Home Properties' (HME) CEO Edward Pettinella on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Home Properties, (HME)

Home Properties (NYSE:HME)

Q2 2014 Earnings Call

August 01, 2014 11:00 am ET

Executives

Shelly Doran -

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

John E. Smith - Chief Investment Officer and Senior Vice President

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

Analysts

Nicholas Yulico - Macquarie Research

Nicholas Joseph - Citigroup Inc, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

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

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

Ryan H. Bennett - Zelman & Associates, LLC

Ross T. Nussbaum - UBS Investment Bank, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded Friday, August 1, 2014. I would now like to turn the conference over to Shelly Doran, Vice President of Investor Relations. Please go ahead, ma'am.

Shelly Doran

Good morning, and thank you for joining us to discuss second quarter results for Home Properties. You can listen to today's call and view slides in the Investors section of our website at homeproperties.com. The second quarter earnings release, supplemental schedules and a PDF of the slides have been posted in the section as well under the heading News & Market Data.

Before we begin our prepared remarks, I would like to state that today's discussion will include forward-looking statements under federal securities law. While management believes that the expectations reflected in these statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved due to a variety of risk and uncertainty. Please refer to the disclosure statement on Slide 2 and the company's SEC filings for additional information regarding forward-looking statement.

Beginning today, we are changing the format of our call and expanding the group of participants. Our goal is to provide the investment community with access to members of upper management, in addition to Ed and David. Participating in today's call providing commentary and participating in the Q&A session will be Ed Pettinella, President and CEO; John Smith, Senior Vice President and Chief Investment Officer; and David Gardner, Executive Vice President and CFO. On future calls, we will also include our Head of Operations, Bernie Quinn, Senior Vice President of Property Management Operations.

With that said, I now turn the call over to Ed.

Edward J. Pettinella

Thanks, Shelly. Good morning, everyone. It's been a very busy 4 months for us here at Home. We completed a comprehensive review of our new markets and made the decision to not, and I repeat, not expand beyond our existing markets. We made the decision to exit the new development business. We've been focused on driving rents and improving occupancy. And fourth, we've completed 2 acquisitions, both in the Philadelphia market, and have queued up additional acquisitions for the second half of the year.

First, I'd like to take a few minutes to talk about new markets and development. In the spring, we began an exploration into 4 markets for potential expansion. The markets were selected by senior management and consisted of 3 markets new to Home, plus Southeast Florida, where we currently have a presence in Fort Lauderdale. The potential new markets were Charlotte, Nashville, and Raleigh/Durham.

Our review and analysis was a multi-step process. We first reviewed the Whitten report prepared for us earlier this year, and then in May, we engaged a consultant, Greg Weingast, to help us in the acquisitions effort, including the review of potential new markets. Some of you may know Greg, he was an EVP at Archstone. Greg, John and the acquisitions team then obtained and studied market research from various other third-party sources in the markets under consideration. They visited each market twice to meet with brokers and owners and to tour properties and submarkets. They then underwrote multiple properties available for sale in each market and compared market data to Home's existing portfolio.

At the end of the process, senior management reviewed the data, conducted extensive internal discussion and decided that it was not in the company's best interest to enter into the new markets of Charlotte, Nashville or Raleigh/Durham because they do not meet our investment criteria, which is: they are low-barrier markets to entry; there is significant supply coming into these markets; the B/C inventory is not large enough; and the inventory is not old enough; and finally, the rent differential between B assets and C assets is not high enough, which basically means, we would not be able to get significant rent bumps for the types of apartment upgrades we specialize in.

However, Southeast Florida does meet our criteria, and we have now decided to pursue acquisition opportunities there. We also continue to pursue acquisitions in our other existing markets.

Now I would like to talk to you about our decision to exit the new development business. As I stated in the release, we are proud of the Class A projects developed and appreciative of the efforts of our dedicated development team.

Looking back 9 years ago, when I was a first-year CEO, our outgoing CEOs had the vision to employ development expertise as a way to close the multiple gap between our B/C strategy and our peer group with a development focus. I think it has been difficult for the market to accept such a dichotomy between upgrading C properties and developing As.

We created significant value in the new development business. However, it has become increasingly evident that we do not get the appropriate credit for our development pipeline in the stock price or valuation. The development of Class A properties, basically, was inconsistent with our core competency, and our pipeline was too small to, basically, move the needle.

After much consideration and deliberation, management decided that it was time to dissolve our development pipeline and simplify our strategy. We can now focus 100% of our time on our core strength and acquiring and redeveloping mature apartment communities.

Our management team was successful in increasing rents and occupancy in the quarter. On Slide #7, new and renewal lease price changes were very positive for the second quarter with new leases executed at rents 3% higher than expiring leases and renewals, 3.2% higher. July statistics indicate continued positive momentum with new leases at 3.3% and renewals at 3.5%.

We gained 40 basis points in occupancy in the second quarter as compared sequentially to the first quarter, and we expect continued improvement in occupancy in the third and fourth quarters. Apartments available to rent, or ATR, is a good indicator for future occupancy and was 6.3% at the end of July as compared to 7.4% 1 year ago. At this time, last year, occupancy started to slip, especially in the D.C. region. With ATR running 110 basis points ahead of last year, we feel confident in our ability to outperform in this metric.

NOI growth was positive in all HME regions for the quarter as compared to the second quarter of 2013, and as compared on a sequential basis to the first quarter of this year.

Southeast Florida continues to be our strongest market, followed by Chicago, Boston and Long Island. Baltimore and D.C. are not performing as well as the 4 strongest markets, but we are seeing very healthy sequential improvements. On Page 19 of our supplemental, we show the sequential growth results for all regions for base rent, total revenue, expenses and NOI.

