Home Properties, Inc. Q1 2008 Earnings Call Transcript

Home Properties, Inc. (HME)

Q1 2008 Earnings Call

April 25, 2008 11:00 am ET

Executives

Charis W. Warshof – Vice President, Investor Relations

David P. Gardner - Chief Financial Officer

Edward J. Pettinella – President and Chief Executive Officer

Analysts

Gregory Milken – Citigroup Global Markets, Inc.

Karin Ford – Keybanc Capital Markets

David Bragg – Merrill Lynch

Steve Swett – Keefe, Bruyette & Woods

Richard Anderson – BMO Capital Markets

Alexander Goldfarb – UBS

Presentation

Operator

Welcome to the first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Charis Warshof.

Charis W. Warshof

This is Charis Warshof, Vice President of Investor Relations. Thank you for participating in our first quarter 2008 earnings conference call. You can listen to the call and used synchronized slides on our web site at homeproperties.com. We also have posted our news release, supplemental schedules, and a .pdf of the slides on the web site. The call replay and script will be posted later.

Here with me this morning are Ed Pettinella, President and CEO, and David Gardner, Executive Vice President and Chief Financial Officer.

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 impact our future results. Each slide is numbered in the lower left-hand corner

Now David will discuss our financial results this quarter.

David P. Gardner

The first chart I’ll discuss is on Slide 3. This chart shows our funds from operations per share of $0.79, which was $0.06 higher than reported FFO for the first quarter of 2007 and $0.02 than last year’s first quarter operating FFO, which excludes the $0.04 per charge related to the redemption of the Series F preferred shares.

FFO of $0.79 for the first quarter was at the higher end of our guidance range, $0.02 higher than the mid-point of our guidance, and $0.01 higher than the analysts’ mean estimate.

The positive variance versus guidance was due to better than expected core property results and a benefit from a revised real estate tax assessment for our one consolidated entity. Revenue growth was lower than our guidance due to lower heating costs, which generated a lower level of utility recovery than anticipated.

Slide 4 shows our core property performance for the quarter. We define core properties as same-store properties owned since January 1, 2007.

On a sequential quarter-over-quarter basis, we had positive improvement in revenue growth with revenues up 2.4%. Expenses were up 5.9% due to higher winter-related costs which resulted in a decline in NOI on a sequential basis of 10 basis points. If fourth quarter 2007 results are adjusted to remain constant with first quarter winter-related costs and reimbursements to compare performance without the effect of winter weather, expenses would have been up only 80 basis points with positive NOI improvement of 50 basis points.

Comparing results for the quarter to the first quarter a year ago, same-property rental income and total income were both up 3.5%, which is mainly the result of a 3.4% increase in rental rates, including utilities.

Turning now to expenses, we saw an increase in operating expenses at our same-store properties of 3.0% compared to last year’s first quarter. The major area of increase was in repairs and maintenance, property insurance, real estate taxes and trash removal. These increases were partly offset by a reduction in natural gas heating costs and snow removal costs.

The various income and expense changes resulted in NOI growth of 4.0% for the quarter compared to the first quarter of 2007. This was a very healthy increase, especially when you consider the very tough comparison we had because last year’s first quarter NOI growth of 11.7% was the third highest of any quarter in our history. Some of our same-property NOI reflects incremental investments in our communities above and beyond normal CapEx. After charging ourselves a 6% cost of debt capital on these expenditures, adjusted NOI for the first quarter of 2008 is 3.2%.

Traffic for the quarter was good, up approximately 13% over the year-ago quarter, with signed leases up 5.0%.

Percentage increases in traffic in some regions may look larger than what we typically see. This is because of the new property management system is more robust in tracking this data. On the old system, someone could neglect to enter a piece of traffic that would not be picked up automatically because we used separate systems that tracked certain data that did not necessarily talk to each other.

As more properties are on the new system which is much more integrated, traffic is being entered more consistently. For the next couple of quarters, until all the properties are on MRI and LRO, you may see this same type of variance. Even after this technology explanation, it is clear that we are enjoying more traffic this year.

This pie chart shows our current capital structure. With a stock price of $47.99 at the end of the 2008 first quarter, leverage was 50.4% on our total market cap of $4.4 billion with approximately 96.0% of debt a fixed-rate.

Looking now at capital market activities, during the first quarter we bought back $50 million of common stock at a weighted average price of $46.66 per share. As of March 31, 2008, we had Board authorization to buy back up to approximately 290,000 additional shares of common stock or OP units. Management expects to request at the regularly scheduled May 1 board meeting that an additional two million shares or units be made available for repurchase and we will issue a news release if that occurs.

