Home Properties, Inc. Q2 2008 Earnings Call Transcript

Home Properties, Inc. (HME)

Q2 2008 Earnings Call

August 6, 2008 11:00 am ET

Executives

Charis W. Warshof – Vice President, Investor Relations

Edward J. Pettinella – President, Chief Executive Officer, Director of Company and HRPS

David P. Gardner – Chief Financial Officer, Executive Vice President of the Company and HRPS

Analysts

David [Tote] – Citigroup

Paul Morgan – Friedman, Billings, Ramsey & Co.

Alex Goldfarb – UBS

Karin Ford – KeyBanc Capital Markets

Haendel St. Juste – Green Street Advisors

Alan Calderon – European Investors, Inc.

Richard Anderson – BMO Capital Markets US

Presentation

Operator

Welcome to the Home Properties second quarter 2008 earnings conference call. (Operator Instructions) It’s my pleasure to turn the conference over to Charis Warshof of Home Properties.

Charis W. Warshof

This is Charis Warshof, Vice President of Investor Relations. Thank you for participating in our second quarter 2008 earnings conference call. You can listen to the call and view synchronized slides on our website at HomeProperties.com. We also posted our news release, supplemental schedules and a PDF of the slides on the website. 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 Two and the Safe Harbor language included in our news release which describe certain risk factors that may impact our future results. Each Slide is numbered in the lower left corner.

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

David P. Gardner

Since we are the last in the apartment sector to report, we’ll try to give you a break and be relatively brief with our prepared remarks. The first chart I’ll discuss is on Slide Three. This chart shows our funds from operations per share of $0.90 which was $0.05 than FFO for the second quarter of 2007. FFO of $0.90 for the 2008 second quarter was $0.02 higher than the highest end of our guidance range and $0.04 higher than both the midpoint of our guidance and the first call mean estimate. The positive variance versus guidance was due primarily to better than expected core property results of over $0.03 per share. Revenue growth was better than our guidance due to a higher level of utility recovery than anticipated and expenses were also better than forecast.

Slide Four 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, although rental revenues were down 40 basis points, because of the normal lower utility reimbursement due to the warmer weather, base rental income was up 1%. Expenses were down 9% due to the typical seasonality of lower natural gas and snow removal cost during the winter months. NOI on a sequential basis was up 6.2%. Physical occupancy was up 20 basis points to 95.1%. Comparing the results for the quarter to the second quarter a year ago, average monthly rental rates including utility reimbursements increased 3% offset by a 0.5% decrease in economic occupancy growth in same property rental revenue was 2.5%. With an increase in other income total income was up 2.8%. Weighted average rent per unit is now $1,131 per month.

Turning now to expenses; we saw an increase in operating expenses at our same store properties of just 60 basis points compared to last year’s second quarter. A major area of increase was in water and sewer, real estate taxes and trash removal. These increases were partially offset by a reduction in repairs and maintenance. The various income and expense changes resulted in NOI growth of 4.3% for the quarter compared to the second quarter of 2007. Some of our same property NOI reflects incremental investments in our communities above and beyond normal cap ex. After charging ourselves the 6% cost of debt capital on these expenditures, adjusted NOI for the second quarter of 2008 is 2.9%.

Traffic for the quarter was good, up approximately 11% over the year ago quarter with signed leases up 6%. Percentage increases in traffic in some regions may look larger than what we typically see. This is because the new property management system is more robust in tracking this data. Now that all properties are on the new system traffic is being reported more consistently so after another few quarters, the year-over-year regional comparisons will look more consistent. Even after this technology explanation, it is clear that we are enjoying more traffic this year.

This next pie chart shows our current capital structure. With a stock price of $48.06 at the end of the 2008 second quarter, leverage was 50.5% on our total market cap of $4.4 billion with approximately 94% of debt at fixed rates. Based on yesterday’s closing stock price of $56 leverage is 46.7%.