It is very important this quarter that you disregard the negative growth you see in the total revenue for these 2 regions. You need to remember the seasonal nature of our northeast markets. We had extremely low temperatures in the first quarter, which led to very high utility bills, which, in turn, produces high utility reimbursement revenue. On a sequential basis, the amount of utility reimbursement goes down considerably from the first to second quarters.

The true apples-to-apples comparison is looking at the growth in the base rental revenues. D.C. is up 1.5%, and Baltimore is up 1%. Embedded in that growth is sequential occupancy improvement, 60 basis points for D.C. and 20 basis points for Baltimore. Combining all regions, base rental revenues are up 1.5% for the second quarter over the first quarter with a 40-basis-point improvement in occupancy.

We monitor the results for all the public multifamily REITs that have not -- that have exposure in the D.C. region. They've all reported, and 8 out of 10 are in D.C. We continue to outperform this group. In the second quarter, we had the third-best year-over-year revenue growth of 0.7% and the best NOI growth in the group, also at 0.7%. The averages for both of these metrics is negative for our peers.

The company's remaining 2 and last development projects, shown here on Slide 8, are nearing completion, and I will provide a brief update on each. Eleven55 Ripley consist of 2 buildings: a 21-storey high-rise with parking, had initial occupancy in the fourth quarter 2013, and a 5-storey wood-frame building with first floor rental that will be completed in Q3 of this year. The tower is currently 40% occupied and 53% leased.

The Courts at Spring Mill Station is also comprised of 2 buildings, a 4-storey wood-frame building with an underground parking garage and a 4-storey donut configuration with a garage. The first building will be available for initial occupancy in September of this year. The leasing office and amenities will be completed this November. The project is expected to be substantially completed by the first quarter of 2015. We opened our temporary leasing offices at the Courts in April and are conducting hard-hat tours at this time. To date, we have executed 9 leases.

I'll now turn the call over to John, who will provide an update on our acquisitions and dispositions activities.

John E. Smith

Thank you, Ed. The current acquisitions environment is very competitive. We remain steadfast, adhering to our investment hurdles and have passed on several acquisitions because they were just too expensive.

Yet, we're still able to find quality properties to buy as evidenced by the 2 acquisitions completed in June and July shown on Slide #10. Both properties are located in the Philadelphia region and were built in the 1970s. The units are well designed, but dated, and will be relatively easy to upgrade. We will immediately begin individual apartment unit upgrades and expect to generate 4-year IRRs between 7% and 8%.

As most of you know, we target C or B- properties that have the potential to be upgraded and repositioned to the Class B or B+. Current cap rates for properties in our sweet spot are in the 5.75% to 6.25% range. Depending upon the region, year-to-date cap rates remained pretty much unchanged.

Deal flow in the second quarter of 2014 was a bit higher than that in 2013. Year-to-date, we've received 140 opportunities in our target markets and reviewed 56 of them comprising about 22,000 units.

Opportunities for expansion within our existing markets are plentiful as illustrated on Slide 11. We own an average of only about 2.1% of the Class B/C inventory in our existing markets, leaving ample room for growth.

We have completed $76 million of acquisitions to date in 2014 and have offers outstanding in excess of $100 million. We also have several properties in the pipeline currently being reviewed. Therefore, we're very comfortable that we'll meet or exceed the midpoint of our 2014 acquisitions guidance range of $150 million to $250 million.

And now I'll provide a few comments on dispositions. We typically sell properties that have been mostly upgraded and don't have much juice left from a repositioning perspective. These are assets that have already plateaued for us. Two of our properties are currently being marketed for sale, and we have identified a few additional properties for potential disposition. Therefore, we continue to project 2014 dispositions within the range of $160 million to $260 million.

At this time, I'll turn the call over to David, who will discuss second quarter results, capital market activities and revised guidance for the year.

David P. Gardner

Thanks, John. FFO for the quarter was $1.04, reduced by $0.06 from the onetime impairment and other charges related to our exit from the new development business. Operating FFO for the quarter, which removes the noise surrounding our decision to exit development, was a rounded $1.11, equal to the midpoint of guidance.

At the end of the quarter, we repaid 2 fixed rate mortgages, one had a July 1 maturity date and the other was our last HUD mortgage with a maturity date in 2028 and the rate of 5.25%. These repayments helped increase the size of our unencumbered pool by 2.2% and are consistent with our ongoing strategy of reducing reliance on secured debt and improving our debt ratios.

Slide 13 illustrates the significant strides we've made in improving our credit metrics over the past 2 years -- actually, 1.5 years. Total debt to total value has increased (sic) [decreased] by over 10%, total debt -- total secured debt to total value has decreased by 9.4% and the percentage of unencumbered pool to total value has substantially improved by 13.6%, up to 57% of our assets.

Improvements in net debt-to-EBITDA, interest coverage and fixed charge coverage have resulted in metrics consistent with, if not better than BBB, B, AA to rated peers. On July 1st, Fitch reaffirmed their BBB rating for HP and revised the rating outlook from stable to positive. We are meeting with S&P later this month and expect to obtain a rating from them around the end of the third quarter. This will position us well for a fourth quarter initial public unsecured debt offering, further strengthening our balance sheet and increasing our access to multiple sources of capital.

Now I'll turn to guidance for the remainder of 2014. We have provided significant detail on both press release and supplemental information package on our expectations for 2014 earnings, so I'll only make some general comments here.

