UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER:  1-13136

HOME PROPERTIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND	16-1455126
(State of incorporation)	(I.R.S. Employer Identification No.)

850 Clinton Square, Rochester, New York 14604

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:  (585) 546-4900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x No o

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

The aggregate market value of the 48,992,495 shares of common stock held by non-affiliates was $3,006,179,493 based on the closing sale price of $61.36 per share on the New York Stock Exchange on June 30, 2012.

As of February 14, 2013, there were 51,535,219 shares of common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Document	Part Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held on April 30, 2013	Part III

HOME PROPERTIES, INC.

TABLE OF CONTENTS

			Page
PART I.
	Item 1.	Business	3
	Item 1A.	Risk Factors	13
	Item 1B.	Unresolved Staff Comments	21
	Item 2.	Properties	21
	Item 3.	Legal Proceedings	27
	Item 4.	Mine Safety Disclosures	27
PART II.
	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
	Item 6.	Selected Financial Data	31
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 8.	Financial Statements and Supplementary Data	58
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58
	Item 9A.	Controls and Procedures	58
	Item 9B.	Other Information	58
PART III.
	Item 10.	Directors, Executive Officers and Corporate Governance	59
	Item 11.	Executive Compensation	59
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	59
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	59
	Item 14.	Principal Accounting Fees and Services	59
PART IV.
	Item 15.	Exhibits, Financial Statement Schedules	60
	Signatures		104
	Exhibit Index		105

2

PART I

Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our actual results could differ materially from those set forth in each forward-looking statement.  Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” on page 56 of this Form 10-K.

Item 1.Business

The Company

Home Properties, Inc. (“Home Properties” or the “Company”) was formed in November 1993, as a Maryland corporation and is a self-administered and self-managed real estate investment trust (“REIT”) that owns, operates, acquires, develops and rehabilitates apartment communities.  The Company’s properties are regionally focused, primarily in selected Northeast and Mid-Atlantic regions of the United States.  The Company completed an initial public offering of 5,408,000 shares of common stock (the “IPO”) on August 4, 1994 and is traded on the New York Stock Exchange (“NYSE”) under the symbol “HME”.  The Company is included in Standard & Poor’s MidCap 400 Index.

The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership, and a management company, Home Properties Resident Services, Inc. (“HPRS”), which is a Maryland corporation.  At December 31, 2012, the Company held 83.2% (81.8% at December 31, 2011) of the limited partnership units in the Operating Partnership (“UPREIT Units”).

Home Properties, through its affiliates described above, as of December 31, 2012, owned and operated 121 communities with 42,635 apartment units (the “Communities” or the “Properties”).

The Properties are concentrated in the following market areas:

		Apartment
Market Area	Communities	Units
Suburban Washington, D.C.	32	13,161
Baltimore, MD	23	10,477
Suburban New York City	28	7,225
Philadelphia, PA	17	5,067
Boston, MA	12	3,303
Chicago, IL	7	2,566
Southeast Florida	2	836
Totals	121	42,635

The Company’s mission is to maximize long-term shareholder value by acquiring, repositioning, developing and managing market-rate apartment communities while enhancing the quality of life for its residents and providing employees with opportunities for growth and accomplishment.  Our vision is to be a prominent owner and manager of market-rate apartment communities, located in selected high barrier, high growth, East Coast markets.  The areas we have targeted for growth are the suburbs of Baltimore, Boston, New York City, Philadelphia and Washington, D.C.  We expect to maintain or grow portfolios in markets that profitably support our mission as economic conditions permit.

3

The Company (continued)

The Company’s long-term business strategies include:

·proactively managing and improving its communities to achieve increased net operating income;

·acquiring additional apartment communities with attractive returns at prices that provide a positive spread over the Company’s long-term cost of capital;

·limited development of new apartment communities on entitled land, on land adjacent to existing owned communities, and, where there are density opportunities, to replace existing garden apartments with mid-rise structures;

·disposing of properties that have reached their potential, are less efficient to operate, or are located in markets where growth has slowed to a pace below that of the markets targeted for acquisition; and

·maintaining a strong and flexible capital structure with cost-effective access to the capital markets.

Structure

The Company was formed in November 1993 as a Maryland corporation and is the general partner of the Operating Partnership.  On December 31, 2012, it held an 83.2% partnership interest in the Operating Partnership comprised of: a 1.0% interest as sole general partner; and an 82.2% limited partner interest through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, which is the limited partner.  The holders of the remaining 16.8% of the UPREIT Units are certain individuals and entities who received UPREIT Units as consideration for their interests in entities owning apartment communities purchased by the Operating Partnership, including certain officers of the Company.

The Operating Partnership is a New York limited partnership formed in December 1993.  Holders of UPREIT Units in the Operating Partnership may redeem an UPREIT Unit for one share of the Company’s common stock or cash equal to the fair market value at the time of the redemption, at the option of the Company.  Management expects that it will continue to utilize UPREIT Units as a form of consideration for a portion of its acquisition properties when it is economical to do so.

HPRS is wholly owned by the Operating Partnership, and as a result, the accompanying consolidated financial statements include the accounts of both companies.  HPRS is a taxable REIT subsidiary under the Tax Relief Extension Act of 1999.

In September 1997, Home Properties Trust (“QRS”) was formed as a Maryland real estate trust and as a qualified REIT subsidiary.  The QRS is wholly owned by Home Properties I, LLC which is owned 100% by the Company.  The QRS is a limited partner of the Operating Partnership and holds all of the Company’s interest in the Operating Partnership, except for the 1% held directly by the Company as sole general partner.

The Company currently has approximately 1,200 employees and its executive offices are located at 850 Clinton Square, Rochester, New York 14604.  Its telephone number is (585) 546-4900.

4

Operating Strategies

The Company will continue to focus on enhancing long-term investment returns by:

·acquiring apartment communities and repositioning them for long-term growth at prices that provide a positive spread over the Company’s long-term cost of capital;

·complementing its core acquisition and repositioning strategy by developing a limited number of new apartment units;

·recycling assets by disposing of properties in low growth markets and those that have reached their potential or are less efficient to operate due to size or remote location;

·balancing its decentralized property management philosophy with the efficiencies of centralized support functions and accountability including rent optimization and volume purchasing;

·enhancing the quality of living for the Company’s residents by improving annually the service and physical amenities available at each community in an environmentally responsible manner;

·adopting new technology so that the time and cost spent on administration can be minimized while the time spent attracting and serving residents can be maximized;

·continuing to utilize its written “Pledge” of customer satisfaction that is the foundation on which the Company has built its brand recognition; and

·focusing on reducing expenses while constantly improving the level of service to residents.

The Company has a strategy of acquiring and repositioning mature C to B- apartment properties.  Since its 1994 IPO, the Company has acquired and repositioned 219 communities, containing more than 61,000 units.  The rehabilitation and revitalization process targets a minimum 10% return on repositioning investments.  It is expected that capital expenditures in 2013 on repositioning investments will decrease slightly from 2012 levels, which were the highest in the Company’s history, as residents demonstrated a preference for an upgraded apartment at a higher monthly rent in a recovering economic environment.  Extensive experience and expertise in repositioning has helped the Company build significant internal design and construction management skills.  The complete repositioning of a community can take place over a five to seven year period.  The comprehensive process typically begins with improvements in landscaping, signage and common areas.  Exterior improvements increase curb appeal and marketability of the property.  Deferred maintenance is corrected, which can include new HVAC systems, roofs, balconies and windows.  At many properties, community centers and swimming pools are added or upgraded.  Apartment interiors are renovated when residents move out, with the most significant investments made in upgrading kitchens and baths.  Complete remodeling of dated kitchens and bathrooms typically includes new appliances, flooring, counters, cabinets, lighting, tile, fixtures, sinks, bathtubs and toilets.  It may include the removal of kitchen walls to open up the living area.  When feasible, in-unit washers and dryers are added. Repositioning efforts upgrade properties that were C to B- level when acquired to the B to B+ level, which, over time, significantly increases the property’s rental income, net operating income and market value.

5

Acquisition, Development and Sale Strategies

The Company’s strategy is to grow primarily through acquisitions in the suburbs of major metropolitan markets that are near public transportation and major highways, have significant barriers to new construction, limited new apartment supply, easy access to the Company’s headquarters and enough apartments available for acquisition to achieve a critical mass.  Targeted markets also possess other characteristics, including acquisition opportunities below replacement costs, a mature housing stock, high average single-family home prices, a favorable supply/demand relationship, stable or moderate job growth, reduced vulnerability to economic downturns and large prime renter populations including immigrants and young adults in their twenties and early thirties.  The Company currently expects its growth will be focused primarily within suburban sub-markets of selected metropolitan areas within the Northeast and Mid-Atlantic regions of the United States where it has already established a presence.  The largest metropolitan areas the Company will focus on include Baltimore, Boston, New York City, Philadelphia and Washington, D.C.  The Company may expand into new markets that possess the characteristics described above although it has no current plans to do so.  Continued geographic specialization is expected to have a greater impact on operating efficiencies versus widespread accumulation of properties.  The Company will continue to pursue the acquisition of individual properties as well as multi-property portfolios.  It may also consider strategic investments in other apartment companies, as well as strategic alliances, such as joint ventures.

During 2012, the Company acquired three communities with a total of 2,018 units for an aggregate consideration of $298 million, or an average of approximately $148,000 per apartment unit.  The weighted average expected first year capitalization rate for the acquired communities was 5.9%.  Capitalization rate (“cap rate”) is defined as the rate of interest used to convert the first year expected net operating income (“NOI”) less a 2.7% management fee into a single present value.  NOI is defined by the Company as rental income and property other income less operating and maintenance expenses.  Two acquisitions were in suburban Washington, D.C.; and one was in the suburb of Baltimore.

The Company believes that it will have the opportunity to make acquisitions during 2013 and has projected $200 million to $300 million in purchases for the year.

The Company has the ability to develop new market-rate communities.  It plans to engage in development activity only in markets in which it is currently doing business in order to add net asset value and supplement future earnings and growth.  It expects to develop new apartment communities on entitled land and on land adjacent to existing Properties, as well as to increase the density of units at some communities currently owned.  The Company plans to continue construction of one project started in late 2011 and another started in the second quarter of 2012.  The Company plans to spend approximately $120 million on development in 2013.  There are no additional construction starts planned for 2013.

After not selling any communities in both 2010 and 2011, the Company closed on the sale of six communities in 2012 with a total of 1,596 units for approximately $160 million, resulting in a weighted average unlevered internal rate of return (“IRR”) of 14.1% over the ownership period of these six communities.  IRR is defined as the discount rate at which the present value of the future cash flows of the investment is equal to the cost of the investment.  The Company has specifically identified additional communities for sale in 2013 and will continue to evaluate the sale of its communities.  The Company expects to dispose of between $200 million and $300 million of properties for the year.  Typically, a property will be targeted for sale if management is of the opinion that it has reached its potential or if it is located in a slower growth market or is less efficient to operate.  After many years of being a net acquirer, for 2013 the Company is looking to create a better balance, with an equal range targeted of acquisitions and dispositions.  Property sale proceeds add another significant source of capital, reducing reliance on debt and equity sources.

6

Financing and Capital Strategies

The Company intends to continue to adhere to the following financing policies:

·maintaining a ratio of debt-to-total market capitalization (total debt of the Company as a percentage of the value (using the Company’s internally calculated Net Asset Value (“NAV” per share) of outstanding diluted common stock, the UPREIT Units, plus total debt)) of approximately 42% or less;

·utilizing primarily fixed rate debt;

·varying debt maturities to avoid significant exposure to interest rate changes upon refinancing; and

·maintaining a line of credit so that it can respond quickly to acquisition opportunities.

On December 31, 2012, the Company’s debt was approximately $2.8 billion and the debt-to-total market capitalization ratio was 42.2% based on the year-end closing price of the Company’s common stock of $61.31.  The weighted average interest rate on the Company’s mortgage debt as of December 31, 2012 was 5.06% and the weighted average maturity was approximately five years.  Debt maturities are staggered, with an average 10.9% of loans maturing each of the next nine years.  The range is from a high of 22.7% in 2016 (includes line facility bank term loan) to a low of 2.9% in 2014.  As of December 31, 2012, the Company had a $275 million unsecured line of credit facility with M&T Bank and U.S. Bank National Association (acting as joint lead banks) and nine other participating commercial banks with $162.5 million outstanding on the line of credit.

To further strengthen the Company’s balance sheet and increase its financial flexibility, during 2012 the Company pursued certain capital market initiatives as follows:

·The Company increased the level of the value of unencumbered properties in relationship to the total property portfolio from 33% to 39%.  This higher level adds flexibility, allowing the Company to place additional unsecured financing if desired, or increase secured borrowing on unencumbered assets.

·The Company benefits from its multifamily focus as the Government Sponsored Enterprises (“GSEs”) Fannie Mae and Freddie Mac are still very active lending to apartment owners.  However, no secured debt was added during 2011 or 2012, except for one small loan assumed in conjunction with a property acquisition.  The Company paid off approximately $42 million of mortgage debt in 2012 with a weighted average interest rate of 6.79%.

·The Company sold 2.4 million shares of common stock through its at-the-market (“ATM”) equity offering program, generating $145 million in net proceeds.

·In 2011, the Company entered into a five-year unsecured term loan for $250 million that bears monthly interest at 1.3% above the one-month LIBOR.  On July 19, 2012, the Company entered into interest rate swap agreements that effectively convert the variable LIBOR portion of this loan to a fixed rate, resulting in an effective rate of 1.99% as of December 31, 2012.

·With a focus of adding unsecured debt, in June 2012, the Company issued a private placement note in the amount of $50 million with a seven-year term at a fixed interest rate of 4.16%.

The capital market initiatives described above allowed the Company to achieve stronger key debt and credit metrics at December 31, 2012 versus December 31, 2011 as follows:

·total debt to value was reduced to 45.2% from 46.9%;(1)

·total secured debt to value was reduced to 35.0% from 39.7%;(1)

·interest coverage ratio was increased from 2.5 times to 3.0 times;

·fixed charge coverage ratio was increased from 2.4 times to 2.9 times; and

·value of unencumbered asset pool was increased from $1.9 billion to $2.7 billion; or from 33.3% to 39.0% of total value, respectively.

(1)As calculated under the terms of the line of credit facility.

7

Financing and Capital Strategies (continued)

For 2013, the Company plans to continue to increase the level of the value of unencumbered properties to over 40% of the portfolio, maintaining the debt-to-total market capitalization ratio at a level equal to or slightly less than the level at December 31, 2012 and issuing shares under the current or future ATM programs.

Management expects to continue to fund a portion of its continued growth by taking advantage of its UPREIT structure and using UPREIT Units as currency in acquisition transactions.  During 2010, the Company issued $4.8 million worth of UPREIT Units as partial consideration for one acquired property.  During 2011 and 2012, no UPREIT Units were used as consideration for acquired properties.  It is difficult to predict the level of demand from sellers for this type of transaction.  In periods when the Company’s stock price is trading at a discount to estimated NAV, it is unlikely that management would engage in UPREIT transactions.