For our 2008 guidance, first I wanted to review how we did in the second quarter compared to our expectations. For the quarter, FFO per share was $0.04 above the midpoint of our guidance range. NOI was 4.3% versus guidance of 1.9% primarily because expenses were 2.9% lower than expected. This was due to lower repair and maintenance expenses, natural gas hearting cost and personal expenses than expected. The lower repairs and maintenance level is partially a timing difference. For the year, we are projecting repairs and maintenance to be up only 1.8%. The second quarter has a very positive variance but we expect that to reverse out during the quarter. Core properties exceeded expectations by over $0.03 with the balance coming mainly from reduced interest expense.

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 increased the midpoint of guidance from $3.39 to $3.41 and have tightened the range of guidance by increasing the lower end to $3.37 from $3.33 while leaving the high end the same at $3.45. The new range would be an increase in FFO per share of between 5.2% and 7.7% for the year. I’ve lowered the midpoint of both third and fourth quarter guidance by a $0.01 due to our expectation that rental revenue could be lower in the second half as economic conditions continue to erode and we expect increased net heating utility cost. I’ve lowered our NOI assumptions for the third and fourth quarter, although for the year NOI is expected to grow by 3.8% versus the 3.5% previously projected due to our beat in the second quarter. We expect to increase in total revenue growth for the year of 3.6% although we now expect economic occupancy to decrease 20 basis points for the year.

I’ve lowered the level of acquisitions for the year from $100 million to $50 million since we have not purchased any property thus far and continue to experience perhaps the toughest acquisition climate we have seen. Dispositions has also been reduced from $240 million to $140 million as we now expect some sales in the Hudson Valley region and other areas that we are exiting will occur in the first quarter of 2009 rather than late in 2008. You’ll find more detail on 2008 guidance in the supplemental.

I’ll now turn it over to Ed.

Edward J. Pettinella

One of our key initiatives this year was the continued roll out of the MRI property management software and the LRO yield maintenance system. As planned during the second quarter, we completed the roll out. We try to gage the impact of LRO our results and we look at nine properties on LRO and compared them to nine similarly located control properties. We studied lease rates, vacancy and total revenue for periods prior to LRO installation and up to 12 months after. The results show an increase in total revenue for the properties on LRO slightly better than 1%. It is very difficult to completely isolate LRO as the cause and effect given all the other variables in place but with various tests showing pretty consistent results, we feel relatively confident now that LRO should result in approximately 1% lift in revenue compared to the one half of 1% we originally had anticipated.

Now, I’d like to give you an update on recent property results in our key regions. Our occupancy level has been very good since the fourth quarter when leasing in the winter months typically is slower. Occupancy stayed strong going in to the peak leasing season and has increased 20 basis points sequentially from the first to second quarter. June occupancy at 95.2% was 10 basis points higher than for the whole quarter as a whole. On a sequential basis, every region had positive occupancy growth except Baltimore. Florida has the best sequential occupancy growth nine tenths of 1% followed closely by Washington DC at eight tenths of 1% and Boston at seven tenths. In the supplemental you’ll find occupancy details for each region.

You’ll also find detail in the supplemental on base rent, total revenues, expense and NOI for each region both sequentially and year-over-year. I’ll just hit a few of the highlights. Base rent was up 1% sequentially for the core properties and was positive in every region except Florida. The highest region was in DC at 1.5%. Year-over-year second quarter base revenue rentals were up 2.5% again with Florida the only region showing negative growth and DC at the top with 3.8%. Apartment available to rent or ATR which is usually a good predictor of future occupancy at the end of July was 50 basis points better than the same period a year ago so we’re feeling pretty good now in the third quarter. Florida had the best ATR of all the regions at the end of July so even our weakest region appears to be improving. Florida’s availability was better by 210 basis points from a year ago, Chicago’s ATR improved by 150 basis points from a year ago, both Long Island and Boston were 90 basis points better, New Jersey’s ATR was 70 basis points better, DC was 60 points improved and Philly 40 basis points better. The regions with worse ATR were Baltimore by 80 basis points and Hudson Valley by 30 basis points.

Looking at concessions, in Boston concessions decreased and we are offering virtually no concessions there now. In the quarter we saw a slight increase in concessions in the Hudson Valley, a region we are exiting and in Baltimore and Florida. There was not much change in the other regions. We would currently rank our markets from high to low based on property management’s perception of market strength as Washington DC as number one followed by the suburban New York City region, Philly, Boston, Chicago, Baltimore and Southeast Florida. That covers our regional property results.