As Ed has described, the stronger decision to exit the new development business brings many future positives to our business. It is difficult to exit a line of business without some onetime charges that you will see hitting this quarter, as well as the next few quarters. This includes land impairment charges, severance and higher interest expense, as we have detailed. In addition, a slower lease-up has resulted in lower NOI from our 2 remaining developments under construction. Although $0.01 of the current reductions to guidance for the year are directly related to the development business, our core operating activities are performing as expected. It will take some time to divest of our remaining land parcels, but it is our expectation that future land sale gains projected in 2015 will at least be equal to or most likely exceed all of these charges that we have identified. Our G&A run rate for 2015 will not be burdened by the cost of operating a development team.

We have provided ranges for core property revenue, expense and NOI growth for both the third and fourth quarters. We have not changed our expectations for revenue growth. Positive strides in occupancy with very favorable year-over-year comparisons, plus continued improvements in both new and renewal rates leave us feeling comfortable with the range for the year.

We have added small additional expense growth in the last 6 months of the year, mostly from higher tax assessments effective with bills starting on July 1. We had left the expense growth range unchanged for the year with the expectation that we will be towards the higher end of the range provided.

We've also left NOI range for the year also untouched, but expect it to be in the lower part of the range. As a reminder, our 2014 annual NOI run rate is burdened by the extreme weather cost incurred in the fourth quarter, which weighs this annual measurement down by 70 basis points.

That concludes our formal presentation. Now we'll be happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Nic Yulico with UBS.

Nicholas Yulico - Macquarie Research

I just had a couple of questions on the land. You had the 2 projects, I guess it was Westpark Tysons and Concorde Circle, that were in construction in progress in the first quarter. Are those now both on the land held for sale item on the balance sheet?

David P. Gardner

One of them, and one of them just -- is just in the land category up above. It gets a little technical as to why there was a difference in the classification, but they both -- we're not going forward with anything there in -- within a year, I would anticipate we'd be out of those positions.

Nicholas Yulico - Macquarie Research

Okay. So is it right to -- so the Tysons land, is that land that you would also look to sell? And would it be that you would try to get a sale that would be approximating the cost incurred that you had there, which was about $35 million, meaning the land sale proceeds could be $50 million or greater? Or am I missing something here?

David P. Gardner

Well, I think -- I'd like to leave it kind of in that big-picture comment that we said that we're recognizing that there are some upfront hits that we're taking, impairment charges, severance, things of that sort. And that when the dust settles, when all development land parcels are sold, most likely next year, that the -- any gains will at least be equal to or exceed the cost we incurred. I think you can appreciate that we'll be marketing the land parcels. And we don't want to provide a lot of details at this time that might reduce the likelihood of receiving maximum pricing or lose any kind of leverage. So we'd really prefer not to go into specific detail, other than we will be divesting. It'll probably take about a year. And we do have some positives that we anticipate going forward there that'll offset some of the upfront negatives.

Nicholas Yulico - Macquarie Research

Okay. But just to be clear that there is land there at that Tysons site that you would be...

David P. Gardner

Absolutely. I mean, if you look back at -- obviously, we took it out of the development schedule in the supplemental. But if you look back at the third -- I'm sorry, the first quarter supplemental, it showed the costs incurred to date were about $35 million. And it's just that that's not -- that's segregated and kind of buried in with the general land cost on the balance sheet now so you just can't see that. But both parcels, we'll be looking to divest in the next year.

Nicholas Yulico - Macquarie Research

Okay. And just one other question was -- there was some press about the development you were pursuing in Smithtown on Long Island, a former concrete factory. Did you actually ever buy the factory? Or is there any agreement in place with the seller or any sort of option agreement? Or are you able to just kind of walk away from that or -- that project?

David P. Gardner

Well, part of the charges incurred include some amount of abandoned pursuit costs. We -- if we were to close on anything, that would've been clearly reflected in the development schedule last quarter. There certainly were some larger, some smaller things that we were pursuing that you don't -- you may have a contract, but you don't have a closing or your incurring some upfront costs, thinking about a contract, all that's been flushed out with the $3.8 million charge that was labeled impairment and other -- land impairment and other charges.

Nicholas Yulico - Macquarie Research

Okay. So there's nothing left that you own there, some sort of option agreement or that has any value.

David P. Gardner

No, no.

Operator

Our next question comes from the line of Nick Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

Ed, I'm just wondering why now exit the new development business and not once you actually developed the remaining land.

Edward J. Pettinella

For us, I think it was -- it's just basically our feelings built to a crescendo. It lies in the fact that we didn't think we were getting the appropriate credit for our development pipeline, both in the stock price and valuation. And we think right now is the time to dissolve it. And -- our complete development platform, and just basically simplify our strategy and continue to focus 100% on being a C/B acquirer/rehabber. I guess what it didn't say in the notes that, in my mind, we -- I guess we could have done it last year or the year before and in 2 years. But the original premise, the premise was, was it adding value to our stock price and valuation. And I don't know if it was the incremental focus on D.C. that started in the third quarter of 2011 that exacerbated, I think, this issue of us not feeling the love in the marketplace. But we felt we should do it now. And as an old portfolio manager myself, your first move is probably your best move on an issue or a project or a department, and this was the time we decided to do it.

Nicholas Joseph - Citigroup Inc, Research Division

And I guess in terms of the markets. Even last quarter, it sound like you're still thinking about exiting South Florida. So I'm wondering what changed there.