In 1997, the Company’s Board of Directors (the “Board”) approved a stock repurchase program under which the Company can repurchase shares of its outstanding common stock and UPREIT Units.  Shares or units may be repurchased through the open market or in privately-negotiated transactions.  The Company’s strategy is to opportunistically repurchase shares at a discount to its estimated NAV, thereby continuing to build value for long-term shareholders.  The last year where the Company repurchased any shares under this program was 2008.  At December 31, 2012, there was approval remaining to purchase 2.3 million shares.  Management does not anticipate making additional share repurchases in 2013.

Competition

The Company’s properties are primarily located in developed areas where there are other multifamily properties which directly compete for residents.  There is also limited competition from single family homes and condominiums for sale or rent.  The competitive environment may have a detrimental effect on the Company’s ability to lease apartments at existing and at newly developed properties, as well as on rental rates.

In addition, the Company competes with other real estate investors in seeking property for acquisition and development.  These competitors include pension and investment funds, insurance companies, private investors, local owners and developers, and other apartment REITs.  This competition could increase prices for properties that the Company would like to purchase and impact the Company’s ability to achieve its long-term growth targets.

The Company believes, however, that it is well-positioned to compete effectively for both residents and properties as a result of its:

·focus on service and resident satisfaction, as evidenced by both The Home Properties Pledge, which provides a money-back service guarantee and lease flexibility, and by its resident turnover ratio which is consistently below the industry average;

·ability to issue UPREIT Units in purchase transactions, which provides sellers with the opportunity to defer taxes; and

·unique repositioning strategy that differentiates the Company from its competitors.

8

Market Environment

The markets in which Home Properties operates could be characterized long term as stable, with moderate levels of job growth.  After a recessionary period, starting in 2010 and expected to continue through 2013, many regions of the United States have been experiencing varying degrees of economic recovery resulting in improving job growth for both the country as a whole and the Company’s markets.

In 2011, the Company’s markets job growth was slightly behind the U.S. average with 0.7% job growth versus 1.3%, respectively.  In 2012, the Company’s markets job growth continued to lag the U.S. average with a 1.1% growth rate versus 1.4%.  However, the unemployment rate for the Company’s markets of 6.9% continues to compare favorably to the country average of 7.6%.  The Company’s Northern VA/DC market continues to experience the lowest unemployment rate of 5.2% at December 31, 2012.  This market represents 30.9% of the Company’s total apartment unit count.  These favorable comparisons help explain why the Company’s markets helped the Company outperform many of its public company multifamily peers on a measurement of same store NOI growth in both 2011 and 2012, producing the fourth best same store NOI growth out of twelve peers each year.

New construction in the Company’s markets is low relative to the existing multifamily housing stock and compared to other regions of the country.  In 2012, Home Properties’ markets represented 27.8% of the total estimated existing U.S. multifamily housing stock, but only 18.0% of the country’s estimated new supply of multifamily housing units.

The information on the “Market Demographics and Multifamily Supply and Demand” tables on pages 10 and 11 were compiled by the Company from the sources indicated on the tables.  The methods used include estimates and, while the Company feels that the estimates are reasonable, there can be no assurance that the estimates are accurate.  There can also be no assurance that the historical information included on the tables will be consistent with future trends.

An analysis of multifamily supply compared to multifamily demand can indicate whether a particular market is tightening, softening or in equilibrium.  The fourth to last column in the “Multifamily Supply and Demand” table on page 11 reflects current estimated net new multifamily supply as a percentage of new multifamily demand for the Company’s markets and the United States.  For both the Company’s markets and the country as a whole, net new supply is low compared to expected new demand.  For the country, net new supply represents 66.5% of net new demand, creating an environment where both pricing and/or occupancy will remain stable with room for some improvement.  The relationship in the Company’s markets is much better, where net new supply after obsolescence is expected to meet only 27.0% of the expected increasing demand for rental housing.

9

Market Demographics

										2012
										Multifamily
									2012	Units as a %		2012
	% of		2012	2012	2012 vs. 2011		December 2012		Median	of Total		Multifamily
	Company		Number of	Job	Job Growth		Unemployment		Home	Housing Units		Housing
CBSA Market Area	Units		Households	Growth	% Change		Rate		Value	Stock (5)		Stock (6)
Northern VA/DC	30.9	%	2,124,902	30,200	1.0	%	5.2	%	359,142	29.3	%	663,573
Baltimore, MD	24.6	%	1,045,893	11,700	0.9	%	7.0	%	262,126	19.6	%	223,481
Suburban New York City (1)	16.9	%	6,986,610	118,700	1.4	%	8.5	%	404,713	37.6	%	2,857,906
Eastern PA (2)	11.9	%	2,600,019	28,200	0.9	%	8.4	%	210,846	14.9	%	416,740
Boston, MA (3)	7.7	%	1,994,716	53,800	2.0	%	5.9	%	564,405	21.3	%	462,736
Chicago, IL	6.0	%	3,508,312	34,700	0.8	%	8.6	%	203,997	24.8	%	949,813
Southeast Florida (4)	2.0	%	2,115,417	1,200	0.1	%	8.1	%	171,076	39.0	%	969,904
Home Properties Markets	100.0	%	20,375,869	278,500	1.1	%	6.9	%	328,277	29.4	%	6,544,153
United States			118,582,568	1,857,000	1.4	%	7.6	%	168,275	17.6	%	23,573,720

(1)Suburban New York City is defined for this report as New York-Northern New Jersey-Long Island, NY-NJ-PA Core Based Statistical Area (CBSA).

(2)Eastern Pennsylvania is defined for this report as Philadelphia-Camden-Wilmington, PA-NJ-DE-MD CBSA & Allentown-Bethlehem-Easton PA-NJ CBSA.

(3)Boston, MA is defined for this report as Boston-Cambridge-Quincy, MA CBSA & Portland-South Portland-Biddeford, ME CBSA.

(4)Southeast Florida is defined for this report as Miami-Fort Lauderdale-Miami Beach, FL CBSA.

(5)Based on The Nielsen Company 2012 estimates calculated from the 2000 U.S. Census figures.

(6)2012 Multifamily Housing Stock is from The Nielsen Company estimates of five or more units based on the 2000 U.S. Census.

Sources:  Bureau of Labor Statistics (BLS); The Nielsen Company (formerly Claritas); US Census Bureau - Manufacturing & Construction Div.

Data collected is data available as of January 30, 2013 and in some cases may be preliminary.

BLS is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics.

The Nielsen Company is a leading provider of precision marketing solutions and related products and services.

U.S. Census Bureau’s parent Federal agency is the U.S. Dept. of Commerce, which promotes American business and trade.

10

Multifamily Supply and Demand

						Estimated		Estimated
					Estimated	Net New		Net New
	Estimated		Estimated		2012	Multifamily		Multifamily
	2012	Estimated	2012		New	Supply as a		Supply as a				Expected
	New	2012	Net New		Multifamily	% of New		% of		Expected		Excess
	Supply of	Multifamily	Multifamily		Household	Multifamily		Multifamily		Excess		Revenue
CBSA Market Area	Multifamily (7)	Obsolescence (8)	Supply (9)		Demand (10)	Demand		Stock		Demand (11)		Growth (12)
Northern VA/DC	10,450	3,318	7,132		5,902	120.8	%	1.1	%	(1,230	)	(0.2	)%
Baltimore, MD	1,945	1,117	828		1,530	54.1	%	0.4	%	702		0.3	%
Suburban New York City (1)	17,160	14,290	2,870		29,769	9.6	%	0.1	%	26,899		0.9	%
Eastern PA (2)	3,300	2,084	1,216		2,803	43.4	%	0.3	%	1,587		0.4	%
Boston, MA (3)	4,145	2,314	1,831		7,643	24.0	%	0.4	%	5,812		1.3	%
Chicago, IL	3,145	4,749	(1,604	)	5,740	(27.9	)%	(0.2	)%	7,344		0.8	%
Southeast Florida (4)	7,053	4,850	2,203		312	706.1	%	0.2	%	(1,891	)	(0.2	)%
Home Properties Markets	47,198	32,722	14,476		53,699	27.0	%	0.2	%	39,223		0.6	%
United States	262,762	117,869	144,893		217,997	66.5	%	0.6	%	73,104		0.3	%

(1)-(6) see footnotes prior page

(7)Estimated 2012 New Supply of Multifamily =  Multifamily permits (2012 figures U.S. Census Bureau, Mfg. & Constr. Div., 5+ permits only) adjusted by the average % of permits resulting in a construction start (estimated at 95%).

(8)Estimated 2012 Multifamily Obsolescence = Estimated 2012 Multifamily Housing Stock multiplied by the estimated % of obsolescence (0.5%).

(9)Estimated 2012 Net New Multifamily Supply = Estimated 2012 New Supply of Multifamily - Estimated 2012 Multifamily Obsolescence.

(10)Estimated 2012 New Multifamily Household Demand = 2012 job growth (Nonfarm, not seasonally adjusted payroll employment figures) (12/31/2011-12/31/2012) multiplied by the expected % of new household formations resulting from new jobs (66.7%) and the % of multifamily households in each market (based on Nielsen estimates).

(11)Expected Excess Demand = Estimated 2012 New Multifamily Household Demand - Estimated 2012 Net New Multifamily Supply.

(12)Expected Excess Revenue Growth = Expected Excess Demand divided by 2012 Multifamily Housing Stock.  This percentage is expected to reflect the relative impact that changes in the supply and demand for multifamily housing units will have on occupancy rates and/or rental rates in each market, beyond the impact caused by broader economic factors, such as inflation and interest rates.

11

Environmental Matters

As a current or prior owner, operator and developer of real estate, the Company is subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties as a result of environmental contamination or noncompliance at its properties.  See the discussion under the caption, “We may incur costs due to environmental contamination or non-compliance that could adversely affect our financial results and reputation” in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on the Company’s operations.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (collectively, the “Reports”), are electronically filed with the Securities and Exchange Commission (“SEC”).  The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549-2521.  Please call the SEC at 1-800-732-0330 for further information on the operation of the Public Reference Room.  The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, which are available without charge.  In addition, you can read similar information about the Company at the offices of the NYSE at 20 Broad Street, New York, NY 10005.

Company Website

The Company maintains an Internet website at www.homeproperties.com.  The Company provides free-of-charge access to its Reports filed with the SEC, and any amendments thereto, through this website.  These Reports are available as soon as reasonably practicable after the Reports are filed electronically with the SEC and are found under “Investors/SEC Filings.”  In addition, a paper copy of the Reports filed with the SEC may be obtained at no charge by contacting the Corporate Secretary, Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.

Current copies of the Company’s Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers with Certification, Corporate Governance Guidelines and Charters for the Audit, Compensation, Corporate Governance/Nominating and Real Estate Investment Committees of the Board are also available on the Company’s website under the heading “Investors/Corporate Overview/Governance Documents Highlights.”  A copy of these documents is also available at no charge upon request addressed to the Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New York 14604.

The reference to our website does not incorporate by reference the information contained in the website and such information should not be considered a part of this report.

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Item 1A.  Risk Factors

As used in this section, references to “we” or “us” or “our” refer to the Company, the Operating Partnership, and HPRS, taken as a whole.

Our business is subject to uncertainties and risks.  Please carefully consider the risk factors described below, which apply to Home Properties, the Operating Partnership, and HPRS, in addition to other risks and factors set forth in this Form 10-K.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or prospects.  The risk factors we describe contain or refer to certain forward-looking statements.  You should review the explanation of the limitations of forward-looking statements contained in the section entitled “Forward-Looking Statements” on page 56 of this Form 10-K.

Real Estate Investment Risks

We are subject to risks that are part of owning residential real estate.

Real property investments are subject to varying degrees of risk.  If our communities do not generate revenues sufficient to meet operating expenses, debt service and capital expenditures, our cash flow and ability to make distributions to our stockholders will be adversely affected.  A multifamily apartment community’s revenues and value may be adversely affected by general economic conditions (including unemployment); local and regional economic conditions (including population shifts); local and regional real estate considerations (such as oversupply of or reduced demand for apartments); changes in home ownership or condominium affordability; the perception by prospective residents of the convenience and attractiveness of the communities or neighborhoods in which they are located and the quality of local schools and other amenities; and increased operating costs (including real estate taxes and utilities). Certain significant fixed expenses are generally not reduced when circumstances cause a reduction in income from a community.

We depend on rental income for cash flow to pay expenses and make distributions.

We are dependent on rental income from our multifamily properties to pay operating expenses, debt service and capital expenditures, and in order to generate cash to enable us to make distributions to our stockholders.  If we are unable to attract and retain residents or if our residents are unable, due to an adverse change in the economic condition of the region or otherwise, to pay their rental obligations, our financial results and our ability to make expected distributions will be adversely affected.  In addition, the weather and other factors outside of our control can result in an increase in the operating expenses for which we are responsible.

Attractive acquisitions may not be available and acquisitions we may be able to make may fail to meet expectations.

We plan to continue to selectively acquire apartment communities that meet our investment criteria.  We expect that other real estate investors, including insurance companies, pension funds, other REITs and other well-capitalized investors will compete with us to acquire existing properties and to develop new properties.  This competition could increase prices for properties of the type we would likely pursue and adversely affect our growth and profitability.  If we are able to make acquisitions, there are risks that those acquisitions will perform less favorably than we expect.  Our estimates of future income, expenses and the costs of improvements or redevelopment that are necessary to allow us to operate an acquired property as originally intended may prove to be inaccurate.  Other acquisition risks include environmental issues, structural issues, competition, economic submarket changes and employment variables.

Real estate investments are relatively illiquid, and we may not be able to respond to changing conditions quickly.

Real estate investments are relatively illiquid and, therefore, we have limited ability to adjust our portfolio quickly in response to changes in economic or other conditions.  In addition, the prohibition in the Internal Revenue Code (the “Code”) on REITs holding property for sale and related regulations may affect our ability to sell properties without adversely affecting distributions to stockholders.  A number of our properties were acquired using UPREIT Units and twelve of those properties are subject to certain agreements which may restrict our ability to sell such properties in transactions that would create current taxable income to the former owners.

13

Real Estate Investment Risks (continued)

Competition could limit our ability to lease apartments or increase or maintain rents.

Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments, condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale.  Competitive residential housing in a particular area could adversely affect our ability to lease apartment units and to increase or maintain rental rates.  The recent challenges in the credit and housing markets have increased single-family housing inventory that may compete with our properties.

Repositioning and development risks could affect our profitability.