From an acquisitions perspective, we continue to look at deals but find it very difficult to make them work. We see cap rates continuing to trend up slightly probably another 20 basis points in the second quarter. This follows three quarters in a row of 10 to 15 point increases so by our estimation cap rates since the low point in June are up about 45 basis points for our type of product. On a development side, we really don’t have any new projects to report and those that are in progress are moving along essentially as I discussed last quarter.

That concludes our formal presentation. Keeping in line with keeping this short, being the last one to report so we’re happy to answer any questions you might have now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of David [Tote] – Citigroup.

David [Tote] – Citigroup

A couple of questions, there’s one particular statistic I find interesting with regard to your residential customers, home purchasing move outs dropped as would be expected but move outs related to rent levels increased. Can you talk a little bit more about your sense of why that popped up?

Edward J. Pettinella

I would suggest that there’s two kind of indicators we’re looking at that kind of lead us to believe that the resident is feeling the pinch a little bit and that is we’re continuing to have bad debt level, it’s actually four quarters in a row now where we’re over 1% where we use to be about maybe 75 basis points so that I think tells us a little bit that they’re feeling the pinch. And, we certainly noticed that increase it’s been a fairly consistent reason for move out. It’s been between 7.5 to 8.5 so the fact that it got up to 10, I think people are feeling the pinch of gas prices being up, groceries being higher, we’ve said before that even though our occupancy levels are holding up very well that our residents are price sensitive so it’s been tough to be too aggressive in rent increase so I think it’s not unusual that they are feeling that a little bit.

David [Tote] – Citigroup

Then just sort of along those lines, can you talk a little bit about your sort of employment assumptions that are underpinning your guidance at this point?

David P. Gardner

We go pretty much by the employment levels in those markets. I don’t know if I have the sheet with me, the last we updated it we continue to be about 1.2% below the national average. There’s not one of our markets that are actually at the national average, just at the average. So it seems to be going okay. As I’ve said to folks recently, when we’ve talked to people in the field we’re not seeing companies that are losing 500 to 1,000 people or more in our particular bedroom community so, so far so good. The good news, at least in northern Jersey, we’re not feeling much of an impact of the Wall Street debacle. I think generally the type of clientele we have are not directly impacted by that. I think unemployment, my sense is that unemployment is holding steady right now in Philadelphia, in Baltimore, not materially changing so we feel the unemployment level is okay. The other thing I would tie back to is your first question, I think bad debt is creeping up slightly, people are feeling the pinch but if you look at our turnover rate, it’s holding steady at 11% or annualized at just over 40% which is the lowest in the industry so it may portend – the leading indicators may portend a little more difficulty in the quarters ahead but it’s not translating in to some of the other more solid indicators we look at like turnover. So, while we’re watching it closely and the more data we get on the unemployment we certainly will pass along but it doesn’t seem to be a major impact to us.

David [Tote] – Citigroup

My last question has to do with municipal taxes and given that some of your markets are exposed to some of the biggest shortfalls, what’s your expectation for tax growth in 09?

David P. Gardner

I know we haven’t given any formal guidance for 09. Real estate taxes is definitely a line item that has been growing at certainly a quicker pace than inflation. We’re seeing for 08 we have real estate taxes going up about 5.6%. I think what we find is that even though there may be a few places that increase taxes a little bit, we’re usually able to find every year a pocket or two, last year we were successful so far we found a few this year where we felt that we could prove that the appraisal was too high and we were able to successfully bring rates down. I think we’re always going to see that 4% to 5% kind of annual increases going forward. It’s not like we’re hearing anything new and different that would suggest any certain region is out there – they usually have the normal typical timing, whether it’s every three years or whatever where they reappraise so there’s nothing unusual that we see there but certainly much higher than a normal inflation rate.

Operator

Our next question comes from Paul Morgan – Friedman, Billings, Ramsey & Co.

Paul Morgan – Friedman, Billings, Ramsey & Co.

There’s been a fair amount of transaction activity recently, I mean obviously its way down but still there’s been some deals in the DC area and I’m just wondering given the market you said you wanted to grow, what is keeping you on the sidelines? Whether it’s just the type of product is not in line with kind of the typical home property or is it more a measure of where you think pricing is and is going to be going?