Edward J. Pettinella

While we -- not just last quarter. We were watching our performance in Southeast Florida for a couple of years, and it keeps popping up as our #1 market. We think our original premise when we did our study back in either -- I think it's 2010, it met the criteria that we wanted -- we were looking for. So it just -- it was trying to work our way through the candle conversions over the last great recession. And once it stabilized and the fact that -- and the consultants we talked to did not see that type of activity happening again down in Southeast Florida, 2 counties, it'll be Broward and Palm Beach. We still like those markets. We know them well. And we got -- from our studies -- have the evidence that would suggest that still a strong eighth market for us when we've been in. So we are not going to abandon that market. And the 2 -- as I said, the 2 properties we have down there are performing on an extraordinary basis for us.

Nicholas Joseph - Citigroup Inc, Research Division

Okay. And then finally, can you talk about the total cost of the new market review and the consultants and the market visits, kind of everything that went into that review?

Edward J. Pettinella

I would -- I don't know if we had -- I would say small relative to initial Whitten report. About every 4, maybe 5 years, we've hired him. But it wasn't substantial. And with regard to our second consultant, Greg Weingast, he's on board on -- from our original contract with him, one, to help us work through the new markets, but the bigger picture for Greg is to help us find new deals to purchase, up and down the East Coast. John Smith, who's here with us now, our CIO, has been taking him around to a lot of our contacts in our major markets. And with Greg's background, we feel he's already going to be able to hit the ground running and help us incrementally on the East Coast for new deals. So the reason we hired him, the micro reason was the new markets. The macro reason was can he help us produce some new deals. And I think our pipeline is evidence of that. We have a very substantial pipeline as we speak right now.

Operator

Our next question comes from the line of David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

I just want to follow up on the -- a little bit more on the strategy shift, and I might have missed this. But could we extrapolate that some of the higher-quality assets might be sold in the future? If you're continuing down the road of really focusing on the B and C assets, would we see some essential [ph] capital recyclings sourced from those assets?

Edward J. Pettinella

You would -- David, you would be extrapolating way too much if you -- with that statement. We aren't kidding when we told you we -- I'm looking at those 7 markets, all the way going back to...

David P. Gardner

The properties.

Edward J. Pettinella

The properties, up in Maine, the Liberty in Portland, Trexler in Allentown PA, East West Highway in Silver Spring, Cobblestone in Fredericksburg, the Courts at Huntington, the East West Highway and, soon to be finished, Ripley, were these -- these properties, except for Ripley, because it's still so new, are performing quite well. And here's how I would answer this question. We rank order our 115 properties multiple times during the year. And what we would be focusing on if we were to ever jettison more of our assets out through a disposition process, those would not come up on the table as ones we should exit. It's conceivable, down the road, David, we might sell one of those for varying reasons. But today, we have no desire to do so.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay, that's helpful. Dave, just one question for you. It appears your tax rates -- or your tax growth rate has been pretty under control relative to some of your peers. Is that a result of company efforts or just a result of market conditions? Why do think that's been relatively benign?

David P. Gardner

No. It's -- the problem with that line item is it tends to be volatile, and it's been volatile in a good way. The last couple of quarters, especially this quarter, we were successful with some tax assessment reductions. And when you're successful, it's usually a build-up of a number of quarters that you get the benefit for all at once in the form of a refund. Compared to year ago, the opposite kind of happen. We had some assessment increases that had related -- especially if you're talking about Chicago, they relate -- those taxes are in arrears. So all of a sudden, you got 1.5 years of true-up that you have to deal with. And we had some negative true-ups last year. We had some positive true-ups this year that led to, basically, a flat year-over-year quarter. The first quarter was -- as I remember, I think it was up like over 4%. The -- so that's the good news. The bad news is there's a lot of tax bills that are effective July 1. We're just starting to get a bunch of those trickle in even though it's August now. They don't always get into you right away. And we are seeing some above-average increases, and we're actually thinking that we're going to be probably above 5%, maybe even between 5% and 10% the next 2 quarters. Again, one -- in the fourth quarter, we had -- we have a very difficult comp. A year ago in the fourth quarter, we had a few Long Island properties with -- I think it was over about $1.5 million of refunds that occurred because of successful assessment challenges. That's not going to be repeating this year. So it's a bit lumpy. I'd like to think that we can -- could continue to be so successful, but I think it's going to come back and hurt us a little bit the next 2 quarters.

Operator

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

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

First, a question on your full year same-store revenue guidance. Your 2Q new lease rate growth of around 3%, it picked up from the past few quarters run rate of around 1% to 2%, but your renewal growth has slowed somewhat from the mid to upper 3% range. We saw over the course of last year to about flat 3% in the first half of this year. So given tougher comps as we head deeper to the cycle and given that your retention rate for your portfolio is 60%, 65% higher than your peers, is the slower renewal rate growth a concern for you? And what do you think is driving that? Is it a function of rents versus incomes? And how do you think that renewal rate growth story plays out in the second half of this year?