A key component of our strategy is to acquire properties and to reposition them for long-term growth.  In addition, we have developed and are in the process of developing new apartment communities.  We plan to continue to selectively expand our development activities.  Development projects generally require various governmental and other approvals, which have no assurance of being received.  Our repositioning and development activities generally entail certain risks, including the following:

·funds may be expended and management’s time devoted to projects that may not be completed due to a variety of factors, including without limitation, the inability to obtain necessary zoning or other approvals;

·construction costs of a project may exceed original estimates, possibly making the project economically unfeasible or the economic return on a repositioned property less than anticipated;

·projects may be delayed due to delays in obtaining necessary zoning and other approvals, adverse weather conditions, labor shortages, or other unforeseen complications;

·occupancy rates and rents at a completed development project or at a repositioned property may be less than anticipated; and

·the operating expenses at a completed development may be higher than anticipated.

If any of these risks materialized, the effect may negatively impact our financial results and reduce the funds available for distribution to our stockholders.  Further, the repositioning and development of properties is also subject to the general risks associated with real estate investments.

Short-term leases expose us to the effects of declining market conditions.

Virtually all of the leases for our properties are short-term leases (generally, one year or less).  Typically, our residents can leave after the end of a one-year lease term.  As a result, our rental revenues are impacted by declines in market conditions more quickly than if our leases were for longer terms.

An increase in operating expenses, including real estate taxes, would negatively affect our financial results.

Unanticipated increases in real estate taxes and other unanticipated or increased operating expenses cannot always be passed through to residents in the form of higher rents and may adversely affect financial results and our ability to make expected distributions.

A significant uninsured property or liability loss could adversely affect us in a material way.

The Company carries comprehensive liability, fire, extended and rental loss insurance for each of our properties.  There are however certain types of extraordinary losses, such as losses for certain natural catastrophes and relating to environmental contamination, for which the Company may not have insurance coverage.  If an uninsured loss occurred, we could incur significant expense.  As a result of a catastrophic uninsured event impacting an entire

14

Real Estate Investment Risks (continued)

property, we could lose our investment in and cash flow from, the affected property, and could be required to repay any indebtedness secured by that property and related taxes and other charges.

The Company is subject to increased exposure to economic and other competitive factors due to concentration of its Properties in certain markets.

At December 31, 2012, approximately 30.9%, 24.6%, 16.9% and 11.9% (on an apartment unit basis) of the Company’s Properties are located in the Washington, D.C., Baltimore, Maryland, suburban New York City and Philadelphia geographic areas.  The Company’s current strategy is to reduce its concentration in the Washington, D.C. market to below 30%.  However, geographic concentration could present risks if local property market performance falls below expectations as a result of deteriorating economic conditions or other factors.  This could have a negative impact on the Company’s financial condition and results of operations, which could adversely affect our ability to make expected distributions.

Insurance costs and policy deductibles expose us to unpredictable expenses which may be material.

The Company’s general liability, property and workers’ compensation policies provide for deductibles and self-insured retention amounts.  These deductibles and self-insured retention amounts expose the Company to potential uninsured losses.  Management believes that this exposure is justified by savings in insurance premium amounts and, in some cases, was necessary in order for the Company to secure coverage.  Depending on the level of claims experienced, insurance coverage may become difficult to obtain at the current premium and expense levels.

Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.

We must operate our properties in compliance with numerous federal, state and local laws and regulations, including landlord tenant laws and other laws generally applicable to business operations.  Noncompliance with laws could expose us to liability.

Compliance with changes in:  (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions; (ii) rent control or rent stabilization laws; or (iii) other governmental rules and regulations or enforcement policies affecting the use and operation of our communities, including changes to building codes and fire and life-safety codes, may result in lower revenue growth or significant unanticipated expenditures.

We may incur costs and increased expenses to repair property damage resulting from inclement weather.

In every market except Florida, we are exposed to risks associated with inclement winter weather, including increased costs for the removal of snow and ice.  In addition, in all of our markets, we have exposure to severe storms which also could increase the need for maintenance and repair of our communities.

We may incur increased energy and other costs resulting from the climate change regulations.

The current concerns about climate change have resulted in various treaties, laws and regulations which are intended to limit carbon emissions.  The Company believes these laws being enacted or proposed may cause energy and waste removal costs at our properties to increase, but we do not expect the direct impact of these increases to be material to our results of operations.  Increased costs relating to energy either would be the responsibility of our residents directly or in large part may be passed through by us to our residents through the utility recovery programs.  We may be able to pass increased waste removal costs on to our residents in the form of increased rental rates.  If this is not possible, it is still not expected that these additional costs would affect the Company’s financial performance in any material way.

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Real Estate Investment Risks (continued)

We may incur costs due to environmental contamination or non-compliance that could adversely affect our financial results and reputation.

Under various federal, state and local environmental laws, regulations and ordinances, we may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances at our properties and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination.  These damages and costs may be substantial.  The presence of such substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, sell or rent the affected property.

The development, construction and operation of our communities are subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge.  Noncompliance with such laws and regulations may subject us to fines and penalties.  We do not currently anticipate that we will incur any material liabilities as a result of noncompliance with these laws.

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building.  These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs.  ACMs are present at some of our communities.  We implement an operations and maintenance program at each of the communities at which ACMs are detected.  We do not currently anticipate that we will incur any material liabilities as a result of the presence of ACMs at our communities.

We are aware that some of our communities have or may have lead paint and have implemented an operations and maintenance program at each of those communities to contain, remove or test for lead paint to limit the exposure of our residents.  At some of our properties, we are required by federal law to provide lead-based paint disclosures to our residents.  Failure to comply with the federal notification requirement can result in a penalty.  We do not currently anticipate that we will incur any material liabilities as a result of the presence of lead-based paint at our communities or the failure to provide disclosures.

Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.  Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions.  This has resulted in an increasing number of lawsuits against owners and managers of multifamily properties.  Insurance companies have reacted by excluding mold-related claims from existing policies and pricing mold endorsements at prohibitively high rates.  We have adopted programs designed to minimize any impact mold might have on our residents or the property.  However, if mold should become an issue in the future, our financial condition or results of operations may be adversely affected.

All of the Properties and all of the communities that we are currently developing have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or ground water sampling.  These assessments, together with subsurface assessments conducted on some of our properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operation.  There is no assurance that Phase I assessments would reveal all environmental liabilities.  In addition, environmental conditions not known to the Company may exist now or in the future which could result in liability to the Company for remediation or fines or to third parties for property or personal injury damages, either under existing laws and regulations or future changes to such requirements.

We occasionally have been involved in managing, leasing and operating various properties for third parties.  Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which could relate to hazardous or toxic substances.  We are not aware of any material environmental liabilities with respect to properties managed by us for such third parties.

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Real Estate Financing Risks

We are subject to general risks related to debt.

We are subject to the customary risks associated with debt financing.  For example, if a property is mortgaged to secure payment of indebtedness and we are unable to meet its debt service obligations, the property could be foreclosed upon.  This could adversely affect our cash flow and, consequently, the amount available for distributions to stockholders.

We may not be able to obtain refinancing at favorable rates.

Because a significant amount of our financing is not fully self-amortizing, we anticipate that only a portion of the principal of our indebtedness will be repaid prior to maturity.  So, we will need to refinance debt.  Accordingly, there is a risk that we will not be successful in refinancing existing indebtedness or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness.  We aim to stagger our debt maturities with the goal of minimizing the amount of debt which must be refinanced in any year.

As of December 31, 2012, we had approximately $2.2 billion of mortgage debt, a significant portion of which is subject to balloon payments.  We do not expect to have cash flows from operations to make all of these balloon payments.  The mortgage debt matures as follows:

2013	$	190 million
2014	75 million
2015	255 million
2016	344 million
2017	265 million
Thereafter	1,036 million

Financing may not be available and issuing equity could dilute our stockholders’ interests.

Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.  Debt or equity financing may not be available in sufficient amounts, or on favorable terms or at all.  If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.

Potential reduction or elimination of the role that Fannie Mae and Freddie Mac play in the multifamily financing sector may negatively impact the multifamily sector and our ability to obtain financing.

Fannie Mae and Freddie Mac (the “GSEs”) are a major source of financing for secured multifamily real estate.  We and other multifamily companies depend in part on the GSEs to finance growth by purchasing or guarantying apartment loans.  In 2011, the Obama administration released a report proposing that the GSEs be gradually eliminated.  The report proposed three possible courses for long-term reform of housing finance.  A final decision by the government to eliminate the GSEs or to change their mandate may adversely affect interest rates and capital availability.  In 2012, the Company added only $7 million of secured debt assumed in connection with an acquisition.  Instead we added $50 million of unsecured debt and increased outstandings on our unsecured line of credit by $160 million.  This demonstrates the Company’s declining reliance on the GSEs.  In addition, management believes, based on the positive performance of the multifamily sector and its low mortgage default rate, that other sources of financing would enter the market such as pension funds and insurance companies.

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Real Estate Financing Risks (continued)

The Company in part relies on its line of credit to meet its short-term liquidity requirements.

As of December 31, 2012, the Company had an unsecured line of credit agreement of $275 million with an initial maturity date of December 8, 2015, and a one-year extension, at the Company’s option.  The Company had $162.5 million outstanding under the credit facility on December 31, 2012.

The credit agreement relating to the line of credit requires the Company to maintain certain financial covenants, ratios and measurements.  Maintaining compliance with these covenants could limit our flexibility.  In addition, a default in these requirements, if uncured, could result in a termination of the line of credit and a requirement that we repay outstanding amounts, which could adversely affect our liquidity and increase our financing costs.

Failure to comply with the financial covenants relating to its unsecured debt, could result in a default and early repayment of the loans.

In addition to the line of credit, as of December 31, 2012, the Company had $450 million of unsecured debt outstanding.  These loans require the Company to maintain some of the same covenants, ratios and measurements as under the line of credit.  A default in any of these requirements could result in a default of these unsecured loans and a requirement that the loan be repaid early.  This could adversely affect our liquidity and result in increased borrowing costs.

Rising interest rates could adversely affect operations and cash flow.

As of December 31, 2012, approximately 87% of our debt was at fixed rates.  This limits our exposure to changes in interest rates.  Prolonged interest rate increases, however, could negatively affect our ability to make acquisitions, to dispose of properties at favorable prices, to develop properties and to refinance existing borrowings at acceptable rates.

Failure to hedge effectively against interest rates may adversely affect results of operations.

We may manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap agreements and rate swap agreements.  These agreements involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements and that these arrangements may reduce the benefits to us if interest rates decline.  Failure to hedge effectively against interest rate changes could have a negative impact on our financial performance and our ability to make distributions to our shareholders and pay amounts due on our debt.

There is no legal limit on the amount of debt we can incur.

The Board has adopted a policy of limiting our indebtedness to approximately 55% of our total market capitalization (with the equity component of total market capitalization based on the per share NAV presented to our Board at its most recent Board meeting), but our organizational documents do not contain any limitation on the amount or percentage of indebtedness we may incur.  Accordingly, the Board could alter or eliminate its current policy on borrowing. If this policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our ability to make expected distributions to stockholders and increase the risk of default on our indebtedness.  Our NAV fluctuates based on a number of factors.  Our line of credit agreement limits the amount of indebtedness we may incur.

18

Federal Income Tax Risks

There is no assurance that we will continue to qualify as a REIT.

We believe that we have been organized and have operated in such manner so as to qualify as a REIT under the Internal Revenue Service Code, commencing with our taxable year ended December 31, 1994.  A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders as long as it distributes currently at least 90% of its taxable income (excluding net capital gains).  No assurance can be provided, however, that we have qualified or will continue to qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification.

We are required to make certain distributions to qualify as a REIT, and there is no assurance that we will have the funds necessary to make the distributions.

In order to continue to qualify as a REIT, we currently are required each year to distribute to our stockholders at least 90% of our taxable income (excluding net capital gains).  In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions made by us with respect to the calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income for that year, and any undistributed taxable income from prior periods.  We intend to make distributions to our stockholders to comply with the 90% distribution requirement and to avoid the nondeductible excise tax and will rely for this purpose on distributions from the Operating Partnership.  However, differences in timing between taxable income and cash available for distribution could require us to borrow funds or to issue additional equity to enable us to meet the 90% distribution requirement (and, therefore, to maintain our REIT qualification) and to avoid the nondeductible excise tax.  The Operating Partnership is required to pay (or reimburse us, as its general partner, for) certain taxes and other liabilities and expenses that we incur, including any taxes that we must pay in the event we were to fail to qualify as a REIT.  In addition, because we are unable to retain earnings (resulting from REIT distribution requirements), we will generally be required to refinance debt that matures with additional debt or equity.  There can be no assurance that any of these sources of funds, if available at all, would be available to meet our distribution and tax obligations.

Our failure to qualify as a REIT would have adverse consequences.

If we fail to qualify as a REIT, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.  In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification is lost.  The additional tax burden on us would significantly reduce the cash available for distribution by us to our stockholders.  Our failure to qualify as a REIT could reduce materially the value of our common stock and would cause all our distributions to be taxable as ordinary income to the extent of our current and accumulated earnings and profits (although, subject to certain limitations under the Code, corporate distributees may be eligible for the dividends received deduction with respect to these distributions).

The Operating Partnership intends to qualify as a partnership but there is no guaranty that it will qualify.

We believe that the Operating Partnership qualifies as a partnership for federal income tax purposes.  No assurance can be provided, however, that the Internal Revenue Service (the “IRS”) will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge.  If the IRS were to be successful in treating the Operating Partnership as an entity that is taxable as a corporation, we would cease to qualify as a REIT because the value of our ownership interest in the Operating Partnership would exceed 5% of our assets and because we would be considered to hold more than 10% of the voting securities of another corporation.  Also, the imposition of a corporate tax on the Operating Partnership would reduce significantly the amount of cash available for distribution to its limited partners.  Finally, the classification of the Operating Partnership as a corporation would cause its limited partners to recognize gain (upon the event that causes the Operating Partnership to be classified as a corporation) at least equal to their “negative capital accounts” (and possibly more, depending upon the circumstances).

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Other Risks

The loss of members of key personnel could negatively affect the Company’s performance.

We depend on the efforts of our executive officers, particularly Edward J. Pettinella, the Company’s President and Chief Executive Officer.  If he resigned or otherwise ceased to be employed by the Company, operations could be adversely affected.  Mr. Pettinella has entered into an Employment Agreement with the Company.

The ability of our stockholders to effect a change of control is limited by certain provisions of our Articles of Incorporation as well as by Maryland law and our executive retention plan.

Our Articles Incorporation, as amended (the “Articles of Incorporation”), authorize the Board to issue up to a total of 80 million shares of common stock, 10 million shares of excess stock and 10 million shares of preferred stock and to establish the rights and preferences of any shares issued.  Further, under the Articles of Incorporation, the stockholders do not have cumulative voting rights.

In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of its taxable year.  We have limited ownership of the issued and outstanding shares of common stock by any single stockholder to 8.0% of the aggregate value of our outstanding shares.

