The payback from Home Properties Inc.’s utility reimbursement program is expected to prop up part of the company’s revenue growth in 2008, while the company overcomes some hiccups in its development pipeline.
The utility reimbursement plan Home Properties finished rolling out last year led to some bad debt in 2007 and to missed earnings estimates in the fourth quarter-but its timing could help insulate the company from market changes.
The local company missed analyst estimates by two pennies a share last week: Home Properties announced its fourth-quarter results on Feb. 21.
Funds from operations for the quarter were 79 cents a share, or $36.7 million, up from $36.4 million, or 77 cents a share, the previous year.
The consensus of 11 analysts polled by Thomson Financial pegged fourth-quarter funds from operations at 81 cents a share, within a range of 80 cents to 82 cents. For the year, the consensus for Home Properties was $3.23, within a range of $3.21 to $3.26.
Bad debt, which crept up in the third and fourth quarters, was partly the cause, said David Gardner, Home Properties executive vice president and chief financial officer, in a conference call.
“We’ve associated a lot of that with how utility recovery money is collected. We’ve taken that back in-house. It’s not going to improve in a month or two, but we believe that now that we’re more in charge of that we will do a much better job,” he said.
The program, designed to charge renters for their utilities, was launched in 2004. Home Properties completed the rollout last August. This year marks the program’s first full 12-month run.
When Home Properties started the program, it was paying heating costs for 77 percent of its units; now it pays for 17 percent. The firm recouped roughly $8.7 million in heating costs last year. Next year, it expects to recover $11.1 million.
In 2007, FFO at Home Properties was $151.1 million, or $3.20 a share, up from $147.1 million, or $3.07 a share, in 2006.
Real estate investment trusts use funds from operations as a key earnings metric. FFO is equal to a REIT’s net income, excluding gains or losses from sales of property and adding back real estate depreciation.
Home Properties buys, rehabilitates and operates apartment communities, mainly on the East Coast. Four years ago, the firm made a push to develop its own properties to diversify its growth potential outside of acquisitions. Good deals, officials noted, have been hard to come by in recent months.
The firm has been looking for development opportunities on excess land at its existing properties, with the goal of constructing two to four new apartment communities a year, or 800 new units annually.
In the fourth quarter, there were four properties totaling roughly 2,000 units, in various stages of development. With 48 units left to build, Trexler Park West in Allentown, Pa., was one of them. It should be complete by the third quarter, said Edward Pettinella, president and CEO.
“Completion of one building was delayed by a quarter due to very rainy weather, which saturated the ground,” he said. “Lease up has been going as expected with no negative effect on the original Trexler property adjacent to our new development.”
In Silver Springs, Md., excavation and sheeting are under way at a high-rise project, and in Alexandria, Va., construction on an apartment building is to start in the third quarter.
At Falkland North in Maryland, Home Properties’ project is in the approval stage-as the company deals with snags in its development plans there. The project has attracted concern from some residents of the area over the history of Home Properties’ existing apartments there, part of which would be torn down as part of the company’s development plans.
The Falkland Chase Apartments, designed by a notable architect as part of the New Deal, consist of several buildings divided over three parcels totaling 22 acres. The Montgomery County Planning Board there recently recommended all three parcels be deemed historic.
“We had hoped that they would only elevate the south and west parcels (to historic status), thereby allowing us to go forward with our planned redevelopment on the north parcel,” Pettinella explained.
“While we were disappointed, this was an informal route we were pursuing to try to expedite the approval process; now there will be a more formal process, which is typical for developers in Montgomery County and will take about six to 12 months to complete,” he added.
Despite recessionary fears across many industries, including REITs, Home Properties expects FFO growth this year.
For 2008, the company expects FFO per share of $3.31 to $3.47, which will produce FFO-per-share growth of 3.4 percent to 8.4 percent when compared with 2007 results.
By quarter, FFO per share breaks down to 75 cents to 79 cents in the first quarter, 84 cents to 88 cents in the second quarter, 86 cents to 90 cents in the third quarter and 86 cents to 90 cents in the fourth quarter.
In the company’s conference call, Karin Ford at KeyBanc Capital Markets asked why the company’s outlook was optimistic compared with other REITs.
Company officials reiterated that their guidance was based on their observation of market conditions so far and the timing of its utility reimbursements. So far the recession has had little to no impact on performance, officials said, and therefore they cannot predict what effect it could have in the future.
“We are not prognosticators,” Gardner said.
The company, officials explained, does expect to feel recessionary impact in the second half of the year, but Pettinella said, “We are not feeling any recessionary trends today.
“Despite a weaker economic environment in 2008, results will be positively affected by our defensive geographic footprint and Class B property type as well as by the full implementation of Web-based property management and centralized rent pricing systems,” he said.
The story for 2008 appears to be reasonable revenue growth with some increased expenses, due in part to increases in expenses such as garbage collection costs, Gardner noted.
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02/29/08 (C) Rochester Business Journal