David P. Gardner

Well, I think where we saw the drop-off was, kind of, consistent with when we started having some occupancy issues, and especially in D.C. and some of the other markets. We kind of reacted to that, and we became a lot more conservative with renewal increases. So they did flatten out there a little bit, as you said, closer to maybe 3%. The good news is that when you look at, on a monthly basis, April, May, were both 3.1%, June was 3.3% and July, which we just got that -- those figures in -- are 3.5%. So we are -- now that we've regained significant amount of occupancy, we improve sequentially in the last quarter by 40 bps. I think we've been a little more aggressive, and we're hopeful that we're going to stay more embedded in that about 3.5% renewal rate. New leases, again, continue to improve, certainly significant improvements. In the second quarter compared to first, we went from 0.2% up to a positive 3% and in -- the information we see for July is 3.3%. So both metrics are improving. If -- I know it's a little bit a hockey stick kind of growth, but the one thing we clearly have going for us is occupancy growth. Last year, it fell off, July, August and into the balance of the year. This year, we're only seeing positive pickup. So if you look at -- just take for instance that the third quarter, the midpoint of our revenue growth is 3.3%. 70 basis points of that is, we're projecting, coming from occupancy pickup. All we have to do is continue just a little bit of improvement from where we are today and we'll get that. Because a year ago, from the second to third quarter, it dropped off 90 basis points. So I think that is very doable. And if you look at -- to the kind of newer renewal that are at least 3% to 3.5%, to be able to get 2.6% of rental growth, as well as 70 basis points of occupancy growth, to get it up to that 3.3% is very doable. Ed mentioned ATR is something that we look at. It's 110 basis points better than a year ago. That the sequential growth we just had this past quarter at 1.5% for the portfolio, it -- everything just bodes well for the improvements that we're seeing here. So again, we're comfortable that we're going to be able to achieve this.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

You mentioned, Dave, earlier in your remarks that some savings from -- G&A level savings from the development -- exiting the development business, can you give us a sense that -- maybe a ballpark of what that run rate would be on a full year basis going forward?

David P. Gardner

Yes, yes, yes. It's somewhere, probably, between $1 million -- I don't think it's all the way up to $1.5 million, but it's, probably, $1 million, $1.2 million, that kind of ballpark.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. And one last one for you Ed. Going back the decision to exit the business, I wanted to get some more meat, more perspective, perhaps -- maybe take us behind the closed doors of your boardroom discussions. How tough a decision was it? Obviously, you put a lot of time, effort, capital and building up the effort over the last 9, 10 years. Was it just a function of not getting as much credit, the function of market opportunities or lack of market opportunities out there versus, perhaps, the abundant redevelopment opportunities within your own portfolio; a function of where we are in the apartment cycle, your platform versus other more established platforms? I'd love to hear more perspective on the overriding factors that swung the decision in the favor to shut it down.

Edward J. Pettinella

Fair enough. I think you know me well enough. I'm trying to give you the straightest scoop I know. Here's what I think was hard and here's what I think was easy. The hardest part was flying to D.C. and shutting down the department because they -- in my experience after 41 years and 4 public companies, usually when I shut down the department, and this is what I told the people, they usually have been underperforming or there are some big problem with them. But I couldn't do that with a straight face, because, as I ready mentioned, the 7 projects we did, we were very happy with them. So why did we do it? It's because the frustration built up. We're watching us in the market. I think maybe we were in too little to move this -- I said in my speech, 'move the needle." And it just seemed to us that there was more negativity on valuation mounting in the past 2 or 3 years. So from a management and a board perspective, quite frankly, it was unanimous, unanimous. So the decision to exit was easy at this juncture. The difficult part was telling the people that, "Hey, you did a great job, but it's not adding to the bottom line." And lastly, I think, in my analysis, trying to do high-end development, which I think we got very proficient at but -- conversely, when you're buying C, C minuses and upgrading them to Bs, it was almost too big of a dichotomy to sell to the marketplaces is my guess. And looking at the reports I saw from last night to today, about 15 of them, I think, most people would say the same thing. But that's the inside scoop of what we were dealing with in terms of the shutdown of development.

Operator

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

Jana Galan - BofA Merrill Lynch, Research Division

Following up on your positive comments on occupancy. I was a little surprised that you took it down about 20 basis points from your prior guidance last quarter. I was just curious if that's, maybe, that you think you'll be pushing a little bit harder on the renewals? Or any markets that's pulling it down a little bit?

David P. Gardner

It's really just a reflection of -- we got ahead of ourselves. We were very aggressive with the projection that we had. It was -- we had 95.8% in third quarter. And if you go back and look at 20 years of history, I think there's only a few quarters where we've exceeded that and -- or met that kind of level. So I think we saw a lot of good indicators and improvements, and it's more of a function of we're not -- it's not that we're seeing negative things come out. We just realize we were just a little too aggressive, and we toned it down. I don't -- it's not a function of we're not all of a sudden being more conservative like we were a year ago. We're full guns ahead with the renewals and getting as much as we can there. It's just, really, a reflection of toning down some of the exuberance we had in that number.

Jana Galan - BofA Merrill Lynch, Research Division

And maybe for John. I'm sorry, in your comments, did you say that you have $100 million out there in offers or $100 million under contract?

John E. Smith

$100 million in live offers out at this time.

Jana Galan - BofA Merrill Lynch, Research Division

And I know you commented that cap rates were kind of in 5.75% to 6.25%, but your 2 Philly projects were kind of at the higher end of that. Was that just good luck there? Or do you think that you could be at that low to mid-6 range on future acquisitions?

John E. Smith

No. It certainly is submarket-specific and property-specific, depending on the region. But we feel very confident. Our pipeline is so robust right now. We have the good fortune of being able to pick and choose the right opportunities and stay within our discipline to pick the best opportunities for the shareholders that are in that cap rate range or maybe even better.

Operator

Our next question comes from the line of Jeff Donnelly with Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Ed, we don't often see companies take strategic steps such as what you announced today. Was there an event or a catalyst behind your decision to undertake this review?

Edward J. Pettinella

No. It -- as I said, it's been in consideration for a number of quarters for us. And just when we got all our figures together, we figured it was time to announce it in the second quarter. There was no -- management made the call and the board backed us up 100%, and that was that.