Edward J. Pettinella

A couple of things, we are as active looking at deals as we’ve ever been. We just simply put, we have a reputation after being in the business for 14 year, we don’t deviate with our financial models, we can’t find accretive deals. That’s the bottom line. And, take it a step further, down in Florida where we’re really trying to take advantage of the substantial drop, which I don’t think is done yet but of the deals we’ve looked at and either bid on or decided to decline on, we’re noticing over 75% of them never actual get consummated which tells me that the sellers are not in distressed situations like you may think. I think that’s what’s going on in the marketplace. People are putting product out there, a lot of the deals don’t get done so there’s a velocity of deals but the actual closings are down. Now, having said that, and I don’t want to say too much about it but we may be starting to see a break in the action here or in the clouds. We’re starting to see deals in the mid Atlantic region that are starting to pencil out where we can bid and we may actually win a few. I don’t know how much we’ll get done this year but we think that’s going to help.

I think with the banks tightening up their standards for the small players, are clearly stepping to the sidelines and I think for shops like us that can still use Fannie and Freddie and are still getting attractive levels, in the next few quarters I would anticipate that acquisitions activity might start improving. Our whole philosophy is do nothing now, wait for more better conditions and the net of that will produce better results because trying to stretch for deals right now that are dilutive our property management team is not that good nor is anybody else’s in the country to make up for a bad deal upfront. So, we’re just sitting tight. But, I think in the next few quarters you might start to see a little more activity getting done than has been in the past two or three quarters.

Paul Morgan – Friedman, Billings, Ramsey & Co.

Then on the expense side you mentioned maintenance expenses being down, was that down versus your expectations? And if so, why would that number have surprised you given you sort of know generally what you’re going to be facing?

David P. Gardner

It was lower than expectations and again some of it as I allude to in the prepared script is timing perspective. Some things are done at different times of the year and when you budget it at the beginning of the year it’s difficult to hit the exact month that some of these larger projects are going to take place so I think some of it is timing. Some of it is truly efforts on reducing costs so I mean I’d say some of it was a surprise in that respect because we’re certainly hoping to reduce costs, we didn’t necessarily budget for it but we are seeing in the things that we can control, payroll, repairs and maintenance, advertising, line items like that we are doing much better. But, I think to the large extent it’s just a little bit of timing when some of this is going to occur.

Paul Morgan – Friedman, Billings, Ramsey & Co.

Last question, on development, I mean you set out your kind of longer term targets for development starts and I guess given the kind of state of the market it may be some more caution there than you would have had last year. Are you changing your kind of view in terms of the roll out of the platform?

Edward J. Pettinella

No, I think the business plan is intact. We’re not – to be realistic about it, we’ve got a walk very slowly business plan to begin with. We want to try to ramp up to 800 units coming on stream within a five year period so that if you pit it up against what the others are doing in our sector, that still would be considered pretty light. We’re working on the projects that we have, they’re moving along nicely. We’re continuing to look for new deals, we haven’t seen anything we’ve really liked in the last few months and that’s okay too. I think there will be more opportunities down the road. What we like about our small little portfolio, we really won’t be leasing up for another couple of years on the bulk of it and we like that timeframe. We think whatever we’re going through now hopefully we’ll be on the other side of it so for us we have very little to begin with, we’re not trying to be aggressive and we don’t see a lot coming on stream until hopefully the economy has turned around.

Operator

Our next question comes from Alex Goldfarb – UBS.

Alex Goldfarb – UBS

Just going back to the tenants and the rents, I think at [inaudible] you guys mentioned that last year you could push rents maybe $150 before tenants would move out but this year was more like $75. I just want to see if there’s been any change in that, if you could still push $75 or maybe that amount has come in?