The percentage ownership limit described above, the issuance of preferred stock in the future and the absence of cumulative voting rights could have the effect of:  (i) delaying or preventing a change of control of us even if a change in control were in the stockholders’ interest; (ii) deterring tender offers for our common stock that may be beneficial to the stockholders; or (iii) limiting the opportunity for stockholders to receive a premium for their common stock that might otherwise exist if an investor attempted to assemble a block of our common stock in excess of the percentage ownership limit or otherwise to effect a change of control of us.

As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law.  Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders’ best interests.  In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for re-election annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.

Also, to assure that our management has appropriate incentives to focus on our business and properties in the face of a change of control situation, we have adopted an executive retention plan which provides some key employees with salary, bonus and some benefits continuation in the event of a change of control.

The future sale of shares under our At-The-Market offering may negatively impact our stock price.

Beginning in 2009, the Company made the necessary filings with the Securities and Exchange Commission to institute the sale of its common shares from time to time in “at the market offerings” or negotiated transactions (the “ATM”).  As of December 31, 2012, approximately 2.4 million shares remain available under the current filings relating to the ATM.  If authorized by its Board of Directors, the Company, in the future could affect additional filings to register additional common shares for sale under the ATM.  Sales of substantial amounts of shares of common stock in the public market or the perception that such sales might occur could adversely affect the market price of the common stock.

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Item 1B.  Unresolved Staff Comments

None.

Item 2.   Properties

As of December 31, 2012, the Properties consisted of 121 multifamily residential communities containing 42,635 apartment units.  In 2012, the Company acquired three communities with a total of 2,018 units in three transactions for total consideration of $298.2 million.  Also in 2012, the Company sold six communities in separate transactions with a total of 1,596 units for total consideration of $159.6 million.  In 2011, the Company acquired eight communities with a total of 2,817 units in eight transactions for total consideration of $500.7 million.

The Properties are generally located in established markets in suburban neighborhoods and are well maintained and well leased.  Average physical occupancy at the Properties was 94.9% for 2012.  “Physical occupancy” is defined as total possible rental income, net of vacancy, as a percentage of total possible rental income.  Total possible rental income is determined by valuing occupied units at contract rates and vacant units at market rents.  Average economic occupancy at the Properties was 94.0% for 2012.  “Economic occupancy” is defined as total possible rental income, net of vacancy and bad debt expense as a percentage of total possible rental income.  The Properties are typically two- and three-story garden style apartment buildings in landscaped settings and a majority are of brick or other masonry construction.  The Company believes that its strategic focus on appealing to middle income residents and the quality of the services it provides to such residents results in lower resident turnover.  Average turnover at the Properties was approximately 39% for 2012, which is significantly below the national average of approximately 52% for garden style apartments.

Resident leases are generally for a one year term.  Security deposits equal to one month’s rent or less are generally required.

Certain of the Properties collateralize mortgage loans.  See Schedule III contained herein (pages 100 to 102).

The table on the following pages illustrates certain of the important characteristics of the Properties as of December 31, 2012.

21

Property Information

												(4)		(4)
						(2)		(3)		(3)		2012		2011
						2012		2012		2011		Avg Mo		Avg Mo		12/31/2012
		#	Age		Average	Resident		Average		Average		Rent Rate		Rent Rate		Total Cost
		Of	In	Year	Apt Size	Turnover		Occupancy		Occupancy		per Apt		per Apt		(000)
Region		Apts	Years	Acq/Dev	(Sq Ft)	%		%		%		$		$		$
	Core Communities (1)
FL - Southeast	The Hamptons	668	23	2004	945	45	%	95	%	95	%	$	1,007	$	979	$	74,418
FL - Southeast	Vinings at Hampton Village	168	23	2004	1,171	44	%	96	%	96	%	1,124		1,104		19,195
IL - Chicago	Blackhawk	371	51	2000	804	54	%	96	%	95	%	896		871		26,885
IL - Chicago	Courtyards Village	224	41	2001	765	46	%	97	%	98	%	892		843		19,300
IL - Chicago	Cypress Place	192	42	2000	840	33	%	97	%	97	%	1,008		944		16,648
IL - Chicago	Lakeview Townhomes	120	16	2010	1,080	47	%	94	%	94	%	1,228		1,153		16,741
IL - Chicago	The Colony	783	39	1999	716	43	%	97	%	97	%	897		867		60,393
IL - Chicago	The New Colonies	672	38	1998	674	59	%	95	%	96	%	773		756		39,005
MA - Boston	Gardencrest	695	64	2002	907	35	%	97	%	96	%	1,637		1,548		119,414
MA - Boston	Highland House	172	43	2006	709	33	%	97	%	96	%	1,244		1,170		21,183
MA - Boston	Liberty Commons	120	6	2006	1,075	49	%	96	%	97	%	1,310		1,267		14,929
MA - Boston	Liberty Place	107	24	2006	924	36	%	96	%	96	%	1,508		1,447		18,152
MA - Boston	Redbank Village	500	68	1998	752	43	%	97	%	96	%	941		906		31,669
MA - Boston	Stone Ends	280	33	2003	813	43	%	96	%	95	%	1,310		1,250		42,411
MA - Boston	The Heights at Marlborough	348	39	2006	898	43	%	95	%	94	%	1,250		1,187		59,603
MA - Boston	The Meadows at Marlborough	264	40	2006	822	39	%	95	%	95	%	1,202		1,147		41,549
MA - Boston	The Townhomes of Beverly	204	42	2007	973	39	%	96	%	96	%	1,544		1,485		42,111
MA - Boston	The Village at Marshfield	276	40	2004	766	39	%	96	%	96	%	1,202		1,158		40,498
MA - Boston	Westwoods	35	22	2007	832	26	%	97	%	97	%	1,310		1,232		4,654
MD - Baltimore	Annapolis Roads	282	37	2010	977	38	%	92	%	90	%	1,280		1,258		38,626
MD - Baltimore	Bonnie Ridge	960	46	1999	998	40	%	96	%	95	%	1,142		1,105		88,880
MD - Baltimore	Canterbury	618	34	1999	858	42	%	95	%	95	%	1,007		974		44,386
MD - Baltimore	Charleston Place	858	41	2010	817	33	%	96	%	97	%	1,178		1,130		115,801
MD - Baltimore	Country Village	344	41	1998	773	48	%	95	%	97	%	1,049		993		26,411
MD - Baltimore	Dunfield	312	25	2007	916	46	%	95	%	96	%	1,200		1,153		39,353
MD - Baltimore	Fox Hall	720	36	2007	826	40	%	92	%	92	%	895		870		78,116
MD - Baltimore	Gateway Village	132	23	1999	932	34	%	96	%	96	%	1,368		1,336		12,446
MD - Baltimore	Heritage Woods	164	39	2006	925	43	%	96	%	97	%	1,194		1,136		18,146
MD - Baltimore	Middlebrooke	208	38	2010	834	50	%	95	%	95	%	989		942		20,432
MD - Baltimore	Mill Towne Village	384	39	2001	804	42	%	96	%	94	%	924		904		32,894
MD - Baltimore	Morningside Heights	1,050	47	1998	865	38	%	92	%	93	%	929		896		75,085
MD - Baltimore	Owings Run	504	17	1999	1,064	43	%	95	%	96	%	1,269		1,242		51,165
MD - Baltimore	Ridgeview at Wakefield Valley	204	24	2005	972	53	%	96	%	95	%	1,221		1,208		25,109
MD - Baltimore	Saddle Brooke	468	39	2008	889	43	%	94	%	93	%	1,099		1,036		60,541
MD - Baltimore	Selford	102	25	1999	946	42	%	97	%	94	%	1,409		1,364		9,508
MD - Baltimore	The Coves at Chesapeake	469	30	2006	986	43	%	94	%	92	%	1,286		1,234		77,682
MD - Baltimore	The Greens at Columbia	168	26	2010	969	39	%	94	%	96	%	1,427		1,362		28,183

22

Property Information

												(4)	(4)
						(2)		(3)		(3)		2012	2011
						2012		2012		2011		Avg Mo	Avg Mo	12/31/2012
		#	Age		Average	Resident		Average		Average		Rent Rate	Rent Rate	Total Cost
		Of	In	Year	Apt Size	Turnover		Occupancy		Occupancy		per Apt	per Apt	(000)
Region		Apts	Years	Acq/Dev	(Sq Ft)	%		%		%		$	$	$
MD - Baltimore	Top Field	156	39	2006	1,132	37	%	95	%	97	%	1,315	1,270	23,056
MD - Baltimore	Village Square	370	44	1999	967	41	%	96	%	96	%	1,193	1,166	29,267
MD - Baltimore	Westbrooke	110	51	2010	651	42	%	95	%	95	%	862	823	7,967
NJ - Northern	Barrington Gardens	148	39	2005	837	45	%	97	%	97	%	1,286	1,198	14,219
NJ - Northern	Chatham Hill	308	45	2004	856	42	%	95	%	95	%	1,881	1,764	66,185
NJ - Northern	East Hill Gardens	33	54	1998	694	30	%	98	%	95	%	1,607	1,555	3,623
NJ - Northern	Hackensack Gardens	198	64	2005	552	35	%	98	%	98	%	1,176	1,119	20,611
NJ - Northern	Jacob Ford Village	270	64	2007	744	26	%	99	%	97	%	1,327	1,247	35,579
NJ - Northern	Lakeview	106	63	1998	575	36	%	97	%	96	%	1,431	1,380	10,458
NJ - Northern	Northwood	134	47	2004	850	28	%	97	%	97	%	1,387	1,339	20,480
NJ - Northern	Oak Manor	77	56	1998	1,006	26	%	98	%	95	%	1,890	1,797	9,321
NJ - Northern	Pleasant View	1,142	44	1998	738	37	%	96	%	96	%	1,190	1,151	92,459
NJ - Northern	Pleasure Bay	270	41	1998	803	43	%	97	%	95	%	1,081	1,041	20,653
NJ - Northern	Royal Gardens	550	44	1997	872	32	%	97	%	96	%	1,294	1,246	41,531
NJ - Northern	Wayne Village	275	47	1998	790	27	%	97	%	97	%	1,443	1,402	26,493
NJ - Northern	Windsor Realty	67	59	1998	622	51	%	95	%	97	%	1,324	1,287	6,712
NY - Long Island	Bayview/Colonial	160	45	2000	717	29	%	99	%	98	%	1,312	1,260	16,501
NY - Long Island	Cambridge Village	82	45	2002	725	33	%	98	%	98	%	1,873	1,789	8,846
NY - Long Island	Crescent Club	257	39	2010	876	28	%	96	%	97	%	1,345	1,275	36,096
NY - Long Island	Devonshire Hills	656	44	2001	767	39	%	97	%	97	%	1,641	1,584	126,360
NY - Long Island	Hawthorne Court	434	44	2002	759	34	%	97	%	97	%	1,478	1,439	57,497
NY - Long Island	Heritage Square	80	63	2002	696	40	%	98	%	98	%	1,837	1,744	10,486
NY - Long Island	Holiday Square	144	33	2002	575	21	%	99	%	96	%	1,269	1,223	13,322
NY - Long Island	Lake Grove	368	42	1997	775	38	%	96	%	96	%	1,503	1,442	41,339
NY - Long Island	Mid-Island Estates	232	47	1997	684	32	%	99	%	98	%	1,461	1,402	19,700
NY - Long Island	Sayville Commons	342	11	2005	1,012	19	%	97	%	97	%	1,629	1,590	67,838
NY - Long Island	South Bay Manor	61	52	2000	806	36	%	97	%	96	%	1,684	1,642	8,806
NY - Long Island	Southern Meadows	452	41	2001	813	33	%	96	%	96	%	1,464	1,411	56,289
NY - Long Island	Westwood Village	242	43	2002	917	34	%	97	%	96	%	2,484	2,384	45,861
NY - Long Island	Woodmont Village	97	44	2002	725	40	%	96	%	97	%	1,370	1,325	12,669
NY - Long Island	Yorkshire Village	40	43	2002	766	35	%	98	%	98	%	1,905	1,839	5,054
PA - Philadelphia	Castle Club	158	45	2000	814	41	%	94	%	94	%	1,013	978	17,360
PA - Philadelphia	Glen Manor	174	36	1997	642	38	%	95	%	96	%	821	813	10,334
PA - Philadelphia	Golf Club	399	43	2000	857	48	%	95	%	94	%	1,137	1,094	44,683
PA - Philadelphia	Hill Brook Place	274	44	1999	711	34	%	96	%	95	%	942	905	22,348
PA - Philadelphia	Home Properties of Bryn Mawr	316	61	2000	705	72	%	95	%	94	%	1,435	1,295	40,222
PA - Philadelphia	Home Properties of Devon	631	49	2000	913	40	%	94	%	94	%	1,233	1,148	81,516
PA - Philadelphia	New Orleans Park	442	41	1997	696	44	%	95	%	95	%	898	867	32,027