David P. Gardner

I'll just add to it. I think we've been looking at the gap in valuations in multiple, and we're looking at -- is there something out there that we can help close the gap? And then this is kind of a 2 for 1. We exit a development line of business that we, clearly, don't think we're getting credit for, and the opposite, we may be getting negative credit for it. But this also allows us to not rededicate and refocus because we've been there already, but kind of reinforce to the outside world that we are a C/B upgrader and that's our core competency. And the capital that may be used to grow the development can now be diverted to opportunities in redevelopment. And if something's going to help close that multiple of gap, we're hopeful that's going to be a big part of the story.

Edward J. Pettinella

Yes. And, Jeff, I would just add -- let me add one more point from a strategic standpoint. There was an era when we first got into development 9 years ago. We -- at that point, many believed that we needed to expand and look like the other REITs out there in the multifamily sector and have a development component. We don't feel that way anymore. As David said, we actually think we might have been working against ourselves. So we think it's a positive to exit development. And we are now -- as the landscape's changed in the multifamily sector, there are only 10 of us. And we're the only one in the Northeast and Mid-Atlantic, and we're the only one that acquires Cs and turns them into Bs. We need to just be happy about that and really drive more deals. I think if you look at what's happened in D.C. and Baltimore, on a sequential basis improvement, we think we can pour a little more money into redevelopment, upgrading our units. We now have incremental cash that formerly was going into development, it's going to go into the acquisitions that John has been talking about. So we're focused. I think we tightened up -- without a doubt, we tightened up our mission, our strategic vision, and we cleared up this new markets issue that was out there in the marketplace for the last few months. So we feel very good about our direction, and we're just going to do more of what we're really experts at. And I think the market will give us give us valuation for that.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Well, it's certainly not easy decision, so I commend the effort you undertook. Dave, I just -- I apologize. I might have missed it. What's the run rate overhead savings you see now from exiting the development area? And then maybe just as a follow-up. Does the elimination of development changed the risk profile of the firm in such a way that you think the rating agencies or those capital providers on the debt side are going to take a different perspective of your risk profile?

David P. Gardner

Yes. The G&A run rate, we talked a little bit about it. It's probably in the $1 million to $1.2 million level. And clearly -- whether it's credit rating, investors, I think anybody that looks at a company that has development, there's more risk involved. But I think the rating agencies -- development is a negative word. It's all upfront cash with returns that come at a later point, but the risk of some deal falling through or whatever. But -- so I'm -- I -- clearly, whatever we're doing has never been a response to that. But as one of the benefits, I think whether it's the 2 companies that had coverage on us today or when we approach Moody's, as we mentioned in a couple of weeks...

Edward J. Pettinella

S&P.

David P. Gardner

I think -- I'm sorry, S&P, I think this will only be viewed favorably.

Operator

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

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

Specifically in D.C., you're right, you are outperforming peers, but the 1% revenue growth year-to-date compares to your initial expectations for that market for this year of 3%. How do you see that market performing in the second half of the year? And how close to your original forecast for the market will you get?

David P. Gardner

I think -- I don't think we're going to get all the way there. I think we were hopeful that we would have seen, especially in the new leases, some quicker improvement there. We are starting to -- the second quarter new leases, we're still flat. They were actually down 0.1%. But if you look at July, it's up 0.8%. If you look at renewals, they've continued to stay pretty good. So in the -- one of the things that we will generate positive there in this big part of the story is that occupancy. Remember when I talked before about how we have some easy comps? That -- the D.C. region got down to -- I don't know the exact number, but I think it was in the 93% range or something. So we're well ahead of that, and a lot of the improvement will be occupancy-driven there. So we're probably not going to get all the way there, but I think we're going to be pretty darn close.

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

And the second question is with Fannie and Freddie ramping up their activity over the past few months. To what degree has that in its -- that alone, for your observation, made the transaction market more competitive for you?

John E. Smith

It hasn't. I haven't felt the effect at all, because of the unique advantage we seem to have is not only our name and reputation but the fact that we're a cash buyer. And while we do compete, mainly with other regional and private companies, we rarely repeat our -- or compete with institutional players similar to ourselves. So we often win our deals based upon not only pricing, not always the highest pricing, but our ability and willingness to perform a deal in a straightforward fashion and just pay cash with no-nonsense, due diligence and closing, whereas a lot of the private players who are dependent upon agency debt, have to put in offers contingent upon financing, either first or [indiscernible] and so on. So while their debt cost to capital may be less than ours, we can do something they can't do.

Operator

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

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

David, you talked about -- obviously, the new strategy in terms of not entering any new markets, but if you look at the beginning of the year and the second half of last year, you were talking about reducing D.C. exposure and rebalancing the portfolio a bit. Can you give us kind of an update on that strategy, whether you -- the intent is still -- in still the markets or the opportunities are more as they come to market right now?