For our 2008 guidance, first I wanted to review how we did in the first quarter compared to our expectations. For the quarter, FFO per share was $0.02 above the mid-point of our guidance range. NOI was 4.0% versus guidance of 3.1%, primarily because expenses were 2.7% lower than expected. This was primarily due to warmer weather which reduced our natural gas heating costs. With the lower heating costs, our utility-recovery revenues also were lower, resulting in revenue that was 70 basis points lower than we had projected in guidance.

Before I review guidance for the remainder of 2008, I would suggest that you look at our supplemental where we have provided more detailed assumptions than are in the earnings news release.

For 2008, we are reaffirming the $3.39 mid-point of guidance and have tightened the range of guidance to $3.33 to $3.45 from $3.31 to $3.47. I have lowered the midpoint of fourth quarter guidance by two cents due to the lower level of acquisitions and higher level of dispositions we are now anticipating which will create dilutions in the fourth quarter.

This essentially offsets the first quarter beat of $0.02. Specifically, we are lowering our acquisition level from $150 million to $100 million, and increasing our disposition level from $180 million to $240 million.

I have tweaked our NOI assumptions slightly, but for the most part have left them the same. We’re still not seeing any reduced demand for our product type, supported by the fact that we continue to get reasonable base rent increases and have maintained very healthy occupancies through the winter season.

Any job reductions in our regions have not reduced demand. We also believe that there is less correlation between job growth and demand for B and C apartments versus A. We of course will update you on this subject next quarter, but as of now do not believe we should be reducing expectations for the balance of the year.

You will find more detail on 2008 guidance in the supplemental.

I will now turn it over to Ed.

Edward J. Pettinella

Slide 8 summarizes our first quarter acquisition and disposition activity. We actually made no acquisitions of apartment communities during the quarter. Cap rates continue to trend up slightly, possibly another five basis points this quarter. It’s interesting to note we are only up 25 basis points since June of 2007 on our existing portfolio.

We closed on three separate sale transactions in the first quarter. One transaction was the sale of five small properties on Long Island. We also sold Carriage Hill Apartments in the Hudson Valley and Mill Company Gardens in Maine for a total sales price of $64.5 million at a weighted average cap rate of 6.25%.

These all are properties we have held for long periods of time, upgraded extensively to maximize their value, and now see more limited future opportunities for them. During the year, we will continue to identify and possibly sell additional properties with similar characteristics.

We already have identified properties in New Jersey and Philly as sale prospects and expect to sell off the remaining properties in the Hudson Valley Region, effectively exiting that market.

One of the key initiatives this year is the continued rollout of the MRI Property Management software and the LRO yield management system. At the end of the first quarter we had 85 properties on the system with a total of around 25,835 units. This represents 68% of the portfolio. The reception in the field has been good and the rollout is progressing as anticipated, with completion expected in the second quarter. Remaining properties to be brought onto the systems are in D.C. and Philadelphia.

Now I’d like to give you an update on recent property results in our key regions. Overall, at mid-April, apartment Available to Rent (ATR) was 20 basis points higher than the same period a year ago. It is a little higher this year because more properties are on LRO.

LRO creates more availability because it is more aggressive with renewal rent increases in months with heavy traffic. Our occupancy level was very good in both the fourth and first quarters for the slower winter season months so we’re very comfortable with our position going into the peak leasing season.

In addition, last year we were still rolling out our utility recovery program. With that concluded, we expect our ability to push rents this year should be better. It’s too early to tell what our pricing power will be. We’ll know more in about a month or so.

Sequential revenue is up significantly from the fourth quarter, largely due to the seasonality of utility-cost recovery. Except in Florida where Home Properties concessions have remained fairly steady.

Concessions for us in all our other markets have decreased across the board. Generally, market concessions are mostly unchanged except in Philly and Boston, where they have increased slightly. Since with LRO there is no “free rent” component, concession movement is less important to us now.

We would currently rank our markets from high to low based on Property Management’s perception of market strength as: Suburban New York City, number one; followed by D. C.; Philly; Baltimore; Boston; Chicago; and finally, Southeast Florida.

Looking at specific regions, Chicago was very strong with occupancy in the first quarter at 96.5% and still trading higher than even in the month of April, the highest of any of our regions by the way. And although ATR was 40 basis points higher in mid-April than a year ago, Chicago’s sequential revenue was up 1.2%.

In the Suburban New York City region sequential revenue growth also was 1.2%. Occupancy was up 1/10 of 1% from first quarter a year ago with ATR at mid-April up 90 basis points from a year ago, mostly from the Hudson Valley.

In Washington, D. C., sequential revenue was up 3.3% with occupancy up 0.8% sequentially and up 1.7% from first quarter a year ago, the most improvement of all of our regions. ATR was 200 basis points lower than last year and the best of all our regions in mid-April.