23

Property Information

												(4)		(4)
						(2)		(3)		(3)		2012		2011
						2012		2012		2011		Avg Mo		Avg Mo		12/31/2012
		#	Age		Average	Resident		Average		Average		Rent Rate		Rent Rate		Total Cost
		Of	In	Year	Apt Size	Turnover		Occupancy		Occupancy		per Apt		per Apt		(000)
Region		Apts	Years	Acq/Dev	(Sq Ft)	%		%		%		$		$		$
PA - Philadelphia	Racquet Club East	466	41	1998	910	37	%	95	%	95	%	1,113		1,061		43,439
PA - Philadelphia	Racquet Club South	103	43	1999	860	41	%	95	%	95	%	945		909		7,811
PA - Philadelphia	Ridley Brook	244	50	1999	796	37	%	96	%	94	%	967		939		17,511
PA - Philadelphia	Sherry Lake	298	47	1998	813	38	%	96	%	96	%	1,271		1,205		32,421
PA - Philadelphia	The Brooke at Peachtree Village	146	26	2005	1,261	30	%	97	%	96	%	1,186		1,138		21,331
PA - Philadelphia	The Landings	384	39	1996	912	37	%	96	%	96	%	1,068		1,012		34,772
PA - Philadelphia	Trexler Park	250	38	2000	919	47	%	95	%	95	%	1,118		1,065		27,231
PA - Philadelphia	Trexler Park West	216	4	2008	1,032	55	%	96	%	96	%	1,372		1,299		26,144
PA - Philadelphia	William Henry	363	41	2000	939	46	%	95	%	94	%	1,194		1,131		46,508
VA - Suburban DC	1200 East West	247	2	2010	839	29	%	96	%	96	%	1,885		1,747		84,598
VA - Suburban DC	Braddock Lee	255	57	1998	749	25	%	98	%	98	%	1,396		1,334		23,025
VA - Suburban DC	Cider Mill	864	34	2002	840	33	%	96	%	95	%	1,192		1,151		103,648
VA - Suburban DC	Cinnamon Run	511	52	2005	966	32	%	94	%	95	%	1,276		1,243		78,441
VA - Suburban DC	East Meadow	150	41	2000	943	36	%	97	%	98	%	1,415		1,354		18,333
VA - Suburban DC	Elmwood Terrace	504	39	2000	910	45	%	95	%	95	%	969		926		35,605
VA - Suburban DC	Falkland Chase	450	75	2003	760	40	%	96	%	96	%	1,440		1,402		69,362
VA - Suburban DC	Mount Vernon Square	1,387	38	2006	847	39	%	95	%	94	%	1,289		1,245		163,727
VA - Suburban DC	Park Shirlington	294	57	1998	840	27	%	97	%	97	%	1,380		1,320		25,539
VA - Suburban DC	Peppertree Farm	879	58	2005	1,020	29	%	94	%	93	%	1,245		1,211		120,511
VA - Suburban DC	Seminary Hill	296	52	1999	901	31	%	97	%	98	%	1,367		1,299		25,168
VA - Suburban DC	Seminary Towers	544	48	1999	911	35	%	96	%	96	%	1,440		1,361		51,028
VA - Suburban DC	Tamarron	132	25	1999	955	30	%	96	%	95	%	1,588		1,537		15,113
VA - Suburban DC	The Apts at Wellington Trace	240	10	2004	1,085	52	%	97	%	98	%	1,394		1,323		32,225
VA - Suburban DC	The Courts at Fair Oaks	364	22	2010	798	43	%	96	%	96	%	1,500		1,439		76,047
VA - Suburban DC	The Manor - MD	435	43	2001	908	28	%	96	%	95	%	1,321		1,282		52,033
VA - Suburban DC	The Manor - VA	198	38	1999	819	44	%	97	%	98	%	1,106		1,037		14,754
VA - Suburban DC	The Sycamores	185	34	2002	858	38	%	97	%	96	%	1,449		1,371		25,646
VA - Suburban DC	Village at Potomac Falls	247	13	2010	940	40	%	96	%	96	%	1,391		1,286		40,254
VA - Suburban DC	Virginia Village	344	45	2001	1,003	38	%	97	%	98	%	1,411		1,334		45,244
VA - Suburban DC	West Springfield	244	34	2002	957	39	%	96	%	97	%	1,556		1,475		41,691
VA - Suburban DC	Westchester West	345	40	2008	985	29	%	94	%	93	%	1,337		1,300		53,088
VA - Suburban DC	Woodleaf	228	27	2004	709	41	%	96	%	94	%	1,284		1,248		25,058
	Core Total/Weighted Avg	36,214	40		858	39	%	96	%	95	%	$	1,239	$	1,189	$	4,232,596
	Redevelopment Communities
VA - Suburban DC	Arbor Park of Alexandria	851	44	2000	1,038	50	%	80	%	87	%	$	1,462	$	1,345	$	118,744

24

Property Information

												(4)		(4)
						(2)		(3)		(3)		2012		2011
						2012		2012		2011		Avg Mo		Avg Mo		12/31/2012
		#	Age		Average	Resident		Average		Average		Rent Rate		Rent Rate		Total Cost
		Of	In	Year	Apt Size	Turnover		Occupancy		Occupancy		per Apt		per Apt		(000)
Region		Apts	Years	Acq/Dev	(Sq Ft)	%		%		%		$		$		$
	2011 Acquisition Communities (5)
IL - Chicago	The Gates of Deer Grove	204	38	2011	844	53	%	95	%	94	%	$	1,042	$	992	$	20,902
MA - Boston	The Commons at Haynes Farm	302	21	2011	881	40	%	96	%	94	%	1,288		1,222		43,853
MD - Baltimore	The Apts at Cambridge Court	544	13	2011	900	48	%	93	%	92	%	1,349		1,283		92,238
PA - Philadelphia	Waterview	203	44	2011	776	53	%	93	%	92	%	1,060		1,035		28,157
VA - Suburban DC	Hunters Glen	108	28	2011	822	44	%	96	%	96	%	976		909		8,005
VA - Suburban DC	Newport Village	937	44	2011	1,051	35	%	95	%	92	%	1,553		1,514		209,429
VA - Suburban DC	Somerset Park	108	6	2011	967	44	%	97	%	95	%	1,451		1,388		20,394
VA - Suburban DC	The Courts at Dulles	411	12	2011	991	47	%	95	%	94	%	1,544		1,482		93,796
	2011 Total/Weighted Avg	2,817	26		948	43	%	94	%	93	%	$	1,385	$	1,333	$	516,774
	2012 Acquisition Communities (5)
MD - Baltimore	Howard Crossing	1,350	44	2012	805	42	%	91	%	n/a		$	1,098	n/a		$	187,425
VA - Suburban DC	The Manor East	164	48	2012	841	46	%	94	%	n/a		1,057		n/a		17,485
VA - Suburban DC	Woodway at Trinity Centre	504	15	2012	868	56	%	96	%	n/a		1,374		n/a		96,571
	2012 Construction Communities (6)
VA - Suburban DC	Courts at Huntington Station	421	1	2011	996	29	%	88	%	n/a		$	1,994	n/a		$	121,893
VA - Suburban DC	The Apts at Cobblestone Square	314	—	2012	923	14	%	84	%	n/a		1,270		n/a		48,691
	2012 Total/Weighted Avg	2,753	22		861	40	%	90	%	n/a		$	1,379	n/a		$	472,065
	Property Total/Weighted Avg	42,635	38		868	39	%	95	%	95	%	$	1,259	$	1,201	$	5,340,179

(1)“Core Communities” represents the 36,214 apartment units owned consistently throughout 2012 and 2011.

(2)“Resident Turnover” reflects, on an annual basis, the number of moveouts, divided by the total number of apartment units.

(3)“Average % Occupancy” is the average physical occupancy for the years ended December 31, 2012 and 2011.

(4)  “Avg Mo Rent Rate per Apt” takes into account resident concessions.

(5)For communities acquired during 2012 and 2011, “Average % Occupancy” is the average physical occupancy from the date of acquisition.

(6)Courts at Huntington Station construction was completed in 2011 and The Apts at Cobblestone Square was completed in 2012.

25

Property Development

The Company has the ability to develop new market-rate communities.  It plans to engage in limited development activity only in markets in which it is currently doing business in order to add net asset value and supplement future earnings and growth.  It expects to develop new apartment communities on entitled land and on land adjacent to existing Properties, as well as to increase the density of units at some communities currently owned.

Completed developments

·During 2012, the Company completed construction at The Apartments at Cobblestone Square located in Fredericksburg, Virginia, consisting of eight, four-story buildings and a refurbished rail depot, for a total of 314 apartment units.  The total cost for this community was $48.6 million.  Initial occupancy commenced in the fourth quarter of 2011 and stabilization was achieved as of September 2012.

Current construction projects

·Eleven55 Ripley, a 379 unit high rise development consisting of two buildings, a 21 story high-rise and a 5 story mid-rise, is located in Silver Spring, Maryland.  Construction commenced in the fourth quarter of 2011, and is expected to continue through 2014 with initial occupancy in the third quarter of 2013 for a total projected cost of $111 million.

·The Courts at Spring Mill Station, a 385 unit development consisting of two buildings, being built in a combination donut/podium style, is located in Conshohocken, Pennsylvania.  Construction commenced in the second quarter of 2012, and is expected to continue through 2014 with initial occupancy in the first quarter of 2014.  The total projected cost for this development is $89 million.

Redevelopment

·The Company has one project under redevelopment.  Arbor Park, located in Alexandria, Virginia, has 851 garden apartments in fifty-two buildings built in 1967.  The Company plans to extensively renovate all of the units over several years on a building by building basis.  As of December 31, 2012, there were five buildings with 90 units under renovation and twenty-six buildings with 391 units completed and 290 units occupied.  As of December 31, 2012, rents in the renovated units were averaging $1,742 compared to $1,397 for the existing non-renovated units.  As of December 31, 2012, the Company has incurred costs of $14 million for the renovation which is included in buildings, improvements and equipment.  The entire project is expected to be completed in 2014 for a projected cost of $30 million.

Pre-redevelopment

·Falkland Chase, located in Silver Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939.  The Company has obtained the necessary approvals to redevelop the North parcel which will allow for an increase of units from 182 to approximately 1,185 units.  Active construction for this project has not commenced.

26

Supplemental Property Information

At December 31, 2012, none of the Company’s properties have an individual net book value equal to or greater than 10% of the total assets of the Company or would have accounted for 10% or more of the Company’s aggregate gross revenues for 2012.  There is no resident who has one or more leases which, in the aggregate, account for more than 10% of the aggregate gross revenues for 2012.

Item 3.   Legal Proceedings

The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance.  Various claims of employment and resident discrimination are also periodically brought.  While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

Item 4.  Mine Safety Disclosures

Not applicable.

27

PART II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Holders and Dividends

The common stock has been traded on the NYSE under the symbol “HME” since July 28, 1994.  The following table sets forth for the previous two years the quarterly high and low sales prices per share reported on the NYSE, as well as all dividends paid with respect to the common stock.

	High		Low		Dividends
2012
Fourth Quarter	$	63.00	$	56.85	$	0.66
Third Quarter	$	66.98	$	60.93	$	0.66
Second Quarter	$	64.20	$	58.35	$	0.66
First Quarter	$	61.25	$	54.42	$	0.66
2011
Fourth Quarter	$	61.00	$	52.11	$	0.62
Third Quarter	$	67.27	$	53.89	$	0.62
Second Quarter	$	63.72	$	58.51	$	0.62
First Quarter	$	59.00	$	52.57	$	0.62

As of February 14, 2013, the Company had approximately 2,915 shareholders of record; 51,535,219 common shares (plus 10,433,628 UPREIT Units convertible into 10,433,628 common shares) were outstanding, and the closing price of the Company’s common stock on the NYSE was $61.88.  It is the Company’s policy to pay dividends.  The Company has historically paid dividends on a quarterly basis in the months of February or March, May, August and November.

On February 2, 2013, the Board declared a dividend of $0.70 per share for the quarter ended December 31, 2012.  The dividend is payable February 26, 2013 to shareholders of record on February 14, 2013.

28

Performance Graph

The following graph compares the cumulative return on the Company’s common stock during the five year period ended December 31, 2012 to the cumulative return of the NAREIT All Equity REIT Index (“NAREIT Equity”) and the Standard and Poor’s 500 Index (“S&P 500”) for the same period.  Management believes that the NAREIT Equity is an appropriate industry index and the S&P 500 is a broad equity market index for purposes of this graph.  The total return on the Company’s common stock assumes that dividends were reinvested quarterly at the same price as provided under the Company’s Dividend Reinvestment and Direct Stock Purchase Plan.  All comparisons are based on a $100.00 investment on December 31, 2007 and the reinvestment of all dividends during the comparison period.  Data for the NAREIT Equity and S&P 500 were provided to the Company by NAREIT.  Stockholders should note that past performance does not predict future results.

	12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011		12/31/2012
HME	$	100.00	$	95.83	$	121.85	$	148.55	$	160.78	$	178.75
NAREIT Equity	$	100.00	$	62.27	$	79.70	$	101.98	$	110.42	$	132.18
S&P 500	$	100.00	$	63.00	$	79.68	$	91.68	$	93.61	$	108.59

Certain of our filings with the SEC may “incorporate information by reference” future filings, including this Form 10-K.  Unless we specifically state otherwise, this Performance Graph shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

29

Issuer Purchases of Equity Securities

The Company has a stock repurchase program, approved by its Board of Directors (the “Board”), under which it may repurchase shares of its common stock or UPREIT Units (the “Company Program”).  The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management.  The Board’s action did not establish a specific target stock price or a specific timetable for share repurchase.  At December 31, 2012, the Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the Company Program.  During the three months ended December 31, 2012, the Company did not repurchase any shares under the Company Program.  The last year where the Company repurchased any shares under that program was 2008.

Participants in the Company’s Stock Benefit Plan can use common stock of the Company that they already own to pay: 1) all or a portion of the exercise price payable to the Company upon the exercise of an option; and, 2) the taxes associated with option exercises and the vesting of restricted stock awards.  In such event, the common stock used to pay the exercise price or taxes is returned to authorized but unissued status, and for purposes of this table is deemed to have been repurchased by the Company, but does not represent repurchases under the Company Program.

The following table summarizes the total number of shares (units) repurchased by the Company during the quarter ended December 31, 2012:

	Total	Average		Maximum shares/units
	shares/units	price per		available under the
Period	Purchased (1)	share/unit		Company Program
Balance October 1, 2012:				2,291,160
October 2012	—	$	—	2,291,160
November 2012	—	—		2,291,160
December 2012	977	59.70		2,291,160
Balance December 31, 2012:	977	$	59.70	2,291,160

(1)The Company repurchased 977 shares of common stock through share repurchases by the transfer agent in the open market in connection with the Company’s 401(k) Savings Plan employee deferral and Company matching elections.

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Item 6.   Selected Financial Data

The following table sets forth selected financial and operating data on a historical basis for the Company and should be read in conjunction with the financial statements appearing in this Form 10-K (amounts in thousands, except share, per share and unit data).