Edward J. Pettinella

Thanks, Mike. This is Ed. We did move at least $300 million out of the D.C. region, as we define it, and we lightened up, on a [indiscernible] unit basis, 31% down to 28%. I have been saying all along, I'm more on our comfort basis that we might let a little more error out of D.C., but -- over the next year or 2, but not materially below where we are right now. The -- here, in our study -- and I want to reemphasize this. In our study, when we're looking at new markets, we never once were thinking we needed new incremental markets outside of the current 8 because we were running out of fertile territory. When we showed the board our final analysis this Tuesday and Wednesday, past Tuesday and Wednesday, I think they were even pretty surprised to see the updated concentration level of Home in the B/C markets, in our current 8 markets. Right now, it's 2.1% and, actually, I think has drifted down a number of tenths since we did the -- we did the study in '06, and we did it in 2010. The bottom line, Mike, is the propensity to do deals in our 8 markets is huge. As evidence to that, we've done 2 deals in Philadelphia. We're finding deals in Boston and Chicago. Our pipeline is extremely robust, more so than maybe what we've seen -- have seen since the '09, John, I think and '11 era, when we did $1.2 billion over that 36 months' stretch. So we're excited about that because we're not competing with the publics. And as John already alluded to, we're cash buyers. We have a great reputation in our backyards we're in, the 8 backyards. So I'm optimistic that we will do a number of deals and at great levels in our existing 8 markets. So I just wanted to clarify, one, what we did in D.C. and what was the main focus for going and looking at new markets. We just think -- every 4 years, we've done it 3 times now in my career here where I want to be in -- when somebody says, "What do you think of Charlotte?" I want to go through the paces and understand and see if anything changed so I'm not missing anything. But our final conclusion was we're not missing anything. For us to 2 -- for a number of reasons, but the top reason is they are still too low barrier for us and it doesn't mesh with our strategy of doing B/C in high-growth, high-barrier markets.

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

I appreciate that. I just want to make sure I understood though. Are you looking at all markets that you're in right now? Or are you focusing more so -- I believe you had mentioned Philly and Chicago and Boston as markets you'd like to grow [indiscernible] in the near term. Is that still the strategy? Or is D.C. back on the radar screen from an acquisition standpoint?

Edward J. Pettinella

They're all in the game. But here would be the difference, I would say, just in D.C. I think I said a couple quarters ago, I'd like to not go above the 28% and, maybe, possibly, gravitate a little bit below over time. So that would be a churn. We would take out one property out of D.C. to put a new one in. But for some reason right now, we're seeing a lot of activity in those 3 markets I just alluded to. We always are looking in Northern Jersey and Long Island, those are great markets for us. The deals just don't come up that often. But when they do, it's an incredible food fight. And for us, we sometimes can't get those deals. So I would say that you're going to see, for us, over the next couple of years, Mike, a much more balanced approach based on where we put assets. But we're going to let the market dictate that. I don't want to get into a situation where I'm going to go to Philadelphia come hell or high water. I think that's a foolish way to go about it. We'll let the market come to us. If the deals pencil out -- and right now, it's Utopia for us. We're able to go into markets that have a lower concentration, and we are going into them. And guess what that does? That inherently lowers the D.C. concentration level. So all things are good right now.

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

Fair enough. Then 2 -- just 2 bookkeeping questions. David, the guidance, does that include the bond offering, you assumed that bond -- the impact of the bond offering in the fourth quarter there? And then also in the same-store numbers, can you just provide us what the lift was from redevelopment in the quarter?

David P. Gardner

I'll -- well, the first question, the guidance does not reflect a bond offering. Any bond offering right now on our timetable is probably -- I think the first part of December, so it'll have a fairly -- if it occurs -- still, a lot depends on John's success and activity and the need to -- if we're going to use up the rest of the capacity on the line. But if there is a transaction, probably, very late in the fourth quarter, which, probably, have a minimal impact. It's going to have much more of an impact in 2015. And I'm sorry, the second question was -- the impact to upgrading -- I mean, again, it's our best little shorthand look at it. It's probably about half of our NOI growth or about 1.4% is coming from upgrading efforts. Certainly, there's a lot more activity that happens, I would say, from, let's say, April through September in upgrades. That's another reason why we're seeing -- we see some ability to push the rental growth a little bit more in the balance of the year, because there'll be that much more input from upgrades. There's not as much that take place in the colder month. Even though this -- it's interior stuff. There's not as many leases that renew, and there's a lot more opportunities to do upgrades at this time.

Operator

Our next question comes from the line of Ryan Bennett with Zelman and Associates.

Ryan H. Bennett - Zelman & Associates, LLC

Just a -- and just to follow up quickly on your comments on the acquisition side. Are you seeing today -- especially with Greg hitting the ground, as you were saying -- on the opportunity side, is it mostly one-off assets out there right now? Or are you seeing any smaller portfolios come to market that might be -- fit your investment criteria?

John E. Smith

We're seeing all of the above. And the fact that Greg is now under our umbrella, we think it adds terrific bench strength for us to optimize the opportunities and find -- not only find more deals, but make more deals that are -- meet our underwriting criteria.

Ryan H. Bennett - Zelman & Associates, LLC

For the portfolio, do you see better pricing than that of one-off asset? Or is there any difference?

John E. Smith

Sometimes they are. It depends on the seller. And at the end of the day, you just never know until how many bidders there are and what the uniqueness is of the property, the submarket and the situation and the existing depth. But we're seeing a few portfolios that we haven't seen in the last year or 2, but also -- and plenty of individual properties, too. So it's combination of both, which is all good for us.

Ryan H. Bennett - Zelman & Associates, LLC

Got it. And then just one question, Dave. I think you had spoken about the occupancy before. Do you still have what your vacancy exposure is over the next 3 months and compare it to last year, just to give you more confidence that you'll keep the occupancy and it will accelerate this quarter?

David P. Gardner

I just want to clarify. When you say vacancy exposure, I'm not sure I exactly follow.

Ryan H. Bennett - Zelman & Associates, LLC

Just in terms of leases that are expiring that had not yet been renewed.