Edward J. Pettinella

I think maybe what I was talking about was in Baltimore where a year and a half ago the range might have been $150 between one competitor and another, it’s narrowed down to $75. I think that’s what I was referring to. I would argue today nothing’s changed, it’s probably as tight and elastic as ever. If you get out of the playground of the competitors you get killed in terms of occupancy. I haven’t got an updated rate but that philosophy I think is still how we’re operating and I think that’s how the markets are playing the game right now. You can increase rents but you go out of the channel you pay dearly in occupancy so we’ve stopped doing that. As you know, we try to get more aggressive with the implementation of LRO but unfortunately this particular period of time, there’s not a lot of great pricing flexibility at the moment so yes it’s staying tight and I think that’s the mild conservatives that we see in the second half of the year. We hope we’re wrong but we’re just trying to make sure we’ve got our bases covered.

Alex Goldfarb – UBS

Would you say that $75 is the typical amount that you can push portfolio wide before tenants look elsewhere?

Edward J. Pettinella

I don’t know. We did that experiment in Baltimore, we never really tested the limits like we did in Baltimore. As you know in Baltimore we got our brains beat in with occupancy when we really tried to get aggressive. We decided we weren’t going to test that out a second time so I don’t know the answer to that. My guess is yes, I’d say along the east coast and the bigger cities it would pretty much bet the same effect. That’d be our guess, that’s the feeling we get across our markets.

Alex Goldfarb – UBS

Then moving to Falkland North, I just want to see an update there. I think there was a town meeting to discuss it, I just want to get an update.

Edward J. Pettinella

Yes, town meeting occurred in July, they’re going to meet again in September and its going to be a Public Works session, this is the planning board, they’re going to try to look at what the conditions and redevelopment issues will be and also there’s a lot of players that seem to be in favor of our project. The county executive is coming out in favor of the redevelopment and also the director of housing and community affairs came to the meeting and testified on our behalf. Keep in mind, kind of what meeting do you really have to focus on, it’s the county counsel that will hopefully make the decision and that will be some time in to 09 when that committee finally meets. We like what we see in terms of how the planning board and how they’re looking at our particular project. So, we’re still optimistic we get ultimate approval but the critical meeting Alex isn’t until 09 sometime and I don’t know the exact date on that.

Alex Goldfarb – UBS

The final question is just to your capital structure and liquidity. It seems like you’re a bit more than half drawn on your line. I just want to get a sense for how you feel about your capital needs, if you’d consider equity given where your stock is currently trading? And, thoughts on debt?

David P. Gardner

I think we certainly have adequate capital. We shifted some of our sales of $100 million but just in to the first quarter of 09 and a lot of that was tax drive as to how much tax we can take in this year. We’ve been pretty successful in looking at placing some second mortgages on properties that are already encumbered but have a decent amount of loan to value room to move that up a little bit. Some of our development is coming a little slower by a quarter or so than what we had originally anticipated so that’s pushing off some of our capital needs. I’m not concerned at all about where the level of the line is. I know we had some refis that we have scheduled for later in the year so I think we’re in good shape. As far as raising equity, it’s certainly, it’s getting closer. It’s not like it’s something we’re going to do next week or next quarter or two quarters, but at least the stock is getting to a price where we can even think about it and say, “Geez, if we went X amount more than we were could we do something?” We’re going to keep that out there but we’d still have to see some pretty reasonable improvement in the stock price before we would attempt to do that.

Operator

Our next question comes from Karin Ford – KeyBanc Capital Markets.

Karin Ford – KeyBanc Capital Markets

Just first a question on what are you guys hearing most recently from Fannie and Freddie?

Edward J. Pettinella

I would say it’s been a consistent theme, I think you may have heard me Karin talk about how we’re a large borrower from Fannie and Freddie. They know our underwriting, it hasn’t changed, the bad news is I haven’t got any deals to run by them right now. The pipeline is pretty dry but they’re still there, the rates are still attractive relative to what you could do elsewhere. Knowing that’s been a substantially profitable portfolio for them, we’re not picking up any vines in terms of what we do for business, our business is tightening down in any way, shape or form that would cause us to say, “Okay, we’ve got to look at our deals differently.” That’s as of this morning. Things could change but I don’t believe that the multifamily sector in Fannie or Freddie is going to materially change, in my estimation.

Karin Ford – KeyBanc Capital Markets

And have you spoken to them since the government stepped in?

Edward J. Pettinella

You mean in the last couple of weeks?

Karin Ford – KeyBanc Capital Markets

Yes.