	2012			2011			2010			2009			2008
Revenues:
Rental income	$	591,933		$	515,780		$	457,819		$	441,645		$	431,849
Other income (1)	52,415			45,776			40,970			39,705			40,122
Total revenues	644,348			561,556			498,789			481,350			471,971
Expenses:
Operating and maintenance	235,040			217,069			203,421			199,881			196,338
General and administrative	34,174			29,145			25,138			24,476			25,489
Interest	125,809			127,618			120,652			118,052			114,481
Depreciation and amortization	165,642			140,713			122,772			114,725			106,540
Other expenses (2)	2,741			3,225			2,871			—			—
Total expenses	563,406			517,770			474,854			457,134			442,848
Income from operations before gain on early extinguishment of debt	80,942			43,786			23,935			24,216			29,123
Gain on early extinguishment of debt	—			—			—			—			11,304
Income from continuing operations	80,942			43,786			23,935			24,216			40,427
Discontinued operations:
Income (loss) from discontinued operations	2,148			3,878			2,396			(1,452		)	1,218
Gain (loss) on disposition of property	80,532			—			(13		)	24,314			51,560
Discontinued operations	82,680			3,878			2,383			22,862			52,778
Net income	163,622			47,664			26,318			47,078			93,205
Net income attributable to noncontrolling interest	(28,320		)	(9,808		)	(6,237		)	(12,659		)	(27,124		)
Net income attributable to common stockholders	$	135,302		$	37,856		$	20,081		$	34,419		$	66,081
Basic earnings per share data:
Income from continuing operations	$	1.34		$	0.83		$	0.50		$	0.53		$	0.90
Discontinued operations	1.38			0.07			0.05			0.51			1.17
Net income attributable to common stockholders	$	2.72		$	0.90		$	0.55		$	1.04		$	2.07
Diluted earnings per share data:
Income from continuing operations	$	1.33		$	0.82		$	0.49		$	0.53		$	0.88
Discontinued operations	1.36			0.07			0.05			0.51			1.16
Net income attributable to common stockholders	$	2.69		$	0.89		$	0.54		$	1.04		$	2.04
Cash dividends declared per common share	$	2.64		$	2.48		$	2.32		$	2.68		$	2.65
Balance Sheet Data:
Real estate, before accumulated depreciation	$	5,455,226		$	5,042,324		$	4,377,730		$	3,915,979		$	3,872,390
Total assets	4,451,492			4,153,206			3,634,703			3,268,034			3,317,094
Total debt	2,777,527			2,663,336			2,618,932			2,302,281			2,317,500
Common stockholders’ equity	1,320,968			1,153,668			720,893			661,112			650,778
Other Data:
Net cash provided by operating activities	$	267,580		$	197,705		$	160,019		$	149,624		$	160,081
Net cash used in investing activities	(366,003		)	(664,343		)	(334,539		)	(47,565		)	(80,584		)
Net cash provided by (used in) financing activities	111,218			464,153			176,493			(99,817		)	(79,039		)
Funds From Operations — Diluted, as adjusted by the Company (3)	251,658			189,723			151,134			146,171			161,318
Weighted average number of shares/units outstanding:
Shares — Basic	49,744,636			41,860,139			36,682,191			33,040,839			31,991,817
Shares — Diluted	50,382,636			42,545,082			37,169,886			33,172,116			32,332,688
Shares/units — Basic	60,364,689			52,926,968			48,201,751			45,274,376			45,200,405
Shares/units — Diluted	61,002,689			53,611,911			48,689,446			45,405,653			45,541,276
Total communities owned at end of year	121			124			116			105			110
Total apartment units owned at end of year	42,635			41,951			38,861			35,797			37,130

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(1)Other income includes property other income and corporate other income.

(2)Other expenses are comprised of acquisition related costs for closed deals that until 2009 were capitalized under authoritative guidance.

(3)Pursuant to the updated guidance for Funds From Operations (“FFO”) provided by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is defined as net income (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”)) excluding gains or losses from sales of property, impairment write-downs of depreciable real estate, noncontrolling interest, extraordinary items and cumulative effect of change in accounting principle plus depreciation from real property including adjustments for unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares.  Because of the limitations of the FFO definition as published by NAREIT as set forth above, the Company has made certain interpretations in applying the definition.  The Company believes all adjustments not specifically provided for are consistent with the definition.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO after a specific and defined supplemental adjustment to exclude losses from early extinguishments of debt associated with the sales of real estate (“FFO as adjusted”).  The adjustment to exclude losses from early extinguishments of debt results when the sale of real estate encumbered by debt requires us to pay the extinguishment costs prior to the debt’s stated maturity and to write-off unamortized loan costs at the date of the extinguishment.  Such costs are excluded from the gains on sales of real estate reported in accordance with GAAP.  However, we view the losses from early extinguishments of debt associated with the sales of real estate as an incremental cost of the sale transactions because we extinguished the debt in connection with the consummation of the sale transactions and we had no intent to extinguish the debt absent such transactions.  We believe that this supplemental adjustment more appropriately reflects the results of our operations exclusive of the impact of our sale transactions.

Although our FFO as adjusted clearly differs from NAREIT’s definition of FFO, and may not be comparable to that of other REITs and real estate companies, we believe it provides a meaningful supplemental measure of our operating performance because we believe that, by excluding the effects of the losses from early extinguishments of debt associated with the sales of real estate, management and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO.

Neither FFO, nor FFO as adjusted, should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance.  Neither FFO, nor FFO as adjusted, represents cash generated from operating activities determined in accordance with GAAP, and neither is a measure of liquidity or an indicator of our ability to make cash distributions.  We believe that to further understand our performance, FFO, and FFO as adjusted, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

FFO, and FFO as adjusted, fall within the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K and as a result the Company is required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors.  Management believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, FFO, and FFO as adjusted, should be considered in conjunction with net income as presented in the consolidated financial statements included herein.  Management believes that by excluding gains or losses related to dispositions of property and excluding real estate depreciation (which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life estimates), FFO, and FFO as adjusted, can help one compare the operating performance of a company’s real estate between periods or as compared to different companies.  In addition, FFO as adjusted ties the losses on early extinguishment of debt to the real estate which was sold triggering the extinguishment.  The Company also uses these measures to compare its performance to that of its peer group.

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(3) (continued)

The following table sets forth the calculation of FFO, and FFO as adjusted, for the previous five years, beginning with “net income attributable to common stockholders” from the Company’s audited financial statements prepared in accordance with GAAP (in thousands, except per share/unit data):

	2012			2011		2010		2009			2008(a)
Net income attributable to common stockholders	$	135,302		$	37,856	$	20,081	$	34,419		$	66,081
Real property depreciation and amortization	166,411			142,059		124,803		118,480			114,260
Real property impairment charges	—			—		—		—			4,000
Noncontrolling interest	28,320			9,808		6,237		12,659			27,124
Loss (gain) on disposition of property	(80,532		)	—		13		(24,314		)	(51,560		)
FFO — Basic and Diluted, as defined by NAREIT	249,501			189,723		151,134		141,244			159,905
Loss from early extinguishment of debt in connection with sale of real estate	2,157			—		—		4,927			1,413
FFO — Basic and Diluted, as adjusted by the Company	$	251,658		$	189,723	$	151,134	$	146,171		$	161,318
Weighted average common shares/units outstanding(b):
Basic	60,364.7			52,927.0		48,201.8		45,274.4			45,200.4
Diluted	61,002.7			53,611.9		48,689.4		45,405.7			45,541.3
FFO — Diluted, as adjusted by the Company per share/unit	$	4.13		$	3.54	$	3.10	$	3.22		$	3.54

(a)FFO, and FFO as adjusted, for the year ended December 31, 2008 were revised from previously reported amounts to exclude impairment of depreciable real estate assets in accordance with NAREIT SFO Alert dated October 31, 2011.

(b)Basic includes common stock outstanding plus UPREIT Units which can be converted into shares of common stock.  Diluted includes additional common stock equivalents.

All REITs may not be using the same definition for FFO.  Accordingly, the above presentation may not be comparable to other similarly titled measures of FFO of other REITs.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to facilitate an understanding of the Company’s business and results of operations.  It should be read in conjunction with the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and the selected financial data included in this Form 10-K.  This Form 10-K, including the following discussion, contains forward-looking statements regarding future events or trends as described more fully under “Forward-Looking Statements” on page 56.  Actual results could differ materially from those projected in such statements as a result of the risk factors described in Item 1A, “Risk Factors,” of this Form 10-K.

The Company is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast and Mid-Atlantic markets of the United States.  As of December 31, 2012, the Company owned and operated 121 apartment communities with 42,635 apartments.

Executive Summary

The Company operated during 2012 in a recovering economic environment, where the Company’s markets and the country as a whole experienced job growth of 1.1% and 1.4%, respectively.  This is slightly more than the job growth in the Company’s markets of 0.7% in 2011.  An increase in job growth leads to household formations, which creates an increase in demand for rental housing.  In addition, the credit crisis of the past recession has made it more difficult for apartment residents who may have considered purchasing a home to qualify for a mortgage.  After years of home ownership being the number one reason our residents gave for moving out of our apartment communities, it dropped starting in 2007, such that it is the number five reason in 2012.  The combination of steady job growth and reduced flexibility for residents to purchase homes has created an environment supporting higher rental income growth and occupancy rates.

The Company owned 107 communities with 36,214 apartment units throughout 2011 and 2012 where comparable operating results are available for the years presented (the “2012 Core Properties”).  Physical occupancies at the 2012 Core Properties increased slightly, by 10 basis points, from 95.5% to 95.6%.  Including bad debt in the calculation to arrive at “economic occupancy”, this metric increased by 30 basis points to 94.6% for 2012 from 94.3% in 2011.  The level of bad debt improved to 101 basis points in 2012 compared to 117 basis points in 2011.  For 2013, we are projecting bad debt to be approximately 90 basis points of rent potential.

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Executive Summary (continued)

The Company uses a measurement referred to as Available to Rent, or “ATR”.  This is a leading indicator of future occupancy rates and refers to units which will be available for rent, based upon leases signed or termination notices received relating to future move in/move out dates.  As of the end of the first week of February, 2013, our ATR was 6.2%, lower than the same time period a year ago when ATR was 6.7%.  Average physical occupancy for the quarter ended December 31, 2012 was at a high level of occupancy at 95.5%, with a continuation of low resident turnover of 38.9%, only 50 basis points higher than 2011.    For 2013, we are projecting physical occupancy to be 30 basis points higher than 2012, as a result of a slightly less aggressive approach to rent increases combined with the continuation of limited alternatives for our residents.

Total 2012 Core Properties rental revenue growth for 2012 was projected to be 4.6%, consisting of an increase of 4.7% in rental rate growth with economic occupancy to decrease 0.1%.  Actual results were positive 4.2% in rental rate growth and 0.3% increase in economic occupancy, resulting in 4.6% total rental revenue growth, or equal to guidance.

The guidance for 2013 Core Properties (apartment units owned throughout 2012 and 2013, the “2013 Core Properties”) total revenue growth is 4.0% at the midpoint of guidance.  Rental rates are projected to increase 3.8%, including above-average rental increases at certain communities resulting from continued efforts to upgrade the properties.  Economic occupancies are expected to increase 0.4% for the year, such that rental revenues are projected to increase 4.3%.  Property other income is expected to decrease slightly at 0.3% year over year, decreasing the 4.3% rental revenue increase to 4.0% total revenue growth.  Expenses for 2013 Core Properties are projected to increase 3.5% at the midpoint of guidance.  The Company has experienced four straight years of negative expense growth which will be very difficult to duplicate in 2013.  Some of the line items where we expect above average increases include: natural gas heating costs up 4.3%; personnel costs (specifically from health care) up 4.8%; real estate taxes up 4.7%; property insurance up over 18%; and snow removal up more than double.  The Company’s markets experienced extreme mild winters in 2012 which are not expected to repeat in 2013.  This affects heating costs, snow removal, personnel costs and insurance.

These revenue and expense projections result in 2013 Core Properties NOI growth of 4.0% at the mid-point of 2013 guidance.  Markets where the Company expects NOI results above the average include: Washington 5.5%, Philadelphia 5.3% and Boston 4.5%.  Markets with below average expectations include:  Florida 3.5%, Baltimore 3.1%, New York City Metro area 1.4% and Chicago 0.3%.  Certain historical demographic information for these markets may be found in the tables on pages 10 and 11 of this report.

Of the two items comprising NOI, revenue and operating expenses, the operating expense component is likely to be more volatile.  It is difficult to predict the weather, which can have a significant effect, and there is growing concern about real estate tax rates.

The Company has anticipated acquisitions in the range of $200 million to $300 million in its budget for 2013.  The Company is committed to a disciplined approach to acquisitions, and following two very successful years in acquisitions we will be prudent in underwriting.  If cap rates stabilize, interest rates continue to be historically low, and NOI growth rates improve, we may take a more aggressive approach.  The Company expects to dispose of between $200 million and $300 million of properties for 2013.   After many years of being a net acquirer, for 2013 the Company is looking to create a better balance, with an equal range targeted of acquisitions and dispositions.  Property sale proceeds add another significant source of capital, reducing reliance on debt and equity sources.

During 2013, the Company will target leverage in a range from 40% to 42% of debt-to-total market capitalization (calculated using the stock price to estimate equity value) in order to meet the goals described above.  This level is the same to slightly less than at the end of 2012.

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Results of Operations (dollars in thousands, except unit and per unit data)

Comparison of year ended December 31, 2012 to year ended December 31, 2011.

The Company owned 107 communities with 36,214 apartment units throughout 2011 and 2012 where comparable operating results are available for the years presented (the “2012 Core Properties”).  For the year ended December 31, 2012, the 2012 Core Properties showed an increase in total revenues of 4.5% and a net operating income increase of 8.1% over the 2011 period.  Property level operating expenses decreased 1.1%.  Average physical occupancy for the 2012 Core Properties was 95.6%, up from 95.5% in 2011, with average monthly rental rates of $1,239 per apartment unit, an increase of 4.2% over the 2011 period.

A summary of the 2012 Core Properties NOI is as follows:

	2012			2011			$ Variance			% Variance
Rent	$	509,476		$	487,214		$	22,262		4.6	%
Utility recovery revenue	20,471			20,753			(282		)	(1.4	)%
Rent including recoveries	529,947			507,967			21,980			4.3	%
Other income	24,482			22,355			2,127			9.5	%
Total revenue	554,429			530,322			24,107			4.5	%
Operating and maintenance	(202,819		)	(205,128		)	2,309			1.1	%
Net operating income	$	351,610		$	325,194		$	26,416		8.1	%

Net operating income (“NOI”) may fall within the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K and, as a result, the Company may be required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors.  The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.  In addition, the apartment communities are valued and sold in the market by using a multiple of NOI.  The Company also uses this measure to compare its performance to that of its peer group.  For a reconciliation of NOI to income from continuing operations, please refer to Note 15 to Consolidated Financial Statements, under Part IV, Item 15 of this Form 10-K.

During 2012, the Company acquired three apartment communities with 2,018 units and placed into service another 263 units at two development communities (the “2012 Acquisition Communities”).  In addition, the Company experienced full year results for the eight apartment communities with 2,817 units acquired and 472 units placed into service at two development communities during 2011 (the “2011 Acquisition Communities”).  The Company has one property with 851 units undergoing significant renovations beginning in 2011 such that the operating results are not comparable to 2012 due to units being taken out of service during the redevelopment period (the “Redevelopment Property”).  The inclusion of these acquired and developed communities generally accounted for the significant changes in operating results for the year ended December 31, 2012.

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Results of Operations (continued)

A summary of the NOI from continuing operations for the Company as a whole is as follows:

	2012			2011			$ Variance			% Variance
Rent	$	591,933		$	515,780		$	76,153		14.8	%
Utility recovery revenue	23,983			21,865			2,118			9.7	%
Rent including recoveries	615,916			537,645			78,271			14.6	%
Other income	28,122			23,756			4,366			18.4	%
Total revenue	644,038			561,401			82,637			14.7	%
Operating and maintenance	(235,040		)	(217,069		)	(17,971		)	(8.3	)%
Net operating income	$	408,998		$	344,332		$	64,666		18.8	%

During 2012, the Company disposed of six properties in six transactions with a total of 1,596 units, which had partial results for 2012 and full year results for 2011 (the “2012 Disposed Communities”).  The results of these disposed properties have been reflected in discontinued operations and are not included in the tables above.