David P. Gardner

Sure. I mean, certainly -- as I mentioned before, the larger bulk of leases renew in that second and third quarter. Once you get into the fourth and first quarter -- I think the fourth, and first is around -- each are around 18% to 19% of leases renew at that point. There's a lot more that -- certainly, there's more that are renewing August, September. But once you get into October, it slows down a little bit. But that's -- I mean, that's very common. That's very typical. People want to be situated before school starts and all that, so not any different than any typical year. The second and third quarters -- the third quarter is our biggest quarter. It's 31% of the leases renew at that time. So I see that as only positive versus risk exposure. We can grab a lot more of those leases that renew. Now that new leases are humming along much better and the renewals for those that are going to stay, we're getting better rates there -- results there. So that's only a positive for us.

Operator

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

Ross T. Nussbaum - UBS Investment Bank, Research Division

I guess the good news is most of your audience has probably jumped over to Camden. Because I'll be honest, I've got a really hard time with a lot of what I've heard on the call today. I guess the first question I have is, why did you guys even announce that you were looking at going into new markets when the review -- the strategic review of that hadn't even really been done? Why wouldn't you keep that to yourselves, wait till you made the decision? And if you didn't decide to do it, we never would have known about it. Why did you feel that information needed to be released to the market earlier this year?

Edward J. Pettinella

It was back, I think, in February when I mentioned it. We already had, had the Whitten study. We had the results. And it's funny, the 2 previous times we did this, we announced it publicly and said we'd be studying it and to no fanfare, to no -- well, virtually no reaction anyway. I think in this particular case, it created a ruckus, not from my comment in February, because what noise started I guess in May, because article had been written by a reporter saying that we weren't just exploring -- this is my take on it -- we weren't exploring these markets, we were going into and we were going deep into the sunbelt, and that Greg was not a consultant but was an employee. When those comments hit -- came out of that article, that seemed to create a lot of noise. And so that's what happened. But early on, we were just saying, like we always do, we're going to look at markets along the East Coast, because that our backyard. And we -- now we just gave the results. But I think what heightened and exacerbated this whole issue was misinformation based on one article, which then led to a few others that was inaccurate.

Ross T. Nussbaum - UBS Investment Bank, Research Division

The second, I guess, question or comment is on the decision to exit the development business. So I guess what I'm struggling with is how you can definitively conclude that the issue with your stock multiple was potentially the development business as opposed to say that REIT investors often have a quality bias or that REIT investors, at least in the multifamily sector, value the companies simply through net asset value and the multiples are really a derivation of that. So the fact that you traded at lower multiple than AvalonBay and Essex and Equity Residential has nothing to do with development and has everything to do with the cap rate that the market applies to your assets. And just to cut off a leg of potential future growth seems -- I'm just -- I'm having a hard time rationalizing that, that's going to be the solution to narrowing the valuation gap.

Edward J. Pettinella

Okay. I hear where you're going. And it's hard to delineate which issue is driving stock price and valuation, and you've highlighted a few of them. But here's what's hard to ignore, Ross. We have, over the past year or 2, live responses from some of our largest shareholders, which is hard to circumvent. And they're saying, "We're not sure about your development strategy," ranging from that to, "We totally dislike it and we think you're hurting or destroying valuation." Well, I've been around a while, with a number of public companies. When you hear that comment, they're either BS-ing you or they're telling you the truth. I chose the latter, and it built to a crescendo, I think, in the last, I'd say, 4 to 8 quarters. And we just felt like we weren't accomplishing what -- why we went in. We were trying to the exact opposite in 2004 and '05. So given the inordinate amount of time and disproportionate amount of time we spent on development to do a good job, I think -- and we think we did on the few properties, projects we worked on, we don't think it translated. And it wasn't just the largest shareholders. It was the analyst space, in many cases. So it wasn't like we were dealing in the vacuum up here in Rochester and saying -- just guessing that it wasn't working.

Operator

And our final question comes from the line of Karin Ford with KeyBanc Capital Markets.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Ed, I guess another philosophical question on the development halt. Do you think there's enough external growth opportunity in kind of the acquisition/redevelopment core business that you'll be able to compete with your peers on an external growth basis in those 8 markets? I know you mentioned the low penetration that you see there. But do you think you'll be able to compete effectively from a growth standpoint externally?

Edward J. Pettinella

Unequivocally, yes, absolutely and most certainly. Do we think right now we have an eye where we are? Just looking at our -- what we've done this year in our pipeline, I would argue that against -- next to the As, I think we're really the only C/B player in our markets playing the game. And yes, you already mentioned earlier that we have a small -- relatively small concentration level of the total inventory of C/Bs. So yes, where we -- John and I definitely feel that the future is bright, especially if the economy is staying in this zone in terms of GDP and unemployment, slightly improving. I think there'll be many opportunities for us to grow. Secondly, we'll have a renewed focus on redevelopment, which is our highest-earning asset. Those -- that will play a huge gain. Our focus -- quite frankly, for us, our focus, beaming everything towards those 2 factors and nothing else, I think, should make an us even more dominant player in those 8 markets.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Okay. And then lastly, does the simplification of the story and the platform, do you think that makes Home a more attractive acquisition candidate for somebody? And was that a consideration in the decision at all?

Edward J. Pettinella

It was never a consideration. But an old M&A guy, we know -- we don't have multiple stories, on- and off-balance sheet activities. We're -- quite frankly, we're very strong if we get successful in getting a third investment rating equivalent to Fitch and Moody's. And with our concentrated focus and our track record and same-store NOI over 3, 5 and 10 years, I -- you would think that, that would be an attractive operation and a business set for the outside world. Yes, we're -- and if you believe me that the piece we jettisoned out here, with development, it makes us a stronger entity, I'd say yes.

Operator

And that does conclude the Q&A portion. I'll turn the call back to you.

David P. Gardner

Well, thanks. 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.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a nice day.

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