David P. Gardner

I mean again, we certainly deal with somewhat higher level folks but even the folks we deal with are not at the highest levels of those organizations so if there was something unusual going on we’re not going to hear about it. But, certainly the people we deal with day in and day out and the people that we may have a meeting with once a year, we put in calls at that kind of level has said they’re still in business, there’s no slowdown, they’re still very active. All in rates they’re a little less than they were the middle of June. I think we’re still feeling pretty good and getting pretty good vibes from them. Seven years is a little over 6%. It may be 6.10% for seven years, 10 years may be 6.34%. We saw higher levels than that a couple of months ago.

Edward J. Pettinella

A year ago they were about the same. So, you think about the all in costs, those are still very attractive borrowing costs for us when we need them.

Karin Ford – KeyBanc Capital Markets

The next question is just on the utility front, you said you’re expecting cost obviously increase in the back half of the year, can you just remind us what your natural gas hedging amount and prices for later this year and in to 09?

David P. Gardner

If you look at the 08/09 winter, today we have 48% of our exposure hedged at $9.07 per dekatherm. If you then assume that the balance is variable at what kind of today’s variable rates are we’d be all in at about $9.50. This compares to last year our actual costs were $8.28. So, if nothing changes, that would be about a 15% increase but we are seeing some light there. In the last few weeks we’ve seen some positive movement, we’ve actually grabbed about 20% of that exposure we’ve gotten in the last few weeks as rates got down in to the $9.00 to $9.50 range. We expect to have another buying opportunity kind of late fall before the winter starts so that’s probably one of the main reasons that we had to reduce expectations for the balance of the year because especially in the fourth quarter even though we have residents paying their fair share, there’s still a decent amount that hits our bottom line and that’s going to cost us about $0.01 for the balance of the year.

Karin Ford – KeyBanc Capital Markets

Last question is just on Florida, you mentioned there was some positive sequential occupancy improvement there. I think you guys have talked to us about being interested in maybe increasing your exposure there via JV or some other acquisition potentially. Can you just give us an update on what your thoughts are in Florida?

Edward J. Pettinella

In Florida right now, first on the property management side, through July Florida and vacancy is really looking pretty good, 3.6%, the average through July is 4.6% which we like the trends. I guess that’s the main theme I would say. The occupancy story for home is continuing to hold up nicely it’s looking as good as it did, you have to go all the way back to 2000 to find a comparable era. In Florida, on a vacancy basis is holding up. With regards to JVs, we’ve been working extremely hard trying to find a portfolio that we thought would work even with the assumptions that we’ve put, we’ve gone through the various cities, we’ve looked at 20 year trend of what rent increases have been, we try to stay in that ban and the upper end of that ban and after we run our models, we still could not make the numbers work.

There’s a huge disconnect down in Florida between what sellers are looking for and what buyers like us are willing to pay. So as of the moment, we can’t make a deal happen but I’m here to tell you at some point we’re poised where there could be some opportunities. So yes, we want to stay in Florida, we think there’ll be some great buys but not yet. I don’t think we’re at the bottom yet, I think the bottom will be a longer trough than most expect but we’re poised, we’re geared up either on our own or through a joint venture basis if we get something that makes sense but I think you folks know us well enough where we’re just not going to do it until it’s right. But, we think there’ll ultimately be opportunities there. If you go back and look at the last three or four cycles in Florida, there’s opportunities to make money but I think it’s too soon today.

Operator

Our next question comes from Haendel St. Juste – Green Street Advisors.

Haendel St. Juste – Green Street Advisors

How should we think about your rehab spending going forward in light of your lack of pricing power?

David P. Gardner

Well, there may be lacking of pricing power in general but that doesn’t mean that there aren’t pockets of people in pockets of our region and these many times are big pockets that very much prefer a rehabbed unit and they’re willing to pay the upgraded price. There’s always going to be people that are in different situations, people that are more secure about their job, they’re company, they’re future and they will commit. Even in say the last recession we may have slowed down a bit and I think we have shown the last year or so a little bit slower than what we may have done but it never stops. There’s always a demand.

Edward J. Pettinella

The premium package that we put out there for kitchens in particular has been extremely popular so with an increased traffic levels you’re able to find people that will like that and they pay it. Another interesting statistic, it’s funny you should mention this, I said to David, I’m looking at what we expect capital expenditures to be for non-recurring, we’re going to be back up in the mid 70s again and the last time we were there was four years ago so this is good news. How I’m looking at it, I’d like to see more new deals happen so that would create more cap ex or rehab possibilities but off our existing portfolio, remember we still have 50% of our portfolio that could be rehabbed so I could hold my breath for at least three years to burn through that so, so far so good and we’re showing some pretty good levels. Had I not looked at that statistic I might have said that should probably start to drop off a little bit with our new product coming in but, not yet. I think there’s still a demand for it as David said so, so far so good and hopefully if the acquisition sprint starts to pick up, that will throw more coal in to the engine and make opportunities to do more rehab down the road.

Haendel St. Juste – Green Street Advisors

Remind me again, what’s your current return hold?

Edward J. Pettinella

The minimum has not changed, it’s 9% and on the kitchens and baths area it’s certainly above that and we ask them to put that in their budgets each year but it’s been running double digit for us. That’s been pretty consistent.

Haendel St. Juste – Green Street Advisors

One last question, can you give the performance of the non-core assets for the quarter? The assets [inaudible] since January 07?

David P. Gardner

I’m sorry I don’t have that with me. I do know – I can’t quote you the exact number, I do know they continue to run higher than our underwriting perspective. So, I think it’s in the mid 6% range.

Haendel St. Juste – Green Street Advisors

So it’s far to say those assets are doing a little better than your core?

David P. Gardner

Well, they’re doing better than we expected them to do. I don’t know that they’re necessarily – probably in the newer things there’s a little more potential to manage them better, do a little bit more rehab right off the bat so early on you can sometimes see a little pick up so I guess it’s doing slightly better.

Operator

Our next question comes from Alan Calderon – European Investors, Inc.

Alan Calderon – European Investors, Inc.

Looking at your guidance page from the first quarter to the second quarter, it looks like you guys expected in the first quarter 3.2% rental revenue increase to 3.5% because of the other income. But, when you look at the second quarter, it was 2.7% increased by the utility reimbursement to get to the 3.6%. So, it seems like your rental revenue growth expectations came down a little bit for the year but your utility recovery came up for the year.

David P. Gardner

You’re exactly right and its mostly our expectations of economic occupancy driven by higher bad debt is why we’re assuming that just regular rental income is going to be lower. We expected economic occupancy to pick up 20 basis points and we’re actually expecting it to now drop 20 basis points. It’s mostly attributable to bad debt. I think there’s another 10 bips drop just in rental rates all together. But, total revenue we expect to be higher. Not only did we do a lot better in the second quarter that is going to help the year but the double edge sword is we have higher utility expense cost but that’s going to lead to higher utility reimbursement which more than offsets that little bit of higher bad debt run rate.

Alan Calderon – European Investors, Inc.

Could you talk a little bit more about the Baltimore region? It seems like that was potentially a little bit softer?

Edward J. Pettinella

Yes, as I was alluding to earlier, that one was probably more self inflected than anything else. When [inaudible] was coming in full steam ahead, Baltimore was one of the ones that had their properties if not all brought up. We wanted to test the limits of it and we probably over shot and that brought down occupancy and now we’re coming back. We’re trying to bring that down, and I’m just looking at some of the units that were available at the beginning of July, it was as high s 554, it’s now down to 405 so there’s been tremendous turnaround in peak season. My suspicion is that Baltimore will look more like Washington within the next number of months as we get back and right size that experiment in the beginning. I guess the broader issue you’re asking is, is there a concern in Baltimore? No, absolutely not. Companies probably don’t like to admit this but we probably screwed up in that one market. We’re pretty darn good at it but we had a new system and we thought we could push rents.

This goes back to Alex’s question, we discovered that the pricing is pretty inelastic in those cities and we just need to back off and not push it as hard as we traditionally can. We want to back off because we think there will be a time, we want to keep our high occupancy level and use it more judiciously down the road when we think we can get a bigger bang in rent increase. What happened in Baltimore, we gave it up, we lost over 1% in occupancy or 1.5% and we didn’t get much in return for it. That’s not what we traditionally do.