In Baltimore, sequential revenue was up 2.7%. Occupancy was down 2/10 of 1.0% from a year ago with Available to Rent 200 basis points worse.

Boston’s sequential revenue was down 1.1%, the only region that did not see positive revenue growth. We can’t pass through utility costs yet in Massachusetts so that region could not enjoy the bump-up other regions are getting from utility recovery.

Occupancy was up 1.0% from a year ago with ATR at the same level as last year.

In Philly, sequential revenue was up 5.0%, the largest increase of all our regions. Occupancy was up 6/10 of 1.0% sequentially although down 4/10 of 1.0% from a year ago. ATR is 30 basis points better than a year ago.

Our Fort Lauderdale, Florida, properties had a 1.0% increase in sequential revenue although year-over-year revenue was down 2/10 of 1.0%, the only region with a year-over-year decline. Sequential occupancy was down 2/10 of 1.0% with year-over-year occupancy down 2.4%. ATR is up 270 basis points from one year ago, reflecting the continued softening in that market.

Some of the challenges for us in Florida is the market itself and some is competition. For instance, right across the street from our property is another property that is upgrading all of its units on turnover and charging approximately $100 less in rent than we are.

That covers our recent regional property results.

Slide 11 lists our new development projects. At Trexler Park West in Allentown, Pennsylvania, we have only 48 of the 216 units left to complete. These final two buildings are scheduled to be completed in the third quarter. All the 168 completed units at Trexler Park are leased and the project has had no negative effect on the original, adjacent property which is currently at 94.8% occupied.

At the high-rise project at 1200 East West Highway in Silver Spring, Maryland, excavation is nearly complete and foundation work should begin in May.

At The Courts in Huntington Station in Alexandria, Virginia, site work for access roads is underway. Construction on the apartment building is expected to begin in the third quarter of this year.

Falkland North in Silver Spring is a redevelopment project that is in the approval stage. We are awaiting notice from the Planning Board’s date for consideration of the master plan amendment by the Historic Preservation Commission, which designates all three parcels of our property as historic.

As most of you know, we had hoped that they would elevate only the South and West parcels thereby allowing us to go forward with our planned redevelopment of the North parcel. The vote on whether the North Parcel should have a historic designation will now go before the Planning Board and finally the County Council.

The County Council has the final say and even if the Planning Board votes in favor of the county-based historical designation, the Council can still vote not to add the North parcel to the Master Plan. We still believe this is a viable development project. Keep in mind that while the process goes forward we continue to collect rents from a very good asset. It’s not like vacant land that has significant carrying costs.

During the first quarter, we purchased land on Ripley Street in Silver Spring, Maryland, for $16 million for a high-rise apartment building. The seller of the site has already received many of the required approvals. We have filed the final site plan application, which is the last key discretionary approval item that needs to go before the planning board. We anticipate receiving final site plan approval in the third quarter and will then proceed with detailed design work.

More details are included in the supplemental schedule on the development pipeline.

We will continue to keep you apprised of our progress.

That concludes our formal presentation. We will now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Greg Milken - Citigroup.

Gregory Milken – Citigroup Global Markets, Inc.

You mentioned that you haven’t yet seen any reduced demands despite the weak numbers over the past few months. And your same-store assumptions for the year are essentially unchanged. Are you not cautious that weaker demand may start seeping into the portfolio in the quarters ahead?

David P. Gardner

Again, that could happen. It certainly takes at least, in our opinion, a couple quarters of job loss before you start seeing reduced demand. So I think we’re still a little early on. But more importantly, we’re taking our cues more from—instead of just the general economic environment—our specific markets in traffic and occupancies. And things are holding up so well that it’s difficult to see out the number of quarters where we’re going to see an issue. And it if comes I think it’s going to be much later in the year; possibly even early next year. And maybe by then the tide will have turned.

Edward J. Pettinella

A couple of more specifics to what David is just saying—we’re looking—we’re deep in April, our occupancy is hovering well above 95% right now. Our traffic is clearly up. Our turnover ratio is at a 7-8 year low, hovering down near 40% annualized, 9%--which is even below that—for the quarter. There are a number of trends that we’ve watched—you know, we must have missed the memo about the recession that is happening right now because it’ll probably be for us—even if there is one coming that will affect our properties, we sense its many months off.

I’ve asked all our key people along the East Coast and Chicago what are they seeing; are they seeing any early signs. And quite frankly, for us, we’re not seeing them. And if you go back to the—and it’s been written about us a lot—if you go back to the 2001-2004 period, even in that recession where it dropped precipitously for many of our peer-group competitors, we only had a mild dip. We dropped, but it was not nearly as much. And I would say that given the strength of our portfolio today versus where it was five and seven years ago, I think we’re going to hold up even better. And I think that’s what you’re seeing right now.

