little bit different when the pricing starts to come in on $188 million on those 2 deals in late May. It's conceivable. It could happen. So I guess my answer is, we're at 3 -- promising you $300 million. And we could do a little bit more based on how market conditions play out over the next 60 days.

David Bragg - Green Street Advisors, Inc., Research Division

Okay, understood. One more question on this topic. Now that you're selling again for the first time in some time, can you talk about the IRRs that you're achieving on these sales?

David P. Gardner

Sure, Dave. If you look at the -- basically, the $284 million that we've done over the last 2 years, which is actually even a much shorter period. We didn't have our first sale until September. The un-levered IRR in the whole group is like 12.5%. So I think we're pleased with that kind of IRR. For the most part, it's properties that we've owned for a long period of time. We've done a lot of the rehab and CapEx such that the interior units have been upgraded up to probably 90%-plus. And we -- there's also a couple of situations of locations that from a long point -- a long-term point of view, we didn't want to stay in. But I think those IRRs show a great long-term program of buying well, putting into significant dollars that a lot of people talk about, the amount of CapEx we're put it in. But I think it's holding up value very well with IRRs staying healthy.

Operator

And our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Just the first question, the project cost for the project enticement corner were revised upward during the quarter. Was that strictly related to the land purchase?

David P. Gardner

I mean, I think it's 95% is the land. I mean there's a few other little incidentals that we've incurred. But for the most part, that's just the land cost.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. And then second of all, bigger picture question. If you think about redevelopment over the next couple of years, does it make sense to continue to build? I mean, does it makes sense to continue the redevelopments markets like Baltimore and D.C., given the amount of Class A supply coming online? Or would you prefer to keep more of a B-C product at this point and a lower price point?

Edward J. Pettinella

Well, if I understand your question, right, they still are 2 separate markets. Predominately, we're buying something that's 25, 35 years old. And we're taking it from some level of a C quality to a B quality. That clearly makes sense to keep going. We've been doing it since our IPO in '94, and we think we're really good at that.

David P. Gardner

So that's what we described as "redevelopment."

Edward J. Pettinella

And then new development we see is just we're building the high luxury A when we do build them, but we're building -- we're not building a high percentage that of our total portfolio. It's only a couple of percent relative to our base. Did I -- I'm, first, trying to delineate the definition. Are we answering your question?

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

No, I'm just wondering, I mean, if you look at the market, you have quite a bit of Class A product coming on there. Do you really want to be aggressively trying to move up your price point from a Class B -- I mean, Class C to a Class B? And do you think you can get the rent when you're competing against the Class A guy with 6-weeks concession?

Edward J. Pettinella

Well, a couple of thoughts. I don't think -- we really don't -- going from B to C, I would make the statement that we really don't compete with the As at all in any way, shape or form. The price point differential is so great, it could be $1,000, $800 minimum and $1,200, $1,300 on the high end. So we're not worried about the As affecting us. We think there's tremendous need and interest going from a B to a C. That has continued to prove out. I mean, we hit our pinnacle of rehabs in last year, 160. We're down more in the 130-plus range, so we've scaled back a little bit more, trying to figure out what the demand will be out there. And what's great about the rehabs is, as you know, Mike, we can basically turn the spigot off on any property or any region fast, within a week. So we like -- we're not exposed. We're not -- it's not like new development, where once you're pregnant with the project, you've got to pretty much keep rolling. So we feel we're insulated from market conditions on that type of a program, too. We can scale it from $80 million to $160 million, depending on what we think the market demand is and economic conditions, demographic conditions surrounding that market.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

On your redevelopments then in the D.C. metro and Baltimore metro areas, you're still expecting a 10-plus percent return?

Edward J. Pettinella

Absolutely. They cannot -- we will not give them the go-ahead, and that's an interesting point. In the fall, we plan from a budget standpoint how much each property thinks they want to do. So they got some planning, and we bring some of our construction people out to each property and make sure everybody is on the same page. But if it's April, like right now, and they're trying to start it, the way the budgets work, if they can't hit the 10%, they have no incentive to keep rolling because it works against them if they don't hit the minimum of 10%. However, on the flip side, Mike, if they do 13%, they will get the incremental piece of that from an incentive standpoint. So we think we've got the incentive program in sync correlated with what we really want as a corporation.

David P. Gardner

I think I'll give you one example. I mean, Arbor Park of Alexandria, 851 units, is the best prime example we have in D.C. This is a major redevelopment, such that we did take it out of the same-store pool. But if you look at rental rate increases for the first quarter, they're 8.4%. We're putting in much more significant dollars in this rehab than we would have in a typical. We're closing buildings. We're really turning the property around significantly, and we're getting close to double-digit rent increases. So is there weakness in D.C.? We haven't seen it. But it is no way we thought that we're going to slowdown that engine at all. And if anything, if you look at the dollars we're putting in now, that will put in more dollars out in D.C. because there still is demand.

Edward J. Pettinella

And as far as this goes, the key point, the core of what we do, the people leaving for buying new homes, it's still at a relatively low level. Even in an improving economic environment and given the constraints in the banking system, somebody asked earlier, the underwriting is so difficult, even the segment, the 60% that doesn't own or want to own a home, the 30% or 40% that can play in that game, they are struggling coming up with a down payment. So their alternative is to stay with us and go for the upgrade. So we're simply driven by the demand. We're not trying to create the demand. We let the marketplace come to us. But I'm telling you, the demand is there for upgrades.

David P. Gardner

And a couple other observations that I looked at. Historically, if you look at D.C., the reasons for move-outs for home purchase has been about 200 basis points less than what we reported for the company as a whole. And I've also noticed that the reason of giving rent level too high is also about 100 basis points -- 120 basis points less than as a company as a whole. So I mean, we're retaining more residents there. We have less turnover there, so it's a prime candidate for doing the rehabs.

Operator

And there are no further questions at this time. I'll turn the call back to you. Please continue with your presentation.

Edward J. Pettinella

Well, great. If there are no further questions, we'd like to thank you all for your continued interest and investment in Home Properties. Have a great day.

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 lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Home Properties Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts