Home Properties Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 7.14 | About: Home Properties, (HME)

Home Properties (NYSE:HME)

Q4 2013 Earnings Call

February 07, 2014 11:00 am ET

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

Ryan H. Bennett - Zelman & Associates, LLC

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

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

Nicholas Yulico - UBS Investment Bank, Research Division

Stephen Mead - Anchor Capital Advisors, LLC

Richard C. Anderson - BMO Capital Markets U.S.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Ryan Gilbert - Compass Point Research & Trading, LLC, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, February 7, 2014. I would now like to turn the conference over to Ms. Charis Warshof, Vice President, Investor Relations. Please go ahead.

Charis W. Warshof

Thank you. Good morning, everyone. Thank you for joining the Home Properties call today. Our speakers 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 Investors section under the heading News and Market Data. The call replay and script will be posted later.

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 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 fourth quarter 2013 Funds From Operations per share of $1.11, $0.02 higher than last year. FFO per share was at the midpoint of our guidance range of $1.09 to $1.13, and equivalent to the Street's mean estimate. Operating FFO, which adds back real estate acquisition cost, was $1.12 per share. As a reminder, the reported results reflect dilution from the July 2013 equity offering, which will continue in the first half of 2014.

Turning now to full-year results on Slide 4. Both FFO and Operating FFO per share for 2013 were $4.37 rounded, an increase in last year's FFO about $4.13 per share and operating FFO of $4.17 per share. To 2013 FFO per share increase over the prior year was 5.9%, and the increase in OFFO was 4.9%. We had very difficult comps this year since our 2012 year-over-year growth, and both measures was the highest since the company's IPO in 1994.

Slide 5 shows our core property performance for the quarter on a number of metrics, both sequentially and year-over-year. We define Core properties as same-store properties owned since January 1, 2012. On a sequential basis, compared to the third quarter of 2013, base rental revenues were up 0.6% in the fourth quarter, and total revenues were up 1.3%. An increase in operating expenses of 2.3% resulted in NOI growth of 0.7% sequentially. Comparing the results for the quarter to the fourth quarter a year ago, base rental revenues were up 2.6% and total revenues were up 2.7%. Weighted average rent per unit is now $1,309 per month. We experienced a 1.9% increase in operating and maintenance expenses, primarily as a result of higher repairs and maintenance, legal and professional expense and snow removal costs, which were partially offset by decrease in national gas heating cost. The various income and expense changes resulted in a 3.2% increase in NOI compared to last year's fourth quarter.

Here are our a few additional details. For the 2013, 2014 heating season, we have 98.5% of natural gas heating cost fixed at an all-in weighted average cost of $4.70 per decatherm, which compares to the cost for the 2012, 2013 heating season of $5.05. For the '14, '15 heating season at the end of this year we're in today, we have 89.9% fixed for weighted average cost of $4.42. And going out even further, currently, we have 63.3% of cost for the 2015, 2016 heating season locked in at a very favorable weighted average cost of $4.37.

We were especially glad to have so much fixed as spot pricing for natural gas spiked to as high as $5.20 due to the recent cold spell covering much of the country.

Turnover for the quarter was 8.8%, up from 8.6% in last year's fourth quarter. Annual turnover in 2013 was 40.5%, slightly above the 39% we experienced in 2012. The reason for move-out related to employment was 13.1%, up slightly from the 12.9% in the third quarter, and move-outs due to rent level were 10.4%, actually down from the 11.5% the prior quarter. Bad debt at 0.92% compares to 1.03% in the fourth quarter last year, and bad debt for the full year was 0.97%, identical to 2012.

Slide 6 shows our current capital structure. With the stock price of $53.62 at the end of 2013 fourth quarter, leverage was 40.5% on a total market cap of $6.1 billion, with approximately 89% of that at fixed rates.

Turning now to guidance. First, I want to briefly review how we did compare to our expectations for the fourth quarter. For the quarter, FFO was $1.11 per share, at the midpoint of guidance we provided, although we arrived at it a little differently from what we projected. Essentially, revenue was slightly below guidance, but we had better expense control than projected. The biggest positive variance coming from property tax refunds on Long Island that were not expected until early 2014. For the year, FFO of $4.37 was $0.01 above the midpoint of our original guidance. NOI of 4% for the year was the same as original guidance we gave a year ago.

Now I'll turn to guidance for 2014. I would suggest you look at our supplemental where we provide more detailed assumptions. For 2014, we expect FFO to be in the range of $4.44 to $4.60 per share, which will produce FFO per share growth of 1.6% to 5.3% when compared to 2013. 2014's first half results will remain muted from the continued dilution from the public stock offering in July of 2013. We expect same-store revenue growth to be 3.1% at the midpoint for the year. Those regions expecting revenue growth at or above the average are Boston, Florida and Philadelphia, with New Jersey, Long Island and Chicago lagging. Expense growth is projected to be 3.5% at the midpoint. We're coming off 4 years from 2009 to 2012 with negative expense growth and limited 2013 to only a 1.8% increase. We see personnel cost, which represent 24% of our expenses, going up to 5.2%. This is greatly tied to a 20% increase in health insurance from having to deal with ObamaCare. Real estate taxes, representing 27% of our expense spending, is projected to increase 5.6%. As a reminder, in 2013, this line item was up 4.6%, and that's after the positive effect from $2.1 million in special refunds from assessment reductions. We were still projecting to have some success on the assessment front in 2014, but 2013 was a record year for special refunds that we don't think can be repeated. Detail on these 2 line items, as well as all other expense categories, are provided in the supplemental. Same-store NOI growth is expected to be 3% at the midpoint. We are projecting first quarter NOI growth of 1.7%, which will increase steadily in subsequent quarters, resulting in a 3% growth we expect for the full year. Acquisitions are assumed to be in the range of $150 million to $250 million. Dispositions are targeted in a similar amount of $160 million to $210 million, which includes the sale of our Cider Mill property that we had expected to close in 2013, but now are scheduled to close at the end this month in excess of $100 million. For development, we are projecting we will spend about $60 million to complete Eleven55 Ripley and The Courts At Spring Mill Station.

To summarize, we expect slightly slower same-store NOI growth in 2014 of 3%, compared to the 4% in 2013. And reduced OFFO growth of 3.6% in 2014, compared to the 4.9% that we had in 2013.

The quarterly results are almost opposite. We started 2013 with our strongest NOI growth and dipped later in the year. We start 2014 at the low point in the year and expect seasonal improvement going forward.

The beginning of 2014 is also saddled with 2 dilutive items. The small assist from the timing of sales and acquisitions. Half of our sales are projected to occur in February, with acquisition activity not expected until late second quarter. The net cap rates are expected to be somewhat similar for both, but short-term of sale proceeds will pay down very low rate line of credit debt until reinvested longer-term into replacement properties. This creates about $0.015 of dilution. The greater dilution affecting the first and second quarter is a tough comparison we have to the pre and post-equity issuance in July of 2013. We operated the first half of 2013 with much higher leverage. And until we get to the second half of 2014, with apples-to-apples comparison, we will see about $0.02 to $0.03 a quarter dilution. Combined, those result in about $0.065 dilution, all hitting the first 2 quarters.

Please go to the next slide, number 8, and I'll turn it over to Ed.

Edward J. Pettinella

Thanks, David. Looking now at capital markets activity on Slide 8, you'll see that in the fourth quarter, we continued to pay down secured debt, as we did after our July overnight stock offering, returned an additional $57 million in mortgages in the quarter. We had no ATM transactions during the quarter. Perhaps, our biggest accomplishment in the fourth quarter was securing an initial Moody's rating at the investment grade level of Baa2. That rating was a result of a multiple-year strategy to improve various metrics, which I will show you on the next slide. The key goal for us in 2014 is to also seek an investment grade rating from S&P.

Much of our effort in 2013 went into significantly improving balance sheet. Two significant accomplishments in 2013 were the equity offering at the gross price before fees or discount of $65.55 per share, which generated net proceeds of $268 million and the increase in the revolving line of credit to $450 million within an extended term.

During the year, we paid off all $190 million of 2013 fixed secured mortgage maturities and reached out to pay off other loans early for a total of $278 million. These capital market initiatives allowed us to significantly strengthen our balance sheet and key debt and credit metrics.

The slide on Page 9, here on Slide 9, shows the tremendous progress made. Debt-to-total value went from 45.2% at the end of '12 to 38.5% at the end of 2013. Secured debt-to-value, which was 35% at the end of 2012, is now at 28.4%. Value is calculated based on the conservative line of credit valuation metrics. The unencumbered asset pool has increased from 37.5% to 47.8%. We improved the net debt-to-EBITDA to 6.1x, and both our interest coverage and fixed charge coverage ratios increased. The capital market's group did an outstanding job getting us to these levels, which is expected to be maintained or further improved in 2014.

Turning to transaction activity on Slide 10. The acquisition environment was sluggish in 2013, resulting in a smaller universe of deals that met our criteria. We purchased only 2 properties during the year, both in the fourth quarter, for a total of $56 million. One purchase was in the Philly region and the other in the Boston region. We sold one property in the D.C. region in the fourth quarter for $68 million. In 2013, we disposed of a total of 1,013 units for $192 million at a 5.8% cap rate. 86% of the value of sales came from the D.C. region. When the sale of Cider Mill with 864 units is completed at the end of this month, our concentration in D.C. region will be reduced to 28% of our units, compared to 31% at the start of 2013. Before asset sales in 2013 were completed at 11.3% weighted average on leveraged IRR. With the slow acquisition market, we used asset sale proceeds to support our upgrade and development program and to pay down debt, improving the credit metrics shown on the previous slide. The other side of the disposition activities that we have had experienced some dilution since we did not immediately reinvest in other properties.

Turning to development on Slide 11. We have 2 properties under construction, Eleven55 Ripley and The Courts At Spring Mill Station, both of which are proceeding as planned. During the quarter, we completed the purchase of the land parcel in Maryland for $13.8 million that will have approximately 300 units and will be called Concorde Circle. We do not expect to begin construction until late '14 or into 2015.

On Slide 12, our photos of the interiors at Eleven55 Ripley shows the first residents moving in during December. The property is 15% leased as of a couple of days ago.

Slide 13 shows construction underway on the 2 buildings at The Courts At Spring Mill Station outside of Philly. We expect initial movements to begin in June.

Now some brief comments on our markets in general. Each quarter, we rank our markets from high to low based on Property Management's perception of current market strength. This quarter, there were no real changes from the third quarter, when we ranked our strongest markets as -- is from Florida, Boston, followed by suburban New York region, Philly, Chicago, Baltimore and D.C. Apartments Available to rent or ATR, which is usually a good indicator of future occupancy, at the end of January was 6.4% at the Core properties, slightly higher than last year's ATR of 6.3%. 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.

On the topic of our markets, we recently contracted with Ron Witten of Witten Associates. As we do periodically, to conduct a market survey and strategy session for us, the study looks at our 7 major existing markets. In addition to that, we looked at approximately 50 other MSAs this side of the Mississippi just to get a point of reference. We are still in the process of analyzing the results, but I wanted to provide you some early color on what the study revealed about our existing markets. And looking at our markets based on the criteria of long-term opportunity and market volatility, #1 rank was D.C., followed by our Long Island, New Jersey region, and third was Baltimore. While we do not believe it is -- we do believe it is prudent to cap our concentration in any individual geographic market, which we are doing, we continue to look at our markets with a long-term view. From that perspective, both D.C. and Baltimore, which are taking some heat for short-term performance concerns, continues to be a very viable market area for us in the long run.

Now turning to the quarterly changes in new and renewal lease pricing compared to the expiring leases, I am on Slide 16. In the fourth quarter, new lease rents decreased by 0.7%, the first negative growth since May of 2010. Renewed leases were up 3.5%, both new lease and renewal leases follow the same quarterly pattern as they did in prior years. In the fourth quarter, New Jersey had the strongest new lease growth at 2.2%. D.C. was the weakest with new leases down 3%. Renewals were strong across the regions for Chicago, the highest at 4.5%, Long Island up 4.2%, Baltimore at 3.8% and Boston at 3.4%. D.C. had renewal increases of 3.3%. In all our regions, both rental rate and revenue growth was positive in the quarter. For the full year of 2013, new leases were up 1.5% compared to 2.6% in '12. Renewals were up 3.7% versus 3.8% the prior year, virtually unchanged. Subsequent to the end of the fourth quarter, we saw a dip in new leases in January, but very preliminary positive results in early February showing a bounce-back of substantial nature in new lease rents. Renewals, which represents 60% of our leases, are coming in at just under 3% in the first quarter so far of '14. Looking forward, we are sending out renewal notices for April now with increases in the range of 3% to 6%.

Just a few comments on the decision to increase the dividend. The dividend of $0.73 for the quarter ending December 31, '13, that was announced last Monday is an increase of $0.03 per share, or 4.3%, from the prior quarterly dividend rate. The annualized dividend of $2.92 per share represents a yield of 5.2% based on the January 31 closing price of $55.75, which was the closing price the day 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 solid operating results we achieved in 2013 and the expectation that will continue in 2014. It also is consistent with our commitment to raise the dividend levels as operating results warrant, which has been our long-held dividend philosophy.

My last chart on Slide 18 shows return on invested capitals published by KeyBanc on December 31, '13. This metric calculates the relationship between recurring EBITDA and average assets before depreciation. We have been asked before to include this type of information on the call to better explain the value of our capital expenditures and what they add to the bottom line. So we've included it at the end of this year.

Home, as you can see, is near the top of the charts. And actually since this chart's been put together, this week's KeyBanc report shows as we've moved up to #2 versus the third slot. This shows that our assets are able to generate superior earnings. And same-store NOI comparison to peers, we acknowledge we received a benefit from the upgrading of units and repositioning of properties. But return on invested capital should be considered an apples-to-apples comparison due to the fact that all of our excess CapEx spend is also included in the denominator. This also is not a 1-year aberration. Looking back, the past 7 years on this metric, we have been in the upper quartile the entire period.

So in conclusion, we are pleased with the consistency of our full cycle performance. Our Core properties, recently acquired properties and newly developed properties are producing well. We made significant strides in strengthening our capital structure, which culminated in a Moody's investment grade rating in 2013. For this year, 2014, we see overall apartment fundamentals experiencing an orderly deceleration or moderation. Occupancy levels have been more difficult to hold with weaker pricing power. Unemployment remains the primary problem, but is continuing to improve. Supply starts continue to be a concern, but longer-term demographic and population trends are favorable for this sector. Consumer confidence and demand are increasing. Manufacturing is growing. CPI is still tame and GDP is growing. Debt capital is available at attractive pricing, and interest rates remain alow.

Talking -- taking all these factors into consideration, we are looking forward to another healthy year in 2014. That concludes our formal presentation. Now David and I will be happy to answer any questions you might have.

Question-and-Answer Session

Operator

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

Nicholas Joseph - Citigroup Inc, Research Division

Can you talk more about D.C., Baltimore and Philadelphia in terms of what you're seeing in those markets? And what gives you the confidence that same-store revenue growth will accelerate in 2014 from 2013?

Edward J. Pettinella

This is Ed. I've mentioned during my talk that we're more optimistic. I just made -- set the tone. We noticed a weakening occurring last summer and then the precipitous drop primarily in D.C., subsequently a little more in Baltimore and Philly. And it was odd for us because that only occurred for us in our 20 years during the recessionary period. I think sequestration and talk of a shutdown pull or caused part of it, maybe supply played somewhere old but in the CB world we're in, it's less likely. But it caused this pause. At that point, we also made the decision not to try to push rents. We felt that we were getting too little upside for burning up too much occupancy. So we kind of let the market do its thing, and that's occurred pretty much through the first half of January. The last 3 to 4 weeks, we're seeing a precipitous swing the other way. As I mentioned, about 2.3% improvement on new leases. And it's happening across the board and including the markets you mentioned. We're also in the period of time now where we're going to be a little more aggressive in pushing rents. So I finally feel they're after multiple months, there may be an opportunity for us to start being a little more aggressive along with the markets possibly being more conducive to accepting higher price increases.

David P. Gardner

I'll just add to that a little bit more detail on some of the submarkets in those 3 regions that you talked about. For the first quarter, we are projecting definitely a pickup in occupancy. That's where, I think, we've lost a lot in the third and fourth quarters. D.C., we expect to pick up 60 bps; Philly, 50 bps; and Baltimore about 10 bps. But if you look at D.C. metro and you look at the Maryland suburbs, those are the weakest suburbs, it's like 2,500 units. It represents about 20% in that region. The low point between the third and fourth quarter in those 2,500 units was down to 92.1%. Today, they're up 94.5% or 2.4% better. In Baltimore, the Northeast suburbs, 2,700 units. About 26% of that region, the low point of 92.5%. Today, we're at 95.2%, that's up 3%. And in Philadelphia, Allentown is included in that region. That definitely has been weaker than the closer in suburbs. 1,100 units represents 22% of that region. The low point in the third and fourth quarter was 92.9%. We're up to 97% or up 4.1%. So I think our weakest pockets, we've been doing a lot of heavy lifting, less aggressive in pricing, getting fannies in the seats. And I think we're going to see some definite improvement in occupancies as we swing into the first quarter here.

Nicholas Joseph - Citigroup Inc, Research Division

Great. And then, in terms of the land purchase, what are your thoughts about development at this point of the cycle?

Edward J. Pettinella

This is something that's been worked on for a couple of years. It's in Baltimore. So about 1.5 miles from the airport, BWI. It's going to be garden style. It's to be in the 4-storey, 3 to 5-storey range. And it's not an -- certainly not in D.C. proper. Our development, as you heard me saying in my speech, that it's like there's a likelihood that not a lot, if anything will actually come out of the ground for Home. Second comment I would make, we've already made a statement on our presence in development, which is the smallest of the 10 players that are in the game. So we're -- we don't see -- we're going to continue along those lines, be very conservative. We're going to finish off Ripley. We're going to finish of Mill Station in Philly. And take a step back and see how the markets play out and only move forward with new developments as we see conditions warrant.

Nicholas Joseph - Citigroup Inc, Research Division

So what's the expected yield on that land parcel you started in late '14?

Edward J. Pettinella

I want to say it's right around 7%. The last, I think, it was about 6 weeks ago and before I went to the board, it's the last I saw, 7% yield.

Operator

Our next question comes from the line of Bryan [sic] (Ryan) Bennett with Zelman and Associates.

Ryan H. Bennett - Zelman & Associates, LLC

Just following up on your comments just about January renewals. You said they came in slightly under 3%. I think you said, and I was just curious what you had originally gone out asking for the renewals at?

David P. Gardner

I couldn't hear your voice. What was the last part of what your question was? What -- we went out with renewals when?

Edward J. Pettinella

He want to know what renewals -- a few months ago, what renewals were we sending out for January.

David P. Gardner

It's 3 to 6. But I think that's clearly -- when we were sending renewals out for January, that was probably right in the middle of the sequester, probably 90 days out, that's October. So it was probably the low point of our sense of aggressive conservatism. So we were a little in a more conservative there. And as I kind of detailed earlier, we were trying to shore up some of the mid-Atlantic, lesser regions, lesser pockets of those regions. So we definitely were just, in general, a little less aggressive. But I think we're comfortable that we're going to bound back up into that, probably, 3.5% to 3% -- high 3% range for the balance of the year.

Ryan H. Bennett - Zelman & Associates, LLC

Okay. And just to follow-up on that then. You mentioned the sequester be in pressure a few months ago. For the bounce-back scenario that you're modeling out, do you have underlying employment and income kind of projections for your markets that kind of underlies that?

Edward J. Pettinella

The best -- what we follow is we know within our specific MSAs, especially in D.C. and our neighborhoods. The unemployment is still hovering around 5.6%, which is still one of the lowest in the nation. So, and you also heard me earlier, we just finished with the Witten Associates report. We feel we're -- we feel very comfortable with our position in D.C. As I matter of fact, it was talked about at the last call when we scaled down. We like the 28% level. We may deviate 1% or 2%, but there's no plans to, really, materially scale down our acquisitions in D.C. We like our portfolio. It's performed well in the past decade. It's struggling today. It's improving a little bit now. But the next 5 to 10 years, through multiple sources, would indicate that we're going to do very well in that market. So we're holding. You're noticing we have not suggested any new acquisitions in the D.C. area. We want to bolster our other regions up. We did 2 in -- 1 in Philly, 1 in Boston. I think you're going to see, based on our acquisitions pipeline, there'll be more acquisitions targeted in other cities other than the mid-Atlantic to try to balance out our portfolio. But we're not, certainly, not going to knee-jerk on the portfolio in D.C.

Ryan H. Bennett - Zelman & Associates, LLC

Okay and just lastly. Just on Eleven55 Ripley. I'm just curious about your leasing strategy for that asset. I guess it's 6% -- 14% or so leased at this point and whether or not you'll speed up the leasing, if there's fair to competition at some market or if you're holding out more to lease up towards the peak leasing season so that you'll have that roll going forward more at the peak leasing season time.

Edward J. Pettinella

Yes. That's a good question. I think we are going to be really positioned well as we come into the next month, especially with the seasonal pickup that starts to occur in D.C. in that time frame. We've -- I think we're still in the process of getting some CFOs [ph] on selected floors. We will have a full complement of offerings available to the marketplace. So I think by the time we talk to you again in 3 months, you're going to see that 15% lease figure go up substantially. A few blocks away, we built East West highway. And we know the market well. We had exceptional lease-up abilities there. I think we finished fifth out of 57 that were done in the 3-year period. So we think we're going to see a similar pattern, and we believe the amenities, the layout is even more superior than East West highway.

David P. Gardner

What we do is we do recognize a little bit more pressure on A versus our B, C properties in D.C. So we have discussed being a little bit more aggressive on lease-up to really capture as much as this spring-summer season that we can.

Operator

Our next question comes from the line of Gaurav Mehta with Cantor Fitzgerald.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

First question I have is on 2014. Can you please break down your new and renewal expectation for your overall portfolio? And also D.C. metro?

David P. Gardner

Our new and renewal, really, is -- we don't segregate that out in our projections. That's more of a historical reference. I think, generally, we would -- obviously, both are starting at a lower point now in the cycle. We would expect, as I mentioned a few minutes ago, renewal to creep back up into the 3.5% to high 4% or, I'm sorry, 3.5% to maybe 3.8%, 3.9% in the middle of the leasing season and may touch upon 4%. So I think new is going to have a similar trajectory that it's always had. The only thing we acknowledged is we're starting out at a little lower point than we did a year ago at this time. But generally, we have a 1.5% increase. The 2%, fourth to first. And then another, probably, at least another 2% to 3% increase second to third. So I think we -- new probably should get back up into that high 2% to low 3% range. Similar to what we did this past year, maybe a little better.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

Okay. Second question I have is on Boston. So if we look at your '14 expectations for Boston, even though your same-store revenue growth is higher than your overall portfolio. But if you compare that to 2013, it seems like Boston experienced largest declines in terms of growth rates. Can you provide more color on what you're seeing in Boston?

