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Home Properties, Inc. (NYSE:HME)

Q1 2014 Earnings Conference Call

May 2, 2014 11:00 ET

Executives

Charis Warshof - Vice President, Investor Relations

Ed Pettinella - President and Chief Executive Officer

David Gardner - Executive Vice President and Chief Financial Officer

Analysts

Nick Joseph - Citigroup

Ryan Bennett - Zelman & Associates

Michael Salinsky - RBC Capital Markets

Stephen Dye - Robert W. Baird

Haendel St. Juste - Morgan Stanley

Derek Bauer - ISI Group

Dave Bragg - Green Street Advisors

Karin Ford - KeyBanc Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Home Properties’ First Quarter 2014 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Friday, May 2, 2014.

I would now like to turn the conference over to Ms. Charis Warshof, Vice President, Investor Relations. And you have the floor, ma’am.

Charis Warshof - Vice President, Investor Relations

Thanks, Jeff. Good morning. Thank you for joining us on the call today. Our speakers are Ed Pettinella, President and CEO; and David Gardner, Executive Vice President and Chief Financial Officer.

As most of you know, I will be retiring as Vice President, Investor Relations effective June 6. Our IRO, Shelly Doran is on board now and is here in the call. Some of you know Shelly from her many years in IR at Simon Property Group. We are delighted to have Shelly at Home and I look forward to introducing her to those of you she doesn’t know at NAREIT in New York next month. I also look forward to saying goodbye to many of you in person at NAREIT. I thoroughly enjoyed my 13 years at Home Properties working with all of you and the team here at Home. And I wish you all the best.

Continuing on with the call, 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.

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

David Gardner - Executive Vice President and Chief Financial Officer

Thanks, Charis. Good morning, everyone. The first chart I will discuss is in Slide 3. This chart shows our first quarter 2014 funds from operations of $1 per share. FFO per share was $0.04 below the midpoint of our guidance range of $1.02 to $1.06 solely due to higher weather-related expenses and forecast, which was based on typical historical costs for a normal winter. Operating FFO for both periods presented was the same as FFO. As a reminder, the reported results also reflect dilution from the July 2013 equity offering, which will continue to affect comparative results through the second quarter of this year. After that, we start seeing apples-to-apples comparisons with similar year-over-year outstanding shares in the third and fourth quarters producing expected FFO growth in the 5% to 7% range.

Slide 4 provides a clear picture of how results were affected by the winter storms this year. We have seen reports of the country as a whole experienced the worst winter since 1994. And with our concentrated East Coast footprint, we were affected much more than others. For each of our regions, we show the snowfall in inches compared to the normal historical average snowfall. As you can see, we got hammered in every region. Baltimore got hit the hardest with four times the average snowfall. All of our regions, except Boston had at least double the normal snowfall.

Slide 5 shows our core property performance with and without the effects of the winter-related items. Core properties are those same-store properties we have owned since January 1, 2013. Since weather had such a significant impact on us in the quarter, we have included two additional schedules in the supplemental package on Page 19 that list weather-related expenses compared to guidance by line item and by region.

As you can see on the slide, compared to the first quarter a year ago, rent was up 2.1%, which was about what we expected. Utility reimbursement was up 16.3% compared to our forecast of 7.3%. This resulted in an increase in total income of 2.8% as reported. Without that additional income, total income would have been up only 2.4%.Reported operating and maintenance expenses were up 8.9%. Of that increase 5.9% is attributable to the additional winter related cost. Some of those expenses included higher costs for heat and payroll expenses dealing with snow removal. One of the most unusual costs incurred was in the insurance line for claims put in for pipes freezing. Our five year average for this is about $25,000 a year. This year with extended frigid temperatures we saw a close to $800,000 spent dealing with this item over $0.01 a share.

Reported core NOI was down 80 basis points from the year ago quarter, but NOI would have been up 2% if adjusted for the unusual weather effects compared to a normal winter. Here are a few additional details. For the first quarter natural gas heating costs were a weighted average cost of $4.70 per dekatherm, which compares to a cost for the 2013 first quarter of $4.92. For the 2014-2015 heating season we have 91.2% fixed for weighted average cost of $4.46. Going out even further currently we have 75.5% of costs for the 2015-2016 heating season locked in at a very favorable weighted average cost of $4.41.