For the year ended December 31, 2012, income from continuing operations increased by $37,156 when compared to the year ended December 31, 2011.  The increase was primarily attributable to the following factors:  an increase in rental income of $76,153, an increase in property other income of $6,484, a decrease in interest expense of $1,809, and a decrease in other expenses of $484.  These changes were partially offset by increases in operating and maintenance expense of $17,971, general and administrative expense of $5,029, and depreciation and amortization of $24,929.  Each of the items are described in more detail below.

Of the $76,153 increase in rental income, $32,721 is attributable to the 2011 Acquisition Communities, $21,043 is attributable to the 2012 Acquisition Communities and $127 is attributable to the Redevelopment Property.  The balance, an increase of $22,262, relates to a 4.6% increase from the 2012 Core Properties as the result of a 0.3% increase in economic occupancy from 94.3% to 94.6% and a 4.2% increase in weighted average rental rates from $1,189 to $1,239 per apartment unit.

Of the $2,118 increase in utility recovery revenue, $1,898 is attributable to the 2011 Acquisition Communities, $548 is attributable to the 2012 Acquisition Communities, partially offset by a $46 reduction for the Redevelopment Property.  The balance, a decrease of $282, relates to a 1.4% decrease from the 2012 Core Properties which is due primarily to warmer than normal temperatures in 2012 compared to cooler temperatures in the spring of 2011, leading to decreased energy consumption and lower heat billed through to residents, partially offset by increases in water & sewer cost increases, also billed to residents.

The remaining property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased by $4,366.  Of this increase, $1,325 is attributable to the 2011 Acquisition Communities, $927 is attributable to the 2012 Acquisition Communities and $2,127 is attributable to the 2012 Core Properties resulting primarily from an increase of $1,195 in cable revenue as a result of enhanced contracts with cable providers which offer services in addition to the basic cable offering in 2011.  The remaining Core Properties increase of $932 primarily relates to a higher level of pet fee income, facility rental income, lower bad debt expense and incentive rebates.  These increases were offset by a $13 reduction for the Redevelopment Property.

Of the $17,971 increase in operating and maintenance expenses, $12,905 is attributable to the 2011 Acquisition Communities, $7,499 is attributable to the 2012 Acquisition Communities, partially offset by a $124 decrease for the Redevelopment Property.  The balance for the 2012 Core Properties, a $2,309 decrease in operating expenses or 1.1%, is primarily a result of decreases in electricity, natural gas heating costs, repairs & maintenance, personnel expense, snow removal and property management G&A.  These decreases were partially offset by increases in water & sewer costs, property insurance and real estate taxes.

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Results of Operations (continued)

The breakdown of operating and maintenance costs for the 2012 Core Properties by line item is listed below:

	2012		2011		$ Variance			% Variance
Electricity	$	7,142	$	7,720	$	578		7.5	%
Gas	13,465		15,780		2,315			14.7	%
Water & sewer	17,000		16,473		(527		)	(3.2	)%
Repairs & maintenance	30,450		31,009		559			1.8	%
Personnel expense	46,295		47,177		882			1.9	%
Advertising	4,373		4,276		(97		)	(2.3	)%
Legal & professional	2,002		1,866		(136		)	(7.3	)%
Office & telephone	6,042		5,720		(322		)	(5.6	)%
Property insurance	6,340		5,024		(1,316		)	(26.2	)%
Real estate taxes	51,377		49,677		(1,700		)	(3.4	)%
Snow	378		1,537		1,159			75.4	%
Trash	3,023		3,078		55			1.8	%
Property management G&A	14,932		15,791		859			5.4	%
Total	$	202,819	$	205,128	$	2,309		1.1	%

Electricity costs were down $578, or 7.5%, from a year ago primarily as a result of reduced commodity rates and energy conservation efforts.

Natural gas heating costs were down $2,315, or 14.7%, from a year ago due to a combination of lower commodity rates and decreased consumption resulting from a significantly warmer spring heating season in 2012 as compared to 2011.  For 2012, the Company’s natural gas weighted average cost, including transportation of $3.00 per decatherm, was $8.34 per decatherm, compared to $8.90 per decatherm for the 2011 period, a 6.3% decrease.

As of the middle of January, 2013, the Company has fixed-price contracts covering 99.5% of its natural gas exposure for the balance of the 2012/2013 heating season.  Risk is further diversified by staggering contract term expirations.  For the balance of the 2012/2013 heating season, the Company estimates the average price per decatherm will be approximately $5.05, excluding transportation, which has historically approximated $3.00 per decatherm.  For the 2013/2014 heating season, the Company has fixed-priced contracts covering approximately 99.1% of its natural gas exposure for an estimated weighted average cost for fixed and floating rate contracts of $4.68 per decatherm, excluding transportation.

Water & sewer costs were up $527, or 3.2%, from a year ago and are attributable to general rate increases being assessed by local municipalities.  The water & sewer recovery program enabled the Company to recapture much of these rate increases from our residents.

Repairs & maintenance expenses were down $559, or 1.8%, primarily due to accounting for involuntary conversions related to fires and floods and the associated insurance claims at certain properties.  Without the impact of these insurance recoveries, the recurring repairs & maintenance expenses decreased $8, which reflects the diligent efforts of property management to control costs through the renegotiation of service contracts permitted by the competitive economic environment, coupled with a higher level of apartment upgrades in 2012 compared to 2011, which result in lower repairs expenditures.  The Company has provided guidance for 2013 which anticipates a 1.3% increase in repairs and maintenance.

Personnel expenses were down $882, or 1.9%, primarily due to $734 lower health and workers’ compensation insurance costs in 2012 as compared to 2011, which reflects the ongoing efforts towards the proactive settlement of prior year claims earlier in their life cycle and the positive impacts of the Company’s safety in the workplace initiatives.  Without the impacts of the insurance savings, personnel costs decreased $148, or 0.3% reflecting the $559 lower incentive compensation for property management personnel, partially offset by the annual wage increase of 2.6%.

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Results of Operations (continued)

Legal & professional expenses were up $136, or 7.3%, primarily due to legal costs incurred in connection with successful tax assessment challenges.

Office & telephone expenses were up $322, or 5.6%, primarily due to $249 non-recurring refunds of certain resident fees from prior years.  Without the impact of this non-recurring expense, office & telephone expense increased $73, or 1.3%.

Property insurance costs increased by $1,316, or 26.2%, primarily due to the non-recurring impact in 2011 of $2,082 in favorable close outs of significant prior year general liability claims compared to $338 of close-outs in 2012.  Both property and general liability losses in 2012 were lower by $111, or 7.3%, and $36, or 2.0% respectively, due to continued emphasis on preventing losses at the communities through safety training programs and the Company’s continued focus on settling claims earlier in their life cycle.  Without the impact of the major items above, recurring property and general liability insurance costs were up $281, or 6.0%.

On October 29, 2012 Hurricane Sandy hit the Mid-Atlantic and Northeast regions of the United States, causing wide-spread flooding and wind damage.  Numerous communities owned by the Company were directly affected by this storm.  The most severe damage occurred at properties in New Jersey and on Long Island.  Property losses, estimated to be $2,225, are covered under various property and flood insurance policies.  The Company’s estimated net expense included in the 2012 results, after insurance reimbursement, is less than $100.

Real estate taxes were up $1,700, or 3.4%, primarily due to tax increases being offset by $1,306 in refunds received in 2012 from successful tax assessment appeals compared to $1,678 of refunds in the 2011 period.  After removing the effects of the non-recurring refunds, real estate taxes were up $1,327, or 2.6%, reflecting increased assessments and typical rate increases in our markets.

Snow removal costs were down $1,159, or 75.4%, as most of our Northeast and Mid-Atlantic properties experienced the mildest winter on record in 2012.

Property management general & administrative costs decreased $859, or 5.4%.  Despite increases in the number of apartment communities and units, the Company has been able to offset costs of growth due to its scalable operating platform, including efficiencies enabled by key application software investments.

The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2012 Core Properties was 36.6% and 38.7% for 2012 and 2011, respectively.  The 2.1% favorable improvement in 2012 is due in part to deliberate cost savings and safety initiatives implemented at the communities, a decrease in natural gas heating costs and rental income growth.  In general, the Company’s operating expense ratio is higher than that experienced by apartment owners in other parts of the country due to relatively high real estate taxes and heating costs in its markets.

General and administrative expenses (“G&A”) increased in 2012 by $5,029, or 17.3%, from $29,145 in 2011 to $34,174 in 2012.  G&A as a percentage of total revenues (including discontinued operations) was 5.0% for 2011 as compared to 5.2% for 2012, indicating that the G&A growth is consistent with revenue growth.  The 2012 costs include $1,580 in connection with the departure of an executive and represent acceleration of previously granted stock-based compensation as well as future payments for salary continuation.  Stock-based compensation expenses were up $3,565, or 42.5%, in 2012, of which $2,937 is due to the new three year performance restricted stock unit grants issued in 2012.  The remaining $628 stock-based compensation increase is primarily due to the impact of executives at, or near retirement age, resulting in the current year restricted stock awards and stock option grants being expensed over a one-year shorter time period in 2012 as compared to 2011.  These increases were partially offset by $116 lower 2012 spending in other general and administrative areas.

Interest expense decreased by $1,809, or 1.4%, in 2012 primarily as a result of paying off $39,000 in maturing loans on several Core Properties over the past year and the redemption of the $140,000 Senior Notes.  In addition, all 2011 Acquisition Communities were acquired without secured mortgage debt and only one 2012 Acquisition Community with assumed secured mortgage debt of $7,284.  These decreases were partially offset by $450,000 of unsecured term and senior notes at a lower average interest rate than the Senior Notes and maturing loans.

39

Results of Operations (continued)

Depreciation and amortization expense increased $24,929, or 17.7%, due to a full year of depreciation expense for the 2011 Acquisition Communities, incremental depreciation on the capital expenditures for additions and improvements to the Core Properties of $129,045 and $113,779 in 2012 and 2011, respectively, as well as a partial year of depreciation expense for the 2012 Acquisition Communities.

Other expenses of $2,741 in 2012 and $3,225 in 2011 are property acquisition costs from the Acquisition Communities. These costs, which are primarily transfer taxes and title fees, represent 0.92% and 0.64% of the total purchase price of the 2012 and 2011 Acquisition Communities, respectively.

Net income increased $115,958 in 2012 primarily due to a gain on disposition of property of $80,532, an increase of $37,156 due to a partial year impact of the operating results of the 2012 Acquisition Communities and the full year results of the 2011 Acquisition Communities plus improved operating results from the 2012 Core Properties.  This is partially offset by $1,730 lower income from discontinued operation in 2012 compared to 2011.

Comparison of year ended December 31, 2011 to year ended December 31, 2010.

The Company owned 97 communities with 33,354 apartment units throughout 2010 and 2011 where comparable operating results are available for the years presented (the “2011 Core Properties”).  For the year ended December 31, 2011, the 2011 Core Properties showed an increase in total revenues of 4.3% and a net operating income increase of 7.7% over the 2010 period.  Property level operating expenses decreased 0.7%.  Average physical occupancy for the 2011 Core Properties was 95.5%, up from 95.2% in 2010, with average monthly rental rates of $1,184 per apartment unit, an increase of 3.7% over the 2010 period.

A summary of the 2011 Core Properties NOI is as follows:

	2011			2010			$ Variance		% Variance
Rent	$	446,628		$	428,955		$	17,673	4.1	%
Utility recovery revenue	20,090			18,803			1,287		6.8	%
Rent including recoveries	466,718			447,758			18,960		4.2	%
Other income	20,832			19,875			957		4.8	%
Total revenue	487,550			467,633			19,917		4.3	%
Operating and maintenance	(189,311		)	(190,610		)	1,298		0.7	%
Net operating income	$	298,239		$	277,024		$	21,215	7.7	%

The inclusion of the 2011 Acquisition Communities generally accounted for the significant changes in operating results for the year ended December 31, 2011.

A summary of the NOI from continuing operations for the Company as a whole is as follows:

	2011			2010			$ Variance			% Variance
Rent	$	515,780		$	457,819		$	57,961		12.7	%
Utility recovery revenue	21,865			19,775			2,090			10.6	%
Rent including recoveries	537,645			477,594			60,051			12.6	%
Other income	23,756			21,089			2,667			12.6	%
Total revenue	561,401			498,683			62,718			12.6	%
Operating and maintenance	(217,069		)	(203,421		)	(13,648		)	(6.7	)%
Net operating income	$	344,332		$	295,262		$	49,070		16.6	%

40

Results of Operations (continued)

During 2010, the Company sold its general partnership interest in one investment where the Company was the managing general partner that had been determined to be a Variable Interest Entity (“VIE”) as defined by authoritative guidance.  During 2012, the Company disposed of six properties in six transactions with a total of 1,596 units, which had full year results for 2011 and 2010 (the “2012 Disposed Communities”).  The results of these disposed properties and general partnership interest have been reflected in discontinued operations and are not included in the tables above.

For the year ended December 31, 2011, income from continuing operations increased by $19,851 when compared to the year ended December 31, 2010.  The increase was primarily attributable to the following factors:  an increase in rental income of $57,961, and an increase in property other income of $4,757.  These changes were partially offset by increases in operating and maintenance expense of $13,648, general and administrative expense of $4,007, interest expense of $6,966, depreciation and amortization of $17,941 and other expenses of $354.  Each of the items are described in more detail below.

Of the $57,961 increase in rental income, $26,311 is attributable to the 2010 Acquisition Communities, $14,871 is attributable to the 2011 Acquisition Communities, partially offset by an $894 reduction for the Redevelopment Property.  The balance, an increase of $17,673, relates to a 4.1% increase from the 2011 Core Properties as the result of a 0.4% increase in economic occupancy from 93.9% to 94.3% and a 3.7% increase in weighted average rental rates from $1,141 to $1,184 per apartment unit.

Of the $2,090 increase in utility recovery revenue, $505 is attributable to the 2010 Acquisition Communities, $563 is attributable to the 2011 Acquisition Communities, partially offset by a $265 reduction for the Redevelopment Property.  The balance, an increase of $1,287, relates to a 6.8% increase from the 2011 Core Properties as the result of the increase in economic occupancy and comparable increase in water and sewer expense.

The remaining property other income, which consists primarily of income from operation of laundry facilities, late charges, administrative fees, garage and carport rentals, revenue from corporate apartments, cable revenue, pet charges, and miscellaneous charges to residents, increased by $2,667.  Of this increase, $1,019 is attributable to the 2010 Acquisition Communities, $663 is attributable to the 2011 Acquisition Communities and $28 for the Redevelopment Property and $957 is attributable to the 2011 Core Properties.

Of the $13,648 increase in operating and maintenance expenses, $9,543 is attributable to the 2010 Acquisition Communities, $6,052 is attributable to the 2011 Acquisition Communities, partially offset by a $649 decrease for the Redevelopment Property.  The balance for the 2011 Core Properties, a $1,298 decrease in operating expenses or 0.7%, is primarily a result of decreases in electricity, natural gas heating costs, personnel expense, property insurance, snow removal and trash hauling.  These decreases were partially offset by increases in water & sewer costs, repairs & maintenance, legal & professional, real estate taxes and property management G&A.