Operator

Our final question comes from Richard Anderson – BMO Capital Markets US

Richard Anderson – BMO Capital Markets US

You mentioned potential opportunities popping up in the mid Atlantic, what does that mean about cap rates and NAV estimates to you?

David P. Gardner

As we said our cap rates –

Edward J. Pettinella

Have crept up a little bit but not substantially so I don’t think that’s going to hurt us in terms of our modeling and to get deals done if that’s what you’re trying to figure out.

Richard Anderson – BMO Capital Markets US

Do you have like an average cap rate in your mind right now? I know you don’t disclose that anymore.

David P. Gardner

Well, I think we’ve been disclosing – at least discussing cap rates. It’s up to about 615 before any kind of – I know historically in our NAV presentation we use to add 25 bips for debt related issues, so across the board we’re about 615 to 640 with that in there.

Richard Anderson – BMO Capital Markets US

I think your line comes due in September, is that correct?

David P. Gardner

The line comes due in September and I think or I thought we mentioned this last call, we’ve already gone ahead and taken our one year extension that we can do. With pricing of the line today versus – what we have is 75 bips over versus what we’d have to go to if we tried to negotiate a new line today, we wouldn’t be able to do that so we think in better environment, or we hope will be a better environment at least next year at this time to negotiate. So, we’ll just stay with the existing line as is.

Richard Anderson – BMO Capital Markets US

Do you have any idea how many people are in your units that have lost their jobs? You keep such good statistics of everything, I wondered how many people are sitting home watching Opera now.

Edward J. Pettinella

I don’t know if we have that.

David P. Gardner

No, no.

Edward J. Pettinella

Not while they’re in.

David P. Gardner

If they’re paying their check we probably don’t even know that information.

Richard Anderson – BMO Capital Markets US

I’m thinking if you lose your job, you’re not going to run away and go and live with your parents the first day but you might six months later. I just wonder about that lag effect of job loss issue.

David P. Gardner

I think the indicators, as we discussed previously, the bad debt is higher, the rent level is a concern. At one point evictions and skips had gotten up a little bit more in the fourth and first quarter but that’s coming back down.

Richard Anderson – BMO Capital Markets US

But that’s too late, I’m thinking get in front of it.

Edward J. Pettinella

Even the employment related has gone down from high in third quarter 1740 to 1520, so it’s improve a couple.

David P. Gardner

But that’s really tough data to have.

Edward J. Pettinella

All I’m going to tell you, the best place to do that is when I have the 30 people running the properties in front of me and I ask a very explicit question, “Who’s seeing companies with 100s of people and above leaving?” They would know and they’re saying they’re not seeing a lot of that, at least in our markets. So, I think that is what my best management by walking around indicator tells me that we’re okay right now.

Richard Anderson – BMO Capital Markets US

Then the last question is on Florida, if you’re not able to find opportunities to get bigger than 800 units in Florida, at what point do you sell because you just don’t have the economies of scale and you don’t have all that good stuff to justify a long term hold in that market?

Edward J. Pettinella

That’s a good question. In my mind I’m waiting for this recovery. If we can’t find deals in this recovery then I would say for the 800 units we would sell it at a profit and go home. My strong suspicion is there will be some opportunities in Florida. I think they’re probably two to four quarters off. But, there’s no eagles up in New York saying, “We’ve got to be in Florida just because it’s Florida.” We’ll get out of it but I want to wait until we see this uptick in the next cycle. It will come, I don’t know exactly when but when it comes and we still can’t find properties that we can do deals on an accretive basis, we’d be open to it but I think I need some more time. We use to get asked that question in Boston all the time, we had two or three properties, now we have 13 or so. We waited a couple of years, we just knew that type of product was what we wanted to put in the portfolio. We believe that in certain pockets in Florida but I need a little more time.

Richard Anderson – BMO Capital Markets US

I think you got that question a few times about Detroit too, if I recall correct?

Edward J. Pettinella

Yes. After the third bang on the head we did it.

Operator

Gentlemen as well as Ms. Warshof, I’ll turn it back to you once again to continue with your concluding remarks.

David P. Gardner

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

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