David P. Gardner

Yes, Boston, we are expecting a slight reduction in revenue. I think it's -- I think we're also suffering a little bit from expense comparison. We had some great success in Boston last year that won't be repeated. The other thing that Boston enjoyed a lot in 2013, we had significant amount of CapEx dollars being poured out in that region, which definitely helped produce some healthier numbers in that region, that may not be able to fully be repeated. Then I -- it's also a pretty strong occupancy level that it's at already, so it's going to be very difficult to say that we're going to improve upon that. It's close to 96%. So there's not going to be any benefit like we've had historically to pump that up at all.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

Okay. And the last question I have is on move-outs. So transfer within Home portfolio experienced the largest increase in 4Q as compared to 3Q in last year. Could you provide more details on what you're seeing there?

David P. Gardner

Well, I mean, that's kind of a -- it's a kind of an odd one. I mean, it's transfers within HME, but it's -- I don't have a lot of color on that. I mean it could be somebody moving within the community, it could be somebody moving down the street. But the most important thing that we're glad about, that it's the highest reason, but we didn't lose the resident. It may have -- like you said, they may have gone from a 1-bedroom to a 2. They may have gone -- they may have downsized. Again, I can't really give you a significant color on that, but the most important thing is that we're glad that we're -- they're keeping in the family.

Operator

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

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

Just first, just to drill on the revenue growth. I mean, if you look at the last few quarters, you haven't really came in where you kind of guided to. I mean, obviously, you've given us the components for rent growth and occupancy. The big variable on that has obviously been utility reimbursements. What specifically are you dialing in for utility reimbursements from '14?

David P. Gardner

I -- let me just get one little -- it's a little more detail. I got to get something in front of me. We are seeing some -- I mean, it's kind of a mixed bag. Water and sewer, we are expecting to go up. So the reimbursements that we get from there, accordingly, will go up. But we're actually expecting heating costs to go down slightly. I mean, as we detailed before, the cost per decatherm is going down a little bit. So even though we're expecting reimbursements to go up year-over-year, the growth in that is not going to be that large. So we're not -- it's not like we're capturing a big additional amount of utility reimbursement there.

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

So do you expect the growth to be less than the 3.1% at the mix point you guided to?

David P. Gardner

Yes, definitely. So like 2%, 2.5%, something like that.

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

Just in terms of the same-store NOI growth expectation for '14, how much of that is redevelopment-related? I know that's been a big focus of being -- in terms of ramping up redevelopment over the last couple of years. How much of a contributor do you expect that to be to same-store growth in '14?

David P. Gardner

I mean, it's certainly -- we're projecting a similar level as far as gross dollars being put out, right around $100 million. This -- I'd say, this past year, we've probably averaged -- I'd say, maybe 1.5% NOI has come from there. So I would think something similar, hopefully along those lines would be expected. I think areas that we're targeting the most are probably D.C., Philly and Boston, again.

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

Okay. Then just as my -- this is my final follow-up question. Have you seen any reversion in B and C cap rates in the transactions you're looking at? Obviously, first quarter is a pretty late quarter in terms of transaction activity. And then as you're thinking about your typical B-minus, C-plus acquisition with the redevelopment, does it make sense to look a little bit more at age at this point, just given the amount of supply coming online and the potential for merchant voters to get in trouble there, than putting in all the CapEx in your redevelopment if you can buy at a decent price?

Edward J. Pettinella

The first part of your question is -- the interesting thing you raised is, we have one of the few quarter-over-quarter evaluations of the whole portfolio. As you know, we look at every single one of our properties. Virtually unchanged. There is no movement that we saw that we could really pinpoint in any of our markets. So it's stable. We project it to be relatively stable for the next few quarters. Obviously, we'll see what happens if interest rates start to rise, but while there's no material move in interest rates, we think cap rates for the C, B will stay right around where they are at the moment. As, unlikely for us. We know who we are. You -- it was one of your earlier questions, we think we make the 30-plus-percent on the redevelopment, the upgrading. We know that market. We -- it's consistent year in and year out. For us to dive into the A market in any material way, it would have to be an A minus or a B plus for us, Mike, to really want to get in there because the real juice for us is to start the upgrading process. And unfortunately, for us, the way we're -- we operate, if we don't have that component, we just -- we're not as comfortable. The other thing that keeps us is a low volatility, low beta stock, is to stay in a C, B world. So when tough times come, we outperform. We always have. I don't want to mix that up with too many more As. And the other reason, I would say, we would be probably, in our financial model, have a lot of difficulty of having these deals cancel out. And I would say people are probably using revenue lifts in their pro formas that we would not feel comfortable with.

Operator

Our next question comes from the line of Nick Yulico with UBS.

Nicholas Yulico - UBS Investment Bank, Research Division

Just turning to the guidance again. Having a little trouble understanding the bottom end on FFO. Let me see, you guys did 2.5% NOI growth. How does that translate into 1.6% FFO growth?

Edward J. Pettinella

I mean, it's -- the bottom end isn't necessarily strictly tied in to NOI. I mean, it could be a combination of less acquisitions, higher dispositions, and therefore, more dilution coming through there. It could be tied in to interest expense. So I mean, I don't want to limit it to just that one item. It's more of just, hey, a range that we think is reasonable considering all the different metrics that are being discussed.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay. So perhaps that the bottom end implies that you're more of a net seller this year?

Edward J. Pettinella

My best suggestion is look at the midpoint, that is our best guess of where we're going this year. That's the best guess on the midpoint of acquisitions, the midpoint of dispositions. I'm not -- I'm really expecting that's where the sweet spot is. If things change, in '13, we started the year thinking that we're going to be large acquirers. We -- and only ended up acquiring a small, little amount. We had a lot more dilution. Am I planning on this, this year? No. But if we do, that could certainly be one of the factors that moves us to the lower end.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay. And then just kind of another question on CapEx. If you look at your portfolio versus to when you started 2012, the per unit amount on recurring CapEx has been about the same. I mean, have you guys thought about selling, let's say, even more assets to help drive down that recurring CapEx per unit number to help drive a little bit better AFFO growth versus your FFO growth?