Turnover for the quarter was 7.9%, down very slightly from the 8% in last year’s first quarter. Traffic was down 9.3% as might be expected from the severe weather. The closing ratios actually were up. The reason for move out related to employment was 13.9%, up from 13.1% in the fourth quarter but down from the 14.7% in the first quarter a year ago. Move outs due to rent level were 9.4%, down from the 10.4% in the prior quarter. Bad debt at 89 basis points compares to 87 basis points in the first quarter last year.

Now I will turn to guidance for the rest of 2014. I would suggest you look at our supplemental where we provide more detailed assumptions. For 2014, we now expect FFO to be in the range from $4.42 to $4.54 per share. We decreased full year guidance by $0.04 at the midpoint to reflect the $0.04 increase in first quarter cost compared to original guidance due to the unusually severe winter weather. We have left future guidance unchanged and we will review it again at the end of the second quarter when we have results from the important spring leasing season on which to base any changes.

For the second quarter of 2014 we expect FFO to be in the range of $1.09 to $1.13 per share. Same store NOI growth for the second quarter is projected to be 2.8% at the midpoint. We are expecting NOI growth to increase steadily in subsequent quarters. We are pleased that top line growth is on target to improve each and every quarter. After seeing a drop off in occupancy starting in the third quarter last year we have clawed our way back such that we expect to close the gap in the next quarter. Both the third and fourth quarters this year are setting up to achieve significant year-over-year occupancy gains. We continued to project acquisitions of $200 million for the year and dispositions of $210 million.

I will now turn it over to Ed.

Ed Pettinella - President and Chief Executive Officer

Thanks Dave. Now some brief comments on our markets in general. Each quarter we have ranked our markets from high to low based on property management’s opinion of each current market strength. This quarter we ranked Florida as our strongest market although we only have 836 units there it is the only market that was not adversely affected by the severe winter weather. Our suburban New York region ranked second followed by Chicago, Boston, Baltimore, Philly and D.C. Apartments available to rent or ATR which is usually a good indicator of future occupancy at the end of April it was 6.3% at the core properties compared to 6.4% a year ago. Compared to first quarter a year ago base rent increased in every region. Sequentially base rental revenues increased from the fourth quarter in all regions except D.C. which experienced a decrease of just one-tenth of a percent.

Total revenues increased in every region on both a sequential and year-over-year basis. If you have any questions about specific markets we will be glad to provide more color during the Q&A and there is more market specific information in the supplemental.

Now, turning to the quarterly changes in new and renewal lease pricing compared to the expiring lease, I am on Slide 8. In the first quarter, new leases – lese rents were up 0.2% or down 0.2% lower than expiring leases, an improvement from the fourth quarter when we experienced the first negative growth since May of 2010. In the first quarter, renewed leases were up 2.9%, both new and renewed leases follow the same quarterly pattern as they did in prior years. In the first quarter, Florida had the strongest growth in new lease rents, which increased 6.9%. New Jersey was next at 2.8%. D.C. was the weakest with new leases down 2.3%. Renewals were positive across the regions with Florida at 4.2%, Chicago and Long Island at 3.4%, Baltimore at 3.3%, Boston at 3% and D.C. at 2.7%. Subsequent to the end of the first quarter, results show a welcome increase in both new and renewed leases.

Next on Slide 9, you can see more detail on monthly changes in new and renewal pricing in 2004. New leases in April were up 2.3% for the portfolio, showing steady upward progress month-over-month since January. Results for May so far show new leases up 3.7% and renewals up 3.1% compared to the expiring leases. We are delighted to see the significant progress in May since it is the first time new lease increases were higher than renewals since July of 2012.

We also show D.C.’s results on this slide, with new lease rents slightly negative in April by 0.7%, but turning positive in May with 0.9% increase versus all leases. D.C. also had steady month-over-month improvement since the beginning of the year mirroring the results in the portfolio overall. D.C. renewals in May were up 3%. Looking forward, we are sending out renewal notices for July with increases in the range of 4% to 6%. We are optimistic about our ability to increase rents during this prime leasing season and about our occupancy levels. With the winter weather behind us, we expect to see more normalized expenses going forward resulting in the guidance David provided you a few minutes ago.

So, in conclusion, except for the effect of the extreme winter weather, our results are where we expected. Our core properties, recently acquired properties and newly developed properties are producing well. Early indications are that we will have a good spring leasing season. We are gearing up for conversations with S&P about initiating our final rating during 2004. From a macroeconomic perspective, we are also optimistic. GDP still little choppy but recovering at a moderate level. Unemployment rates continuing to improve the cost to rent versus a mortgage payment is still favorable and demographic factors are positive along the East Coast for us. While multi-family rental starts are higher than normal in 2014, they are projected to decrease in subsequent years and remain below historic long-term trend lines. Taking all these factors into account, occupancy and rent growth should remain strong leading to my optimism for the balance of ‘14.

Before I turn the mike over, I would personally want to thank Charis Warshof for the great 13 years we have had with the company. And now, David and I will be happy to answer any questions you might have.

Question-and-Answer Session

Operator

Thanks. (Operator Instructions) Your first question comes from the line of Nick Joseph with Citigroup. Please proceed.

Nick Joseph - Citigroup

Great, thanks. I want to get some more color on the trends you are seeing in D.C. and Baltimore, recognizing we are only a few days into May, what do you expect in for new lease rate growth for those two markets and renewal lease rate growth?

Ed Pettinella

Nick, first of all, we are positively surprised. We get surprise as good and bad. It’s been a crazy period of time from last October when the government was wreaking havoc in the supply concerns, but just to give you a sense, March for D.C. was negative 1.3%, and April was 0.7% negative. But this month and we feel it’s sustainable at this point, we have got I think about two-thirds of the leases recorded 0.9% positive. That’s a pretty big whip back of 1.7% or 1.8% increase. Baltimore is even more impressive, it came out in March at 2.6% positive and new 3.4% in April and 4.8% coming in the May. We are encouraged, we were seeing some figures. The overall new leases haven’t been this good since 2012. So we have been in the doldrums no question about it. But I think we are starting to see some good figures coming out of those areas. Also for just to give you more color Nick in Baltimore where it’s popping in Baltimore with the average I said in May is 3.1%, but Baltimore is 3.8%, which is the highest of all of our markets. So and D.C. is hovering still around 3%, so encouraging statistics. Our gut is telling us that this portends as I said earlier in the script a very good spring summer season.

David Gardner

I just want to add one thing it is only May 1, but that historically when we run these reports we get about two-thirds of new leases. We are already aware of what they are going to be, so it’s pretty significant portion of the new leases signed are already in the system. We did the same thing in April. The 1st of April I think it changed 10 basis points form April 1 to the end of the month as a whole. So that 3.7% is a very, very good indicator of where the number is going to be when it all comes out in the balance of May.

Nick Joseph - Citigroup

Great. Thanks for that detail. And then just in terms of renewals for the portfolio overall, I think you mentioned that you are sending them out at 4% to 6%, so what spread have you seen so far this year from where you are sending out the renewals to what you have achieved and what are you expecting going forward for renewals?

Ed Pettinella

Well, I think last quarter on this call we are probably I think we are seeing 3% to 6% and as you can see, we have been averaging more at that lower end, so more like that 3.1%, 3.2% or whatever. Again when we say 4% to 6% I think mostly we are going to tend to be closer to that lower end. There is always a little play in residents in negotiating down a little bit, but we would expect to see in the mid-3 range 3.5% maybe would be a good increase from the 3.1% that we have seen lately.

Nick Joseph - Citigroup

Great. Thanks.

Operator

Your next question comes from the line of with Ryan Bennett with Zelman & Associates. Please proceed.

Ryan Bennett - Zelman & Associates

Hi good morning. Just to clarify where does your occupancy stand today versus your second quarter guidance projection?

Ed Pettinella

Sure, the occupancy today is 95.5% and we have really made some huge strides. If you look at just the quarter standalone it was 95%. If you look at March only compared to the quarter was 95.2%. If you look at April, it was 95.5%. So we are really making huge strides in occupancy and during that period where we are obviously seeing much more aggressive new pricing and renewal pricing. And we are seeing similar again D.C. is always the big topic. We are seeing similar and even better improvements in D.C. occupancy. The quarter, we ended the quarter at 94.1% in D.C. March standalone was 94.4%, so 30 basis points better. And April was up to 94.8%, 70 basis points better. So on all fronts we are feeling very good about the combination of much better pricing and occupancy improving very substantially.

Ryan Bennett - Zelman & Associates

Okay. And just with that as the backdrop with the better occupancy, what percentage of your leasing activity has been new leases so far this quarter and how is that typically compared for this time a year?

Ed Pettinella

Yes, it’s – we’re continuing with the typical 60% or so of our residents are renewing in 40% are new so, there is really – we overly see a tremendous seasonality change there. So, what we saw last year mirrors that about 60-40 so that’s holding in.

Ryan Bennett - Zelman & Associates

Okay got it. And just lastly just on Eleven55, the lease up there, how is that trending relative to your expectations obviously with the weather in the quarter probably little bit slower than you anticipated. Have you seen a pickup so far in April?

Ed Pettinella

I think like generally most of our markets as a whole it’s – there was a lot of pent-up demand with people not being able to get out with winter issues. We saw traffic down in every market in D.C. was no exception and now that April has had a great month, but certainly much improved, we’re back – we’re basically on target to where we – if I look at six months ago, we’re probably in target where we thought we’re going to be. But look at three months ago, we’re probably little behind just because we were already to be much more active in leases and then the weather just killed traffic. So that’s why we kind of moved out the conception final date. We moved out one quarter because that’s also was definitely affected by the winter weather.

Ryan Bennett - Zelman & Associates

Got it, thanks.

Operator

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

Michael Salinsky - RBC Capital Markets

Hi, good morning, guys. Just can you give us an update and could follow-up on that question, it looks like you pushed out Westpark indefinitely there, just can you give us an update on your plans for development overall just in terms of ’14 and when you would expect – what you think it is in terms of the commencement on that?

Ed Pettinella

I’ll make this short and sweet, no new developments will be started in ’14 and what we decide to do beyond ’14, we won’t – we probably won’t have an answer until later on in the year, but there is only two, there is Concord and outside Baltimore and places as you referred to D.C., but both those an ice at this point. We’re finishing off, we’re almost we just talked about Ripley that’s being leased up and we’ll start leasing in the few months in their one other in Philadelphia and that’s really all we have, but no new.

Michael Salinsky - RBC Capital Markets

Okay. Can you give us just an update on Eleven55 Ripley, how that’s trending the yield versus expectations?

Ed Pettinella

I think the yield is in the low, I think as low 6s, like 61, 62 there about – it’s I think construction cost probably and end up to be a little over due to some of the time delays with weather, but I think we’re also seeing there is not as much competition. I think we’re hitting the market at a reasonably good time as far as in that general facility where other new product is available as somewhat limited. And as you can see by our success in improving occupancy and some of our other product that I think average rents are going to be a little better than expect so it’s kind of washing off each other and be in that low 6 range.

Michael Salinsky - RBC Capital Markets

Okay, that’s helpful. Third question just in terms of the acquisition pipeline at this point, normally start seeing activity pickup, is that filing in normal seasonal pattern and have you seen any compression or reversion in cap rates in the last call at 90 days?

Ed Pettinella

It’s been virtually – I will start with the second point first, cap rates have been relatively constant for a long time now. Regarding our pipeline, we are seeing a very robust pipeline at this point. In multiple cities, we’re looking at properties in Boston, Philadelphia, Chicago. So we are, if anything we do in the Mid-Atlantic, which is I think slim to none at this point. We would just be – we would be churning to stay at the 28% that I think we alluded to in the script. We have come down from 31%. We mentioned that we wanted to get that to their level. That was our own strategic objective. We have hit it. So, I think you are going to see some opportunities. We like the yields, Mike, they are in the low 6s, the IRRs, un-leveraged IRRs in the 7.5%, some up to 8.5%. So, there is deals out there, where we are sticking to our value-add. These are virtually all sees that have – they have tremendous upgrade capabilities. And if we churn, we are going to be getting out of the ones that basically we have played the upgrade rehab chip completely.

Michael Salinsky - RBC Capital Markets

(indiscernible) before.

Ed Pettinella

Pardon me? Hello?

Operator

And it appears he is dropped out of the queue. Our next question comes from the line of Stephen Dye with Robert W. Baird. Please proceed.

Stephen Dye - Robert W. Baird

Good morning. I am standing in for Paul today. So, thanks for the color on your D.C. exposure, you mentioned you are looking at properties in Boston, Philly, Chicago, which of those markets do you want to see rise up in terms of your exposure level?

Ed Pettinella

I commented a couple of ways. Boston and Chicago are half, probably three quarters and a half respectively of a full regional loaf in terms of where we want to go with units. The efficient frontier would be D.C., Baltimore, and Northern Jersey. When we trip over 10,000 internally, 10,000 units, that’s when we feel our G&A pretty much gets to its peak level. Chicago, we have got a great regional out there that could handle more and we have been looking off and on for the past years to try to bolster that portfolio. So that’s when we are trying to grow same I would say for Boston. And we certainly even though we are added efficient level in Northern Jersey, that’s always been a top, top performer for us. And we are looking there if we could get incremental product, we would definitely be aggressive in that particular market. The rest of them, also the Chicago and Boston, they are all I would say I call them full fledged regions. And adding more to it, to those portfolios will be good, but there is no emphasis to get above the 25% to 28% level. And I want to reemphasize that the 25% to 28% level for Baltimore or D.C. over the near-term. We like our portfolios there. We might do a little churning, but we are certainly not going to add net-net growth there at this point.

Stephen Dye - Robert W. Baird

Great, thanks. That’s really helpful. Then just turning to the reasons for move-outs, the eviction skip reason popped a little in the first quarter, is that mostly or was there something else more meaningful going on there? Also, move-outs to home purchases fell substantially from the fourth quarter, was that weather-related? And can you talk about which markets that saw big drop in?

Ed Pettinella

I will take the first one, eviction skips is very much a seasonal thing. You see it spike around the holidays. I don’t know if people will extend themselves or what, but if you look back historically, the fourth quarter is generally – first and fourth quarters are always one of the higher ones and then it comes back down, so certainly, no real indicator or concern there. The home purchase, I would say, number one that there is not like any particular markets that are driving that reduction. I think it’s across the board. I am not sure if it’s just a function of – I think people maybe are not comfortable making the big move and they are looking to just keep things status quo. And so there is less move-outs, but I can’t be sure, it’s not a huge drop from what we have experienced, but it is the lowest that we have seen in quite a while.

Stephen Dye - Robert W. Baird

Great, thanks.

Operator

Your next question comes from the line of Haendel St. Juste with Morgan Stanley. Please proceed.

Haendel St. Juste - Morgan Stanley

Good morning guys.

Ed Pettinella

Good morning.

Haendel St. Juste - Morgan Stanley

So I appreciate in your earlier comments in call that you are not starting any more projects this year and that you are putting development on ice, I was wondering if you could put some more meat around that statement. And particularly where do you think development fits within Homes or external growth profile so far have you reconsider the company’s long term future as a developer?

Ed Pettinella

Yes, here is how I would answer that. They pay me good money to try to always stay at the crest of strategically where we need to go in our planning. I think where we are right now is where we are continually trying to figure how to allocate our dollars on redevelopment, acquisitions, or new development. Given where the markets are and given the fact that we have been Atlantic – mid-Atlantic centric for development. Our current view inside is that we don’t want to play the economy game right now. The economy has been going on a recovery, a choppy recovery as I said earlier for a number of years, but at some point here regardless of the supply I don’t think we want to be making a major commitment there. So you are asking some great questions, we have made a decision to not move forward with two projects. And I think over the near-term we will have even more color in terms of where we are going to go in the development area.

Haendel St. Juste - Morgan Stanley

I appreciate that. And speaking of those projects, West Park and Concorde Circle obviously you are tracking market conditions, rent and having a sense of what the costs are today what would be the current yields and IRRs be today if you were to start the projects?

Ed Pettinella

Those projects are extremely attractive and based on our pro forma work and what we see I would say we are right now the Tysons project would be around the 7% level. And I would say the first year yield on a pro forma basis for Concorde would be close to that 6.80% to 7%. And the unlevered IRRs would be deep in the double digits I would say both in the 13%-14% the last time I looked at it, I am we are not – obviously we are moving on them right now. But the extremely attractively the Tysons project let’s say I don’t need to say much about that. That’s in a great neighborhood if you will for development. It’s a little busier than most any other place in America in Concorde where we like that property.

Haendel St. Juste - Morgan Stanley

You said 13% and 14% unlevered IRRs.

Ed Pettinella

Yes, that’s right.

Haendel St. Juste - Morgan Stanley

Okay, and last one if I may Maybe Dave this is for you. What if any potential impact to the income statement of suspending the near-term development starts at Concorde and West Park any costs that capitalize that may hit the income statement?

David Gardner

Well, again I mean nothing has dramatically changed. I mean we never anticipated starting Concorde in ‘14 ever. We had contemplated having Tysons start near the very end of ‘14. And we have shifted it best into the next year, so there would be very little change if anything based on that.

Haendel St. Juste - Morgan Stanley

Alright. Thank you, guys.

Operator

Your next question comes from the line of Derek Bauer with ISI Group. Please proceed.

Derek Bauer - ISI Group

Great, thanks. I just had a quick follow-up on new lease growth, what percentage of new leases signed in May were on repositioned units?

Ed Pettinella

We don’t track that, that’s very granular that we don’t – I can’t really tell you. I mean I can’t say that our redevelopment work is an ongoing thing throughout the year. It’s not really tremendously choppy. So I don’t think there is any suggestion that May has an in order amount of rehab versus April or versus March as leases turned is the market we’re putting significant dollars in their program or we’re targeting at least $100 million this year, fairly similar to what we spent last year so, there is really – there is no nugget of information that would suggest that this one is goosed anymore than any other month from rehab dollars.

Derek Bauer - ISI Group

Okay. And can you just remind us where are you expecting new leases to the trend on reposition units and what are new leases across your portfolio that are just sort of core non-redeveloped units?

Ed Pettinella

Again, we don’t – I don’t segregate that information, I mean, we – I mean in any one time, we’re upgrading I got 120 properties were probably didn’t upgrades in 100 of those properties, every month there is ex-number of units that are being turned to the next month or there is so, it’s basically impossible to segregate what’s going on with upgraded units versus the rest of the product in that individual property so, I just can’t tell you that.

David Gardner

I just want to add on that one, we’re – when you asked that question we’ve got 125 properties, I would say probably on the low end, 115 almost virtually every property in every month is some upgrades going on so, it’s very pervasive for across to our portfolio, it’s now like some other rehab as where they may just deal with one building or couple of buildings or one property, but leave at the 10 alone, we’re everywhere basically and every month.

Derek Bauer - ISI Group

Got it. Thank you.

Operator

(Operator Instructions) Our next question is a follow-up that comes from the line of Michael Salinsky with RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Hi guys. Sorry, I got dropped off there. Just a follow-up question, Ed, on last quarter’s call you talked about bringing in Ron Witten kind of looking at markets portfolio composition and kind of being in the middle stages of that. Can you just give us an update how that came out anything interesting in the portfolio that was provided?

Ed Pettinella

Yeah, let me just give you a little color, we’ve brought this I think the third-time we actually brought Ron Witten have been around 13, 14 years, I think we did in all 610 and currently part of it as we – we’re in the front-end of our reduction, a strategic plan that reduced D.C., we wanted to see, we’re trying to do I think simultaneous that we’re trying to reduced D.C., but we also wanted to pop our heads up have been about 4, 5 year since we look at other markets along these coast. So, we look at – we first analyze our seven markets, we just wanted to do a gut check and see how we – what we feel about them. The outcome of that was great that there was no decisions strategically to reduce anything other markets, you heard somebody asking about some of the other markets, there was a matter of fact we’ve got we want just look for more deals in Chicago, Northern Jersey and Boston. We’ll look at deals in Mid-Atlantic, but it will be mostly on a churn basis and they are little pricy at this point base time where cap rates.

We also while we’re in there paying the cost, we ask Ron, what other marketing along East Coast emulate the characteristics the economic background, the demographics the ones we’re trying to take two or three of our best markets or neighborhoods, where else can you duplicate that and that’s where Ron is extremely useful, he has got the modeling capacities in the data to study that. So, each time we do this like we come up with a list of other markets that could conceivably be of some interest to home, no decision we get that information as part of the package, but we have not executed at anything along those lines at this point. If in fact we ever due down the road, we will definitely let you know.

Michael Salinsky - RBC Capital Markets

Would you care to share the markets you mentioned?

Ed Pettinella

Yes, I’ll mention them the city that came out fairly high at multiple cuts will be Nashville, the Triangle, the Raleigh, parts of South Florida, where we are in now and Charlotte and the whole Raleigh/Durham corridor.

Michael Salinsky - RBC Capital Markets

Okay, thank you much.

Operator

Your next question comes from the line of Dave Bragg with Green Street Advisors. Please proceed.

Dave Bragg - Green Street Advisors

Thank you. Good morning. Just as a follow-up to that question, you are still planning to exit South Florida, right?

Ed Pettinella

Yes, that’s what we have been saying. I hate that I am being very extremely frank with you, David. It’s our best damn market out of 125 today. So, it’s been an extraordinary producer. The other reason just to give you a little more color on that, when Ron Witten was in, we were – when we were looking at the types of portfolios we will be looking at, if we stay in a B economic environment down there, there is good money to be made and Ron’s research suggested that, that would be – that’s currently and in prospectively a long-term place we should consider. Somebody just asked me what markets that was – that was one of those areas that they thought was good.

One of the reasons, Ron thinks prospectively, it will be better than it’s been. He thought the kind of conversion collapse in Southeast Florida exacerbated the problems. He thinks with tighter underwriting not as much kind of conversions in the bubble, he doesn’t see a bubble for the foreseeable future. So the bottom line is he believes that market would be safe sailing to be in it. That was one of the pieces that we got out of his analysis. So then coming back to this and watching our portfolio perform down there, so it’s just we are continuing to study it. We don’t want to move out of South Florida until I think fourth quarter of 2015, because that’s when the prepay worked out. So, there is no change in our opinion at the moment as I sit here, May 2 in ‘14, but I basically have got a year and about 7 months to study it even further. I don’t know if that answers your question.

Dave Bragg - Green Street Advisors

It sounds like it’s now to be determined.

Ed Pettinella

That I think that’s a fair statement, but we want to just keep doing our own internal research from the reports we got from Ron.

Dave Bragg - Green Street Advisors

Alright, I wanted to ask D.C., so you had a strategic decision was made to take it down to 28% of units and you are there now?

Ed Pettinella

That’s right.

Dave Bragg - Green Street Advisors

What’s the next course of action in D.C.? Will D.C. account for the majority of your dispositions over the balance of this year to take you lower than that?

Ed Pettinella

Here is what I think is going to happen. There is not a lot of properties where we are now. And if you look at our performance over the past 2.5 years relative to the other players in D.C., I think you would see from a revenue standpoint where we have been pretty much steady in the top quartile. It’s not as strong as the other – our other markets are across the country, but of the players in. And I think it’s that CB issue. Here is what I think. So there is not a disproportionate amount that we want to sell out of D.C. What I think is going to happen is going to be numerator, denominator kind of decision. As we build up some of the other markets, you might see D.C. drop a couple of percent, but we are what I would also tell you we are comfortable in that zone in the 25% to 28%. What we would be selling out of D.C. might be a couple of properties over the next year or two that are fully cap backstop, where the choose to upgrade is virtually gone. We are over 90%. Those were those – there might be two or three of those candidates over the next year to two years, but independent of that, I think you will say well jeez, how come it dropped a little further is because we are – we might be growing in other markets.

Dave Bragg - Green Street Advisors

So, to…

Ed Pettinella

Our pipeline, I was just trying to give you some more color, David. Our pipeline if you look at it right now is pretty much non-D.C. loaded. In that because we are staying away, just because there seems to be deals that are more prevalent elsewhere at the moment.

Dave Bragg - Green Street Advisors

Right, that was my next question as to what extent there is 28% of units governing your activities in terms of not developing, may be not looking for acquisitions this year and you’re missing out on opportunities to make decision on this land and may be are there better IRR opportunities in D.C.’s in the 7.5% to 8.5% that you’re looking at elsewhere. I guess the answer on the later sounds like it’s not, cap rates haven’t moved in D.C. and on an IRR basis you find better opportunities elsewhere, is that right?

Ed Pettinella

Yes, you stole by answer yes, I would say which refers that is a 20% affecting anything under development side no, and absolutely not, the two unrelated strategies, we’re – the point is here is what we’re going back to the wind associates studies and what we knew internally. In the burbs, where we are right now as we tweet – that we recently tweets the D.C. portfolio, it’s the last 5 and 10 years it’s been a hell of a portfolio for us, yes, it’s struggling today but here is the problem, if I went down the 15%, I would have a hard time duplicating what I think these properties will do in the burbs, in Northern Virginia and D.C. and in Baltimore I don’t be over the next 5 to 10 years to projected to do to roar once again. So it’s insult to injury. If I strap below these concentration levels were comfortable with now, I think we would actually heard the company’s performance. So, we’re in a comfort zone and minor tweaking at this point and fortunately there is further diversification of our portfolio, there is opportunities elsewhere. And the markets that I alluded to earlier we’re going to continue to explore them. There is no decisions at the moment to talk about, but I’m trying to further diversify in East Coast, we’re out of the rust belt and there is no – I don’t think there is any reason if we would further expand our markets down the road along East Coast and in cities that emulate that the profitability what we’ve been seeing we consider that.

Dave Bragg - Green Street Advisors

Thank you.

Operator

Your next question comes from the line of Karin Ford with KeyBanc Capital Markets. Please proceed.

Karin Ford - KeyBanc Capital Markets

Hi, good morning. David, if you could, can you walk us from the $1.4 that you did in the first quarter excluding the weather impact up to the $1.11 mid-time for the second quarter just with the breakout there is between core development G&A anything else you think is contributing to the sequential increase?

David Gardner

Although that the biggest contributor is just we’re out – we’re out of a winter quarter and there is probably there is about $0.08 of items it will not be repeated so, again if you start with the normalized 104, you’re basically there, even starting at the dollar you get up to a $1.8 and there is certainly some occupancy gains, some revenue gains, I think G&A goes down slightly, but I mean the line share is just look at snow, look at utility even – even netting out utility reimbursement that goes down, the pipes freezing, all those things will not be repeated. And even though we build back residence for utility and it smooths things out ever so slightly, there is still just a huge differential in those line items between first and second quarter that suggested that a no-brainer to move up to that kind of level that we are showing improving.

Karin Ford - KeyBanc Capital Markets

Okay. And second question is given the experience in the first quarter, are we rethinking your snow removal contract going forward may be doing unlimited snow given the risks and the impact?

David Gardner

Well, I mean, I’m not sure what we do today, is we generally try to take as much as snow removal cost is possible in house, what you see in the snow expense line is a lot of snow melt product, which is very expensive and use the third-party contracts only when and if it goes way above and beyond our capability. So in a normal year there is a big snowfall and all of a sudden you need to hire somebody. This year especially we are talking about situations where there is so much snow that not only you couldn’t push it anywhere, you needed to get trucks into loaded up and taken off site, that gets very expensive. There is no kind of third party contract that I am going to be able to smooth that out ahead of time. I think in a normal year that where things are spread out it’s our own trucks, it’s our own ploughs, it’s our own people we can handle that, it’s really when things spike. And as the chart suggested it’s in the presentation Baltimore had four times the snow, I think three other regions had close to three times as much snow as normal and it’s the worst winter since 1994. So I don’t think we can really plan to protect against that kind of spike. It’s if you go back to a normal winter I think we would be throwing money away if we tried to ensure against really huge spikes like that.

Ed Pettinella

And Karen if we ever go to Alaska, we think we can kick tail up there.

Karin Ford - KeyBanc Capital Markets

Thanks very much.

Operator

And it looks like there are no further questions at this time.

David Gardner - Executive Vice President and Chief Financial Officer

Well, if there are no further questions we would like to thank you all for your continued interest and investment in Home Properties. And we look forward to see many of you at NAREIT. Thank you.

Operator

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

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