Gregory Milken – Citigroup Global Markets, Inc.

And then on the new development park in Maryland, any more information you could give? You know, once you receive final site plan approval, expectations on the start date, initial yield?

Edward J. Pettinella

As we get more information we’ll try to keep you updated down the road on a quarterly basis with that. But we can’t give much more at this point.

Gregory Milken – Citigroup Global Markets, Inc.

Could you talk about natural gas hedging, how much is hedged, and at what price?

Edward J. Pettinella

Right now I would say it’s around 35%. What we locked in, we’re very fortunate. We got a cost of, I think—I want to say $8.68, which was very similar to what we locked in last winter. How we generally do this--and there’s no set program—usually there’s periods of time—December, January—there seems to be a low where we can buy; sometimes in the early spring, and usually sometime in the summer—between summer—certainly before the hurricane season starts we’re able to catch another window.

So we will continue to hedge the remaining portion. We would like to get to the 90% [inaudible] percentage coverage at some point between now and probably Labor Day. So we’re more than a third of the way now.

Operator

Our next question comes from Karin Ford - Keybanc Capital Markets.

Karin Ford – Keybanc Capital Markets

On Washington, D.C., the sequential occupancy gain and the overall top line growth looked pretty good there. Do you expect that Washington is going to be sort of a haven of safety, even more so than some of your other markets, once again with the job growth? And do you think that a lot of the pressure from the single-family condo side has started to abate in Washington at all?

Edward J. Pettinella

Here’s what I tell people. If I have to get stuck in one market, I’m picking Washington, D.C. in America. That held up extremely well in the last recession, from 2001-2004. It’s holding up well for us now. Ironically, we had some occupancy struggles a year to two years ago, but for now it’s turning around. We actually—I’m looking at the current level for Washington right now—we’re well over, on a national basis, we’re well over 95% occupancy at the moment. So it is holding well. Yes, you’ve got defense, you’ve got the government, and you’ve got good population trends. We like that market and yes, we do believe that will hold up extremely well.

That will probably prove out to be the anchor. If there is a down period coming, more severe than what we’ve seen, that will hold up and be the anchor and it’s starting to shape up like that’s our cornerstone. And with about 30% of our [inaudible] generated out of that region, we feel very comfortable.

You asked a second part of that I can’t remember what you asked me about.

Karin Ford – Keybanc Capital Markets

Have you started to see some of the pressure that’s been in that market from single-family side and condos. Has that abated?

Edward J. Pettinella

No, not really. It’s interesting. We’re in the ‘burbs, so first the condo market, we’ve been pretty lucky. And I’ll call it luck. Most of our markets are not caught up in the whole condo—the busted condo movement. What we’re seeing—the phenomenon that’s going on with us right now, and it’s not just in D.C., there’s a couple of factors: we think buyers that are on the edge of being able to qualify are having second thoughts--the underwriting that the banks put you through, the higher LTVs, the bigger down payments, the fact that you might not get pre-payment penalties like you would like, is causing more people to stay with us; people that are selling their homes that have not quite gone bankrupt—the [inaudible] which you read in the national press I think is a movement to the B class apartments; and I think three, I think you’re seeing some people in their late-20s, early-30s, they’re living in a higher cost apartment, $2,500-$3,500 a month and they’re coming to us in the D.C. region for $1,300-$1,200 and they’re saying, “I can save a lot of money during this tough period of time.”

I’m calling it a quiet, silent run because we continue to be flabbergasted by our occupancy levels because we’re actually not trying to jack our occupancy levels up right now. We’re right in the midst of trying to push our rents, but there’s some inertia coming from multiple sources. I tried to mention a few. We’re not a hundred percent sure.

So like I said, Washington would be the bellwether but we’re seeing similar situations in Northern Jersey, Baltimore, and Boston.

Karin Ford – Keybanc Capital Markets

I wanted to follow up on your comment earlier that you think there’s less correlation with job growth in your B apartments versus A apartments. Why do you think that is and what data have you looked at to check that out?

Edward J. Pettinella

Well, we know the unemployment levels along the East Coast have been trailing—have been positive, about a percent below. The last I saw, at year-end we were 3.8% on an unemployment level versus the national average of 4.8%. I think it’s kind of gone to 4% and 5% respectively. So I do think that’s key. The only thing I would tell you on a live basis, in our bedroom communities we’re not feeling the sensing a lot of companies have cut back in large groups of people; as of yet. Now, there’s been some recent companies announcing and maybe that will have some adverse impact but to date I think that cushion we have is working for us in some of our major markets along the East Coast.