David P. Gardner

I think it's kind of -- you really got to dive deeper into just looking at the one calculation that says what's our per unit CapEx spend. What it truly is, is many units that are being rehabbed that we're putting $15,000 a year in, that we're putting $20,000 a year in. That's driving the net calculation. You got other units that are -- some of the newer ones in the portfolio that certainly, that's dramatically lower numbers. So looking at averages is very dangerous when you look at number. Typically, what we're selling are properties that we've -- gone through that significant rehab, it's 90%, 95% rehabbed up. And those are the logical candidates to sell. Until that point, we still have significant amount of inventory that still needs to be rehabbed, and you're going to continue to see averages of that amount. But again, it's a lot of units with little spend and decent amount of units with very large spend. And that averages out to that number.

Nicholas Yulico - UBS Investment Bank, Research Division

Right. No, I appreciate that. And what I'm wondering is if in the next couple of years, there's, at all, a scenario where you can actually drive down your overall recurring or redevelopment CapEx dollars to show better AFFO growth than your FFO growth?

David P. Gardner

Well, I mean, I think our recurring is, generally, we show it, we believe it's at -- in the $800- to $850-per-unit range per unit. I have no idea what various analysts and others use as a number when you're looking at the -- a blended spend of $3,000 per unit including upgrade. I don't think we're ever going to drive down that $850 per unit. It's the nature of the beast. We're talking about normal recurring stuff that has to be spent year in and year out. So we're not going to drive that number down. And it's up to everyone to study and to decide what they're going to do between the $850 and the $3,000.

Operator

Our next question comes from the line of Stephen Mead with Anchor Capital Advisors.

Stephen Mead - Anchor Capital Advisors, LLC

Could you just go down each market and talk about, in your relevant space, in terms of rent levels and competition, what does, now, the new supply look like in terms of which markets have the highest increase in terms of new supply coming to market?

Edward J. Pettinella

Hands down, for us, it's pretty simple. D.C. is #1 predominantly in the district where we're not. But that -- we're -- we have very little impact. I think the interesting thing in D.C., on supply, we've got 2/3 outside the district and outside the Beltway, for that matter. About 1/3, between the district and the -- and outer loop. So that's one of the reasons, I think, we've been holding up quarter after quarter relative to the other 7 of current 11 that are -- in our sector that are in D.C. We -- the C, B, high-barrier, high-growth, more-in-the-burbs has protected us. Then you go to the other end of the spectrum where our properties are located outside the Beltways and Philly and Baltimore, very little supply. Very, very little. It's -- there's no material impact to us there. The same can be said for Northern Jersey and Long Island. As I think, through Chicago, in the burbs, there's no development going on around our C, B properties are. So when you stop to think about it, there's not -- outside of D.C., it's a precipitous drop off in terms of -- to push the supply issue for Home, given that the quality we have and where they're located, for the most part.

Stephen Mead - Anchor Capital Advisors, LLC

And then as you look at the transition from the DeMarco to Watt at Fannie Mae and Freddie Mac, do you have any sort of perception as to any potential changes in terms of as a funding source for multifamily from the GSEs?

Edward J. Pettinella

Why we're going to...

David P. Gardner

[indiscernible] That was like adjusted Multi-family, in general.

Edward J. Pettinella

Yes. I don't know. All of us -- a couple of things I would say right now, one, and I'll use Home as a good example, we worked feverishly the last few years to get our rank ratings, and we're going to get that last one, S&P. We've got Fitch and Moody's now. The type of borrowing we're going to do on the secured side with having the benefit of those ratings, in some cases, could be through the pricing of the GSEs. You're talking -- we all -- we're -- we have historically been one of the largest borrowers from them. We haven't borrowed anything in the last few years, and we're working off the premise that we'll do -- we'll operate just nicely on our own without the GSEs. Until our ratios get even higher or more improved than what they are now in terms of our balance sheet ratios, we're probably not going to be borrowing through them that much. I think it's still a jump ball in terms of what ultimately happens with the GSEs. I think if you talk to the board, National Multi Housing Council and NAREIT, I think the most of us think that there'll be some version of the GSE still out there once they tackle it. So I think we'll still be the recipient of having those borrowing alternatives. But in the unlikely case they're not there, I think that our sector all has ratings, just so we could tap the other markets. One last comment, I continue to tell people, light companies, the U.S. banking system would love to collapse in on the GSE market once they -- if in fact, they left in a major or total way. So I really don't think there'll be a major shift in borrowing cost in our sector if something more materially happened in a negative way with the GSEs.

Stephen Mead - Anchor Capital Advisors, LLC

And then going back to -- when do you go to S&P, and do you have any plans to do at-the-market stock offerings in 2014?

David P. Gardner

S&P is probably -- we're still probably preparing in the next month or 2. We would probably approach them maybe during the second quarter, after first quarter earnings are available. And depending on how long the process takes, we may hear something by the second or the beginning of the third quarter. ATM issuance, we've always, I think, been very conscious of where our stock price is during cycles. And we always try to hit higher stock prices and closer NAV. In my model, I've assumed no issuances. We would have to see significant improvement in our stock price to warrant considering that. So I think on the -- I think what you -- where you see a lot more sources coming in these days, last year and this year, is in sale of properties that help offset acquisitions in our revenue -- other CapEx and development needs. So I would say, 0 equity right now. And we certainly don't feel that we need to dramatically improve numbers for S&P. I think there'll be some natural improvement just by having better -- the better NOI growth. We're certainly paying off any of the maturing secured loans, and planning on a larger unsecured bond offering later in this year, again, will improve the secured, unsecured kind of relationship. So clearly, no equity needed at all.