So, it’s important but I think we’ve always been on the plus side of that equation. And generally have been, even during a recessionary period, our unemployment levels seem to outperform the national markets.

David P. Gardner

Certainly back during the last recession, you know, our own experience, we clearly outperformed. But I’ll give credit to some of you analysts out there. I’ve read a couple of the reports; I can’t remember—I can’t attribute the names—but I know there were at least two different analysts that commissioned some studies and gave their feeling was that there was much less correlation, so I’m stealing some of their research.

Karin Ford – Keybanc Capital Markets

On bad debt, it looked like that was elevated again for the second quarter in a row. Are you seeing pressure on your residents from energy, food costs?

Edward J. Pettinella

It’s hard to specify where the pressure is but certainly there’s no question that the economy is a little—it is weaker—and we believe that our residents are feeling a little bit more of that pinch. The thing is, it’s not resulting in occupancy pressure, it’s resulting more in what you’re seeing here, a little bit higher bad debt run. I think as we’ve said a couple of different quarters, the two receivables that we’re dealing with is rent and utility receivable. Our utility receivable was running, you know, on a relative basis, higher and older than our rent. So even though it ultimately comes to us, I think they’re quicker to pay their rent than they are the utility bill, so the bigger portion of our debt relates to that.

The other thing I would mention, you know if you look for reason-to-move-outs, clearly one big reason that we’re seeing go down, kind of the story I was talking about a few minutes ago, the reason for home purchase is way down. But you also see the reason for rent model is up about 170 basis points. So it’s been fairly constant and lower so I think people are starting to feel the pinch a little bit.

On the flip side we are being a little bit more aggressive in our late charges and we’ve actually received more in income in late charges compared to a year ago. So if you were kind of netting that out against the bad debt expense, the 106 would be down to about a 93, so it would compare a little better.

But no question, people are feeling a little bit of the pinch. But what we’re glad about is occupancies are holding up.

Karin Ford – Keybanc Capital Markets

I think you had talked last quarter about expanding the size of your line of credit. Are you still working on that and how has the demand been for it?

Edward J. Pettinella

We’re exploring alternatives but there is no question that right now it’s a tough pricing environment for credit. We have the easy ability to extend for one year with absolutely no change with pricing and availability and such, and I would say we’re probably leaning more towards that. We have some other—as you notice, we upped the level of our disposition of debt, we have some other second mortgages we’re looking at we could take out at a very competitive rate, so I think we are looking to try to get through—2009 is the year where I see a little more pressure in needing some additional funds, but I think that’s a long-term goal, but short-term it’s probably not going to happen right away.

Operator

Our next question comes from David Bragg - Merrill Lynch.

David Bragg – Merrill Lynch

I just wanted to get a quick clarification on your commentary on cap rates. Did you say that from your perception they’re up 25 basis points from June of last year?

Edward J. Pettinella

Yes. I’ve got it right in front of me. In June of 2007 our cap rate was around 5.95%, September I think we were around 6.05%, December 6.15% and March 2008 it’s 6.20%, so by my calculation it’s around 25 basis points.

David Bragg – Merrill Lynch

And the 5.95% starting point, we’re running off the cap rate that you used to provide in your NAV?

Edward J. Pettinella

Yes. And also that we had—just so you know—we had, in all those figures I gave you from June 2007 to March 2008, we added 25 basis points for debt-related issues. Pre-payment costs and so forth. So we’ve already factored that in. I guess in order to be a little more realistic and conservative.

David Bragg – Merrill Lynch

So that has not changed since we last saw your NAV?

Edward J. Pettinella

Correct.

David Bragg – Merrill Lynch

Did you say you are looking to exit the Hudson Valley market? And if I look at your second half disposition expectations, could you give us an idea of just what percentage of those this sale in itself would represent?

Edward J. Pettinella

I think the Hudson Valley Region is around 693 units; it’s not that big. And I’ll tell you a real quick—I was with some of the other CEOs and they asked me—they didn’t even know where Hudson Valley Region was; they were kind of laughing at me. So it must not be that big of a well-known area nationwide. So, it’s a small peanut relative to our total portfolio.

Edward J. Pettinella

It’s probably about 40% of what’s left to sell for the balance of the year. Net ballpark. 40%-50%.

David Bragg – Merrill Lynch

I know the turnover numbers are a bit distorted this quarter, but do you have an apples-to-apples number that kind of compares to your fourth quarter number?

Edward J. Pettinella

It’s not turnover; it’s traffic.

David Bragg – Merrill Lynch

I’m sorry, I misspoke. Traffic.