Operator

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

Richard C. Anderson - BMO Capital Markets U.S.

When you talked about the disposition gets you to D.C. exposure to 21% after the next one, is that what you said?

David P. Gardner

28%.

Edward J. Pettinella

28%. [indiscernible] account right. And we're pretty much at the level we feel we want to be at this point. We want to...

Richard C. Anderson - BMO Capital Markets U.S.

Okay, so -- go ahead, Ed.

Edward J. Pettinella

No, I was just going to say, we just wanted to get below 30%, and we're just about where we need to be, especially after the -- one more sale, Cider Mill, takes place here, I think, at the end of the month of February.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. So you also mentioned that about D.C. as a long-term market. You're doing your study with Witten, and I'm just curious how you put that observation into action. You've been a seller, obviously, but now that sounds like you'd be a buyer. How do you turn the page on what you've done? And is any of the $200 million of acquisitions that you have in your guidance in, actually, D.C.?

Edward J. Pettinella

Here's how we're looking at it. When we went and started to go through the rating agencies, they wanted us to get below 30%, and so did most of the analysts and investors. It's just that the concentration level, it was one of the higher concentration levels of any city of any of the 11 or 12 of us. So we now feel like we've accomplished that. I think adding new -- what I believe, we'll do more acquisitions certainly in '14 and '13, that's our feeling. And we want to push acquisitions, but I think you're going to see them occur in a lot of other markets. It doesn't necessarily have to happen in D.C. I said earlier on the call that we like our D.C. portfolio, and we think it's going to perform very well in the future. So we can -- I'm almost envisioning that it will be give-and-take, if we sell one property out of D.C., we'll most likely replace it. We'll stay in that mid-25%, 27% level for the foreseeable future. The Witten study, we're trying to look -- analyze not only our existing markets. We wanted to, really, take another -- get another litmus test in D.C. and Baltimore, and we're ecstatic with the results. I think based on our model that we've worked on with Witten since we started in 2006, we feel we've got very -- a very good homegrown model to evaluate what markets we should get into and stay into. So those markets, we're fine with. That's not ruling out the possibility of -- that there could be further expansion beyond the southern markets along the East Coast. So we're studying that right now, and we'll have more to say on that in future meetings.

Richard C. Anderson - BMO Capital Markets U.S.

Maybe the right D.C. exposure numbers is 29.9%.

Operator

Our next question comes from the line of Haendel St. Juste with Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

So a couple of questions. First, I guess, can you tell us what the portfolio new lease change was in January? I'm not sure if I missed it, but can you give us what the new lease rate overall change in January was for the portfolio, and then for D.C. specifically?

David P. Gardner

We're looking.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. While you're looking, maybe I'll start with another question.

David P. Gardner

It -- new leases in January got down to around a negative 2%. D.C. was a little worse than that, closer to 3%. We've looked at February preliminary. And it's preliminary, but you certainly get a lot of -- a lot of the action occurs in the beginning of the month. The great news is, it's 200 -- on a combined basis, it's 230 basis points improved. Every single market has improved. D.C. has improved 1.6%. So we're very pleased with the initial results as we kind of get out of the low point of December, January kind of thing. Renewals are staying right around that 3% level. I think D.C. is just slightly under that. But again, renewals are holding it in pretty good.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

And can you share the corresponding occupancies?

David P. Gardner

Occupancy came in -- I don't -- it's 94.9%, which I think is pretty darn close to where -- yes, we ended the fourth quarter at 94.9%. So that's not -- well, I guess, that has something as a February that's got it to 95.1%.

Edward J. Pettinella

95.1%.

David P. Gardner

That's the end of January.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

And do you have that number for D.C.?

Edward J. Pettinella

Yes, it's -- that one is 95%.

Edward J. Pettinella

94.5%

David P. Gardner

94.5%

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay, okay. And can you talk a bit about redevelopment opportunities, your outlook for redevelopment in the portfolio today? What you're budgeting for spend this year? What type of yields you think you could generate?

David P. Gardner

Well, the redevelopment CapEx that we've put in our earnings guidance was $100 million of revenue generating, upgrading CapEx. I think that's maybe slightly down from what we had in '13, but not significantly. So just a little bit less. We're -- we continue to target that minimum 10% cash-on-cash return. But certainly, many of the -- many of them that have very significant upgrades where you're doing the whole kitchen, the whole bath, we're getting probably closer to 12%, 13%. In an economy like this, it's not at the high point, it's certainly nowhere near the low point. There's always a number of people that are -- feel very comfortable with their situation. They like where they are, but they love an upgraded unit. So we don't anticipate any drop-offs in upgrade potential, and we see a lot of opportunities there.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. Fair enough. And then can you help me understand, then, your continued pursuit for ground-up development when -- I think you mentioned underwriting to about a 6 on ground-up development when the opportunities for redevelopments for portfolio seem pretty substantial.

Edward J. Pettinella

First, the yields we're looking at right now will be in the 7 level, not 6. That's what I said earlier. But development for us is a very, very small piece, the smallest of all the players in the market. And further go on to say that, I think, given where the -- where we are in the cycle, we're watching it very closely. And after Spring Mill Station is done at Philly, that's the last one, we're going to sit back and watch what goes on. And remember, the ones we do take on, Falkland Chase is a great example, we are also very open to getting things fully -- to a fully entitled position site-ready. And instead of building out, we may sell it in the open market and take those multiple millions we'll pick up by getting it ready to go. So we're -- we've got a slightly different development strategy than say, Avalon, they -- where they'll build, they'll buy and get it ready and build it out in almost every case.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

So just to clarify, when you say watch what goes on, that should imply that you could be inclined to pursue additional land redevelopment opportunities?