Edward J. Pettinella

The problem is we’re comparing to last year at this time and last year is what it is and this year it’s a more automated process and we’re capturing more, so it’s very difficult to—we can’t recreate a year ago, so it’s up 13%. How much of that is real versus what we’re capturing? It’s difficult to pinpoint. It’s clear that our property management teams are very excited and they’re suggesting that traffic is up, so can’t get any more detailed than that, though.

David Bragg – Merrill Lynch

If we look at Page 25, you did not change your market expectations for growth in the bottom right from last quarter and clearly we can tell your bullishness on the D.C. region. What regions, at this point, nearly four months into the year, are looking to under perform your initial expectations?

Edward J. Pettinella

Clearly Florida has already started to disappoint. The good news is there’s only two properties and a little over 800 units there. That, I would say—maybe Boston’s a little tighter than it had been. Those are the only two.

And some of the others are [inaudible] surprises I think. So, it’s D.C., certainly Northern Jersey. I think there’s some offsets there, coming.

Operator

Our next question comes from Steve Swett - KBW.

Steve Swett – Keefe, Bruyette & Woods

Revenue expectation supporting the guidance, Dave, did you say that was all attributable to the lower utility reimbursements?

David P. Gardner

I think it’s about 70% of the reduction of revenue from what we anticipated was strictly from reduced heating cost expense. So it was a very small amount that was related to base rent. And actually out of that, most of that is bad debt related. We had hoped and anticipated that bad debts would come back down, you know, maybe more into the [inaudible] level or something so the fact that that stayed up was, I don’t want to say a surprise, but that’s the line item that most of the change occurred in. Other than utility reimbursement.

Steve Swett – Keefe, Bruyette & Woods

And the same thing with the expense line? Is that largely due to the utilities being lower?

David P. Gardner

A little over 60% of the positive variance there was heating costs. Repairs and maintenance came in a little better and personnel came in a little better.

Steve Swett – Keefe, Bruyette & Woods

On the traffic, again I understand maybe you don’t the best detail on your prior year’s traffic, but any sense—any indication on which markets are seeing the biggest changes in traffic and maybe what is driving the increase, whether it’s people coming out of homes or something else?

Edward J. Pettinella

We do have the traffic changes by market listed there, so I think you just have to reduce all those somewhat from what is published. I mean, certainly Hudson Valley at 63%, we know that that’s not real, but the biggest improvements are in Boston. And Florida actually has a lot. You know, New Jersey is up. There’s none—and Philadelphia is the weakest one as far as traffic, at 4%. But I don’t think there’s any region that we’re seeing negative situations as far as traffic. So even though Florida is weak as far as the ability to put trends and occupancy is down, we’re certainly seeing a lot of traffic.

Steve Swett – Keefe, Bruyette & Woods

I guess I’m just trying to understand what is supporting the increase in traffic. There’s fewer people looking to move into homes this year than last year?

Edward J. Pettinella

The reasons we gave—we keep asking the guys because it’s tough to get the data but it’s the few reasons I rattled off. I think we’re starting to see a couple of things. First, to help our foundation, less people leaving. Secondly, it’s people that I think are qualifying for homes, or close to it, the carrot keeps getting pulled away from them with the way—how tight banks are and underwriting. And I think you’re starting to see some movement from A to B.

And I don’t know if any one category is huge, Steve, for us to get a real good gauge on it, but I’m telling you, with our occupancy levels right now, deep in April where it is—95%+--the people are still coming through the doors, across many of our markets. And I think that’s probably the most encouraging news I feel right how.

However, to be balanced about this, if you asked me if there’s a lot of pricing elasticity in the regions, I would say probably not at the moment. I think a lot of us are out there getting traffic but it’s a pricing ban right now. I don’t think anybody is really a cowboy out there, pricing away from the ban, because I don’t think it’s there at the moment.

Steve Swett – Keefe, Bruyette & Woods

David, just last couple of questions related to your leasing turnover. All the leases that you signed in the first quarter, how many of those were people that were already paying their utilities and how many of those people were asked to pay their utilities on their new lease?

David P. Gardner

We are 100% through that phase. I mean, that ended in August 2007 so certainly anybody that was an existing resident that renewed, they had already been on the system.

Steve Swett – Keefe, Bruyette & Woods

You just said in August is when you’re fully through that year-over-year . . .

Edward J. Pettinella

Certainly the first quarter enjoyed—first quarter a year ago we still had a lot of residents that hadn’t started paying it. Certainly now they are. But any new lease, it’s always apples-to-apples now.

Operator

Our next question comes from Rich Anderson - BMO Capital Markets.

Richard Anderson – BMO Capital Markets

On the topic of utility reimbursement, isn’t that really a wash to you? Meaning that you have to pay it and then you bill your tenants for it; doesn’t it sort of come out of one bucket into another?

David P. Gardner

Yes.

Edward J. Pettinella

Yes.

Richard Anderson – BMO Capital Markets

So the fact that revenues were down and expenses were down, so it’s sort of like a who-cares type thing?

Edward J. Pettinella

Well, we’re still responsible for—it’s like 17% of the properties that we don’t do it and 10% common area. So it’s still close to 30% of the expense that I do care about. And we care about—I mean, to me, it’s positive that the utility expense is down because our residents have a smaller nut that they have to pay. So that is positive news for us.

David P. Gardner

And potentially could be translated into a slightly higher rental rate down the road. We don’t know, but we certainly like that position.

Richard Anderson – BMO Capital Markets

When you hedge—you say you like to be 90% by Labor Day, that’s just, again, the 30% that you’re still on the hook for, right?

David P. Gardner

No.

Edward J. Pettinella

No. We hedge 100%. Whatever we’re hedging, it’s everything we’re paying.

Richard Anderson – BMO Capital Markets

How do the residents benefit from your hedging?

Edward J. Pettinella

That’s a key point. We tell them that. Because it’s a lot of where we’re told by suppliers we’re the equivalent of a large U.S. industrial company in terms of the usage of natural gas. So we come rolling into the suppliers; we get the wholesale level and the customers—you and I—we get the retail level. So we talked about that. That could be as much as a buck or two or more, depending on the volatility in the natural gas markets.

Richard Anderson – BMO Capital Markets

And just back on the sort of the wash concept. Why did you—I guess I’m just trying to figure out. You said you missed in revenues but in NOI the utility issue just doesn’t matter.

Edward J. Pettinella

Because of the 30%.

Richard Anderson – BMO Capital Markets

What is the general mindset for increasing your dispositions? Why did you suddenly feel that you wanted to do that?

Edward J. Pettinella

I don’t know if it was sudden. I mean, I think we suggested in the last quarter or so, we are exploring more potential dispositions. It’s a logical source of funding for whether it be the buy-back we just had, future potential stock buy-back, you know capturing is still fairly low, cap rate environment.

You have to keep in mind where we’ve been. You’re seeing a couple of other majors across the country doing some big sales. Home did their—for us—on a relative basis did our big sales in 2005, 2006, and 2007. Detroit, upstate, and so forth. But we focused on the big portfolios. My gut as I sit here, we’ll have $200+ million sold this year but I’ll be surprised that after this batch is sold out that we’re going to have other than a onsey/twosey here and there—we like our markets.

The Hudson Valley Region, we had just one eye on for quite a while, but it wasn’t big enough to get too excited. We just didn’t want to get that in the middle of quarter billion dollar sales we had the two prior years.

The other thing is weren’t—to be perfectly frank—we weren’t sure cap rates were going to hold up from last summer. But lo and behold they are, and we’re in there and we’re ranging from 5.9% and 6.25% and we’re happy campers on selling the stuff that we quite frankly don’t think our best product that we recently bought. So we like lightening up a little bit in this market, but we’re pretty much done after this year, would be my guess.

Richard Anderson – BMO Capital Markets

David, at some point in the conversation you said—I don’t know what you were referring to—that 2009 might be tougher, more challenging. I don’t remember what exactly you were commenting on.

David P. Gardner

I think it was referencing cash needs and the line of credit discussion. Just as we continue to ramp up development and some of those cash needs—it just means I’m going to need some dry powder for 2009.

Richard Anderson – BMO Capital Markets

So then to that sort of next year type of comment, do you guys see 2008 as sort of just an industry bottoming and that 2009 actually is where things start to trickle back up? Is that sort of how you see the world right now?

Edward J. Pettinella

Yes, I think that’s been answered a number of times and I’m still, as I said, on the right of cautiously optimistic. We like where we are right now. When the guidance was being put together I was a little more nervous with David. I feel a little bit better right now. The markets are holding up. I think we’re going to get our way through 2008 before anything hits the fan. And I think between what the Fed is doing, what the two big sugar daddies are doing—Fannie and Freddie—is helping us out. That’s good news for us. I do think sometime in 2009 we will be on the other side of this and I think that bodes well for our sector.

Richard Anderson – BMO Capital Markets

When I think of you and your portfolio, I think of a tenancy that has sort of left trends and sort of stays put. You have lower turnover and all that. Probably larger units, I don’t know what percentage of your units are 3 bedrooms, but do you guys sort of have in your crosshairs, watching for people leaving to maybe go and rent a home that might become available and you might be more exposed to that because of the nature of your business?

Edward J. Pettinella

The answer to one question—the 3 bedrooms are around 9%-10% of our portfolio. So it’s not large. You know, we don’t get that detailed. I mean, if someone is saying they’re leaving for another rental situation we haven’t gone so far as to try to figure out if it’s because it’s a single-family home or not. My sense is it happens a little bit, but I think if you’re into a single-family home situation the rent is going to be a little bit higher than were typically paying, so I don’t think we’ll see a lot of that.