Edward J. Pettinella

Here's what we have in our strategy, to look at only 200 to 300 units per year to put into the pipeline. That's the most we would do, because we feel we have a queue with a couple of density-placed properties we already own, that could be -- also built on. We're looking at those, but very little. As I said in the prepared text, it's quite conceivable we won't do anything else in 2014. That hasn't been fully determined, but that is one likely outcome.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. One last one, if I may. I think it might have been you David, who said earlier in your comments that you expect D and C cap rates to stay where they are for the remainder of the year. If so, kind of curious on your underlying thoughts, strategy and expectations. And can you talk a bit also about buyer appetite for the products you're seeing? Seeing any change in the depth of interest? Any push back on pricing, any retrading, et cetera?

Edward J. Pettinella

I would say -- it was me that said earlier that cap rates have been relatively unchanged. It's hard to -- it would be hard, with any degree of accuracy to say it's moved much. I also think that there's going to be more activity, more deals coming out in the marketplace. The universe of deals for C, B, what we looked at along the East Coast was smaller than it's been for years, the total pie. The competition was pretty intense in '13, but a lot of deals didn't get done either. So people went out to the street, tried to sell and never executed with anybody. I think there will be some more people deciding that, that's what they will do, especially if interest rates start to move up. For some of these owners that have taken advantage of GSE financing or low rates or variable rates, they may feel they're towards the end of the term and don't think they'll be able to roll over at these favorable rates, so they might be more inclined to sell. So this part of the deal -- some of the deals that are shut out of the market because they refinanced, I think, will flow in, in '14 and '15 and hopefully, we'll take -- we'll get a crack at that. No major competition. Incremental competition for us. Well, there's a deal we really like and there's a lot of CapEx opportunities, and a C, many buyers if the -- were prices that we're offering are close to the competition. We're usually the biggest player. We're known for once we do our due diligence closing, no retrading on our part. I would also say, the deals that are getting done, there hasn't been substantial retrading going on in the past 6 months. And I hopefully think that -- I hopefully expect that will be the case in '14 for us, too. Not a lot of retrading.

Operator

Our next question comes from the line of Ryan Gilbert with Compass Point.

Ryan Gilbert - Compass Point Research & Trading, LLC, Research Division

I'm looking at your 2013 acquisition disposition cap rates. It looks like you guys were able to achieve a positive spread, even after trying to take into account the difference between buyers' and sellers' cap rates. And in 2014 you're looking at flat cap rates. So I'm just wondering if the -- is the change -- is the difference between a positive spread and flat cap rates in 2014 just a mix of -- geographic mix of what you're buying and selling?

David P. Gardner

Yes. We -- I would say we did a very good job with sale cap rates that were below the acquisition cap rates. A lot of that was Falkland Chase in D.C. Early in the year, had a 5.5% cap rate and had a lot of -- it was a property that we had spent a lot of effort in getting the approvals for development. I think -- so I think there was some additional value there that we untapped. I think, going forward, the expectation would be sale cap rates that are pretty similar and potentially slightly higher than an acquisition cap rate. So I fully expect to not repeat that. It's the best breakeven and maybe we slipped 10 or 20 basis points and have slight dilution. But that's pretty tough to repeat.

Edward J. Pettinella

I would just tie something that was said earlier. I think if you take Falkland out of there, you might see the rate goal -- weighted rate goal above the 6% on acquisitions. But that also ties to what we've said earlier. Instead of building out, we'll take Falkland, and when it's ready to go, if you don't want to do that many units, like we didn't, we'll sell it in the market, and that gets factored into the net cap rate. But it's a rare situation. But it skewed the weighted cap rate.

Operator

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

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

Given the competitive transaction market, which you alluded to, the large discount at which your shares trade to NAV, which you also alluded to, how often does the board talk about share repurchases instead of incremental acquisitions and new development starts?

Edward J. Pettinella

Yes, Dave, that's a great question. That has come up. What we're doing right now, and I would have to admit and even '13, David and I, how we were trying to gear up for our ratios and get the first major credit rating, and the second one's coming this year, we've been less inclined to do some stock repurchasing at the moment. But in the next number of months, once we get by S&P, we may be a little more open to that. Number two, some of the deals we were looking at in acquisitions in '13, Dave, we may have not been as -- quite as aggressive, especially the ones where we would have to assume debt, because we were trying to lower our GSE secured debt levels. So that played into the game. So I don't know if that helps answer your question.

David P. Gardner

No, I'll just add that certainly, with S&P in the horizon to start down -- to do stock share repurchase probably is not in our near future. I think we're also anxious to fund a -- we'd like to think that we can fund a healthy acquisition level. And doing that with dispositions is the logical course there. And remember, we may buy something at 6% or 6.2%, 6.3% cap rate, but it's usually a valuate opportunity where we can grow that return much -- a pretty high trajectory, the second, third and fourth year out. So we'd hate to have anything to slow us -- that down. The stock repurchase is nice window dressing for a short period of time, but leverage is also something that's near and dear to us now that we don't have to mess with.

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

And second question is as you do the market study that you've referenced a couple of times, are there any markets that you're thinking more about exiting or entering? Is that a reason that you're doing this?

Edward J. Pettinella

Well, we're looking -- we're trying to keep a complete open mind. We've -- the model we built with associates, which we're looking to do a number of things with the output. I think it's premature today to say what we're going to do. But I would tell you, I don't think there's any markets that we really are -- that's screaming off the page on us that we need to sell. We -- the only one that we've publicly announced we would consider selling is our -- under 1,000 units at -- in Florida, in Fort Lauderdale. But outside of that, I think we're -- we like our geographic footprint. We've been fine-tuning it for many years now. The studies would indicate that the greater percentage of where we are has good long-term prospects and limited volatility. And lastly, there may be -- in our future, you don't know what the output will be, after we've continued to analyzed it, could there be some new markets that we might want to enter.

Operator

And there are no further questions at this time. Please continue with your closing remarks.

David P. Gardner

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

Operator

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

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