Richard Anderson – BMO Capital Markets

You’re not worried about it?

Edward J. Pettinella

No.

Operator

Our next question comes from Alex Goldfarb - UBS.

Alexander Goldfarb - UBS

Just to go into the line of credit for a minute. Back on the first quarter call—sorry, the fourth quarter call back in January—you guys mentioned about targeting sort of an average $40 million for the year and ending up with about $100 million at the year-end given on the line of credit, balance. And just wanted to get a sense given the increase in dispositions, is that still your target?

Edward J. Pettinella

No, we’re probably, for the most part—I mean my guidance doesn’t suggest any additional stock buy-backs for the balance of the year. So I think for the most part there will be a little bit of repositioning debt will be the like candidate for reduced level of outstandings will be the line, so I think you’ll see that come down. And again, that’s kind of preparing for the balance sheet of 2009.

Alexander Goldfarb - UBS

So then there was—you had spoken before—about a $0.03-$0.04 pick up from using more of the line of credit. That’s no longer the case?

Edward J. Pettinella

No, I think we’re still going to get a decent amount of that because a lot of the sales activity that we have projected is still into the fourth quarter so we’re not going to see—I think second and third quarter we’re still going to be using the line quite consistently and getting some benefits from the LIBOR-based pricing there. And where you’re going to see more of the possible issues of the fourth quarter. That’s why I reduced that a little bit.

Alexander Goldfarb - UBS

On the assets you’re selling, what’s the typical leverage on those?

David P. Gardner

I don’t have the exact number. I’m positive it is below our average and our average is right around 50% or a little under. I think these are below 40% but I don’t have the exact number.

Alexander Goldfarb - UBS

Can you just comment—you spoke about bad debt. But can you just comment on delinquencies? And then also remind us if on the utility recovery program, do you guys wholly administer that, in the sense of, I think there’s a third party that get involved, but do you then track down everyone to make sure they’re paying or does the outside entity take care of collecting payments?

David P. Gardner

I’ll take the second one first. We do use a third-party provider that basically we give them our utility bills, they have a system set up where whatever statistical square footage or number of occupants or whatever—whatever we’re using to allocate, they make that calculation, they send out the bill, and what the biggest change has been, Alex, is that up through probably the middle of the fourth quarter we allowed that third party to do the collections for us, up to the first 90 days. And we really didn’t have any visibility there. I shouldn’t say visibility—we didn’t have contact with our residents on that. They were doing any kind of notification or trying to collect.

What we’ve done is we’ve slimmed that down to 30 days, where we get involved much quicker. And I think what we’re looking towards is moving that even down to a point—and it’s going to take another quarter or so before we do this—but we’re moving toward having them just prepare the bill and then us get involved on day one. We’ve realized that we certainly have a much more risk, a much better direct relationship with the residents, and we want to take a more active involvement in that collection process.

So that is part of the reason that we’re hopeful that we’re going to be able to get this just a little more under wraps in the future but again, it doesn’t happen over night. It will happen in the next couple of quarters.

And I wasn’t sure about your question on delinquencies.

Alexander Goldfarb - UBS

Just the trend on delinquencies. Is it flat, down, up?

David P. Gardner

It’s basically flat.

David P. Gardner

And hopefully, as we’ve taken control over the energy piece that Dave described, we think there could be some positive movement there over the next number of months. But I don’t know how that will counter if the market deteriorates further but in a static situation we should be able to shave off a few basis points on delinquencies because of that.

Alexander Goldfarb - UBS

But overall, your delinquencies overall on rent payment and stuff, those trends are flat?

David P. Gardner

Compared to the last quarter or two. Compared to a year ago, they’re up.

Alexander Goldfarb - UBS

How much are they up?

David P. Gardner

I’m using the bad debt comparison to give us more of an indicator there. That’s up 25-30 beats, so that’s a good bellwether for the level of delinquencies. Some of that is created, though. I’ll give you an example. We have properties in New Jersey that went rent de-control. And the current renters are paying $800. The new residents comes in when we can take them to market, are paying $1,600. We’re seeing more delinquencies from people at $800 levels than we are at the higher level. And we actually enjoying seeing them being a little delinquent and if we take quick steps to move them out, we can move somebody in that’s going to be more than willing to pay that higher level. So it’s to some extent a little bit of delinquency now, we’re creating.

Operator

There are no further questions at this time.

Edward J. Pettinella

Well, if there are no further questions, we’d like to thank you all for your continued interest in investment home properties. Have a great day.

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