41

Results of Operations (continued)

The breakdown of operating and maintenance costs for the 2011 Core Properties by line item is listed below:

	2011		2010		$ Variance			% Variance
Electricity	$	7,033	$	7,222	$	189		2.6	%
Gas	15,239		15,637		398			2.5	%
Water & sewer	15,560		14,522		(1,038		)	(7.1	)%
Repairs & maintenance	28,778		27,176		(1,602		)	(5.9	)%
Personnel expense	42,986		44,285		1,299			2.9	%
Advertising	3,738		3,797		59			1.6	%
Legal & professional	1,753		1,515		(238		)	(15.7	)%
Office & telephone	5,242		5,364		122			2.3	%
Property insurance	4,158		5,924		1,766			29.8	%
Real estate taxes	45,907		45,592		(315		)	(0.7	)%
Snow	1,447		2,045		598			29.2	%
Trash	2,868		3,128		260			8.3	%
Property management G&A	14,602		14,403		(199		)	(1.4	)%
Total	$	189,311	$	190,610	$	1,299		0.7	%

Electricity costs were down $189, or 2.6% from a year ago primarily as a result of energy conservation efforts including a compact fluorescent bulb replacement program and the installation of motion sensors and timers in common areas.

Natural gas heating costs were down $398, or 2.5% from a year ago due to a combination of lower commodity rates offset by increased consumption resulting from a colder spring heating season in 2011 as compared to 2010.  For 2011, the Company’s natural gas weighted average cost, including transportation of $3.00 per decatherm, was $8.91 per decatherm, compared to $9.37 per decatherm for the 2010 period, a 4.9% decrease.

Water & sewer costs were up $1,038, or 7.1%, from a year ago and are attributable to general rate increases being assessed by local municipalities.  The water & sewer recovery program enabled the Company to recapture much of these rate increases from our residents.

Repairs & maintenance expenses were up $1,602, or 5.9%, primarily due to insurance claim recoveries of $782 in 2010 compared to insurance claim expenses of $248 in 2011.  Without the impacts of these insurance claim recoveries and expenses, the recurring repairs & maintenance costs increased $572, or 2.0% from a year ago.  The increase reflects normal increases in supplies and contract services partially offset by the favorable impact of lower resident turnover of 38.1% in 2011 as compared to 38.7% in 2010, which resulted in less spending on apartment turnover costs.

Personnel expenses were down $1,299, or 2.9%, primarily due to a reduction in workers’ compensation costs which reflects the ongoing efforts towards the proactive settlement of prior year claims earlier in their life cycle and the positive impacts of the Company’s safety in the workplace initiatives.

42

Results of Operations (continued)

Advertising expenses were down $59, or 1.6%, in 2011 and is reflective of the resident marketing program which places less emphasis and spending on print media and more focus on internet-based methods and resident programs which have resulted in a 1% increase in traffic in 2011 as compared to 2010.

Legal & professional expenses were up $238, or 15.7%, primarily due to legal costs incurred in connection with successful tax assessment challenges.

Property insurance costs decreased by $1,766, or 29.8%, primarily due to positive trends in general liability claims, which are reflective of the increased emphasis on preventing losses at the communities through safety training programs and the Company’s continued focus on settling claims earlier in their life cycle.

Real estate taxes were up $315, or 0.7%, primarily due to tax increases being offset by $1,678 in refunds received in 2011 from successful tax assessment appeals compared to $737 in the 2010 period.  After removing the effects of the non-recurring refunds, real estate taxes were up $1,256, or 2.7%.

Snow removal costs were down $598, or 29.2%, as most of our Mid-Atlantic region properties suffered from record storms in the first quarter 2010 which were not repeated in 2011.

Trash removal costs were down $260, or 8.3%, as a result of effective rebidding with trash haulers that took effect in late 2010.

Property management general & administrative costs increased $199, or 1.4%, which reflects annual wage increases of 2.4% that were partially offset by staff reductions as a result of efficiencies enabled through key application software investments.

The operating expense ratio (the ratio of operating and maintenance expense compared to rental and property other income) for the 2011 Core Properties was 38.7% and 40.8% for 2011 and 2010, respectively.  The 2.1% favorable improvement in 2011 is due in part to deliberate cost savings and safety initiatives implemented at the communities which resulted in lower insurance costs coupled with rental income growth.  In general, the Company’s operating expense ratio is higher than that experienced by apartment owners in other parts of the country due to relatively high real estate taxes and heating costs in its markets.

General and administrative expenses (“G&A”) increased in 2011 by $4,007, or 15.9%, from $25,138 in 2010 to $29,145 in 2011.  G&A as a percentage of total revenues (including discontinued operations) was 4.9% for 2010 as compared to 5.0% for 2011, indicating that the G&A growth is consistent with revenue growth.  The 2011 incentive bonus is up $1,791, or 68.7%, as compared to 2010, reflecting the Company’s favorable operating performance versus its peers.  Stock based compensation expenses were up $1,813 in 2011 as compared to 2010, primarily due to the impact of employees nearing retirement age vesting over one less year in 2011 as compared to 2010.  These increases were partially offset by $400 savings realized in 2011 for director costs as we had four fewer directors beginning in May 2011 due to retirement.

Interest expense increased by $6,966, or 5.8%, in 2011 primarily as a result of interest expense on the new debt of several 2011 Core Properties, which were refinanced during 2010 at approximately $200,000 higher principal than the maturing loans and full year impact of 2010 Acquisition Communities which included $156,000 of assumed debt.  All 2011 Acquisition Communities were acquired without secured mortgage debt.  These increases were partially offset by lower interest on the unsecured line of credit due to a lower outstanding balance and a lower interest rate in 2011 compared to 2010 and an overall savings in 2011 from the redemption of the Exchangeable Senior Notes and the subsequent unsecured term loan and unsecured senior notes at a lower average interest rate.

Depreciation and amortization expense increased $17,941, or 14.6%, due to a full year of depreciation expense for the 2010 Acquisition Communities, incremental depreciation on the capital expenditures for additions and improvements to the Core Properties of $98,420 and $83,245 in 2011 and 2010, respectively, as well as a partial year of depreciation expense for the 2011 Acquisition Communities.

43

Results of Operations (continued)

Other expenses of $3,225 in 2011 and $2,871 in 2010 are property acquisition costs from the Acquisition Communities. These costs, which are primarily transfer taxes and title fees, represent 0.64% and 0.85% of the total purchase price of the 2011 and 2010 Acquisition Communities, respectively.

Included in discontinued operations for 2011 are the operating results of the 2012 Disposed Communities.  Included in discontinued operations for 2010 are the operating results of the 2012 Disposed Communities and the VIE.  For purposes of the discontinued operations presentation, the Company includes interest expense and losses from early extinguishment of debt associated with specific mortgage indebtedness of the properties that are sold or held for sale.

Included in the $13 loss on disposition of property reported for 2010 are residual items relating to the 2009 Disposed Communities.

Net income increased $21,346 in 2011 primarily due to a partial year impact of the operating results of 2011 Acquisition Communities and the full year results of the 2010 Acquisition Communities plus improved operating results from the 2011 Core Properties.

Liquidity and Capital Resources

General

The Company’s principal liquidity demands are expected to be distributions to the common stockholders and holders of UPREIT Units, capital improvements and repairs and maintenance for its properties, acquisition and development of additional properties and debt repayments.  The Company may also acquire equity ownership in other public or private companies that own and manage portfolios of apartment communities.

The Company intends to meet its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank line of credit, described below.  The Company considers its ability to generate cash to be adequate to meet all operating requirements, including availability to pay dividends to its stockholders and make distributions to its Unit holders in accordance with the provisions of the Internal Revenue Code, as amended, applicable to REITs.

To the extent that the Company does not satisfy its short-term liquidity requirements through net cash flows provided by operating activities and its existing bank line of credit, it intends to satisfy such requirements through proceeds from the sale of properties, from the issuance of unsecured senior notes and from the issuance of its common stock through its equity offering programs, described below.

In 2000, the Company obtained an investment grade rating from Fitch, Inc.  The rating in effect at December 31, 2012 is a corporate credit rating of “BBB” (Triple B), which was reaffirmed on June 27, 2012.

For 2013, plans include increasing the level of the value of unencumbered properties to over 40% of the portfolio, maintaining the debt-to-total market capitalization ratio at a level equal to or slightly less than the level at December 31, 2012 and issuing shares under the current or future ATM programs.

Cash Flow Summary

The Company’s cash flow activities are summarized as follows (in millions):

	Year Ended December 31,
	2012			2011			2010
Net cash provided by operating activities	$	268		$	198		$	160
Net cash used in investing activities	(366		)	(664		)	(335		)
Net cash provided by financing activities	111			464			176

44

Liquidity and Capital Resources (continued)

The Company’s net cash flow from operating activities was $268 million in 2012 compared to $198 million in 2011.  The $70 million increase was primarily a result of $65 million higher NOI in 2012 partially offset by $5 million higher general and administrative costs in 2012 as compared to 2011, with the increases primarily attributable to the 2012 and 2011 Acquisition Communities.

The Company’s net cash flow from operating activities was $198 million in 2011 compared to $160 million in 2010.  The $38 million increase was primarily a result of $49 million higher NOI in 2011 partially offset by $6 million higher interest expense and $4 million higher general and administrative costs in 2011 as compared to 2010, with the increases primarily attributable to the 2011 and 2010 Acquisition Communities.

Cash used in investing activities was $366 million during 2012 compared to $664 million in 2011.  The $298 million decrease in investing between periods is primarily due to the $290 million used for acquisition of three properties in 2012 as compared to $499 million for the eight properties acquired in 2011.  Cash outflows for capital improvements were $153 million in 2012 compared to $127 million in 2011.  In addition, the Company spent $12 million on redevelopment in 2012.  The investments in both periods reflects management’s strategy to continually reposition and perform selective rehabilitation in markets that are able to support rent increases, with the year-over-year increase reflective of the demand in the market for upgraded apartments.  Cash outflows for additions to construction in progress were $62 million in 2012 as compared to $32 million in 2011.  Cash outflows for the purchase of land for development was $13 million in 2011.

Cash used in investing activities was $335 million in 2010. Cash outflows for acquisitions were $186 million, capital improvements were $98 million and additions to construction in progress were $46 million in 2010.

Net cash provided by financing activities totaled $111 million for 2012, primarily as a result of net proceeds from the unsecured line of credit of $160 million, the sale of common stock under the ATM offering of $145 million, $50 million issued in unsecured notes and proceeds from stock option exercises of $17 million.  Total proceeds were partially offset by payments on mortgages of $103 million and distributions paid to stockholders and UPREIT Unitholders of $159 million.

Net cash provided by financing activities totaled $464 million for 2011, primarily as a result of the $400 million issuance of unsecured notes, the sale of common stock under the public offering of $337 million and the ATM offering of $190 million and proceeds from stock option exercises of $21 million being partially offset by payments on mortgages of $163 million, distributions paid to stockholders and UPREIT Unitholders of $131 million, repurchase of senior notes of $130 million, net payments under the unsecured line of credit of $54 million and payments of $5 million for mortgage borrowing costs.

Net cash provided by financing activities totaled $176 million in 2010. Cash flows from the sale of common stock under the ATM offering of $108 million, net proceeds from mortgage financing of $172 million, proceeds from stock option exercises of $11 million and net borrowing under the unsecured line of credit of $3 million were partially offset by distributions paid to stockholders and UPREIT Unitholders of $112 million and payments of $6 million for mortgage borrowing costs.

Unsecured Line of Credit

As of December 31, 2012, the Company had a $275 million unsecured line of credit agreement with M&T Bank and U.S. Bank National Association, as joint lead banks, and nine other participating commercial banks, with an initial maturity date of December 8, 2015 and a one-year extension, at the Company’s option.  The Company had $162.5 million outstanding under the credit facility on December 31, 2012.  The line of credit agreement provides the ability to issue up to $20 million in letters of credit.  While the issuance of letters of credit does not increase the borrowings outstanding under the line of credit, it does reduce the amount available.  At December 31, 2012, the Company had outstanding letters of credit of $16.4 million resulting in the amount available on the credit facility of $96.1 million.  Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  As of December 31, 2012, based on the Company’s leverage ratio, the LIBOR margin was 1.30%, and the one-month LIBOR was 0.25%; resulting in an effective rate of 1.55% for the Company.

45

Liquidity and Capital Resources (continued)

Unsecured Term Loans

On October 28, 2011, the Company entered into an unsecured term loan agreement with M&T Bank that had a total limit of $140 million.  On November 1, 2011, the Company borrowed $135 million on this facility which was used to fund the repurchase of the exchangeable senior notes. The term loan was repaid on December 9, 2011 with proceeds of the $250 million term loan described below.  The loan bore interest at 2.41% (2.1% above the one-month LIBOR) and had covenants that aligned with the unsecured line of credit facility.

On December 9, 2011, the Company entered into a $250 million five-year unsecured term loan with M&T Bank as lead bank, and ten other participating lenders.  The term loan generated net proceeds of $248 million, after fees and closing costs, which were used to pay off the $135 million unsecured term loan, purchase an unencumbered property and acquire land for future development. The loan bears monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  On July 19, 2012, the Company entered into interest rate swap agreements with major financial institutions that effectively convert the variable LIBOR portion of this loan to a fixed rate of 0.685%.  As of December 31, 2012, based on the Company’s leverage ratio, the spread was 1.30%, and the swapped one-month LIBOR was 0.685%; resulting in an effective rate of 1.99% for the Company, as described in Note 11 to Consolidated Financial Statements.  The loan has covenants that align with the unsecured line of credit facility.

Unsecured Demand Note

On June 27, 2012, the Company entered into a loan agreement with M&T Bank with a maximum principal amount of $100 million and monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  The Company borrowed the maximum amount of $100 million.  Proceeds from this demand note were utilized to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012.  During the fourth quarter, 2012, the Company repaid the $100 million note in full.

Unsecured Senior Notes

On December 19, 2011, the Company issued $150 million of unsecured senior notes.  The notes were offered in a private placement in two series: Series A: $90 million with a seven-year term due December 19, 2018 at a fixed interest rate of 4.46% (“Series A”); and, Series B: $60 million with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00% (“Series B”).  The net proceeds of $89 million and $60 million for Series A and Series B, respectively, after fees and closing costs, were used to purchase an unencumbered property and pay off a maturing mortgage note.  The notes require semiannual interest payments on June 19 and December 19 of each year until maturity and are subject to various covenants and maintenance of certain financial ratios.  Although the covenants of the notes do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the notes and the line are identical.

On June 27, 2012, the Company issued a private placement note in the amount of $50 million with a seven-year term, a fixed rate of 4.16% and a June 27, 2019 due date.  The proceeds from this note were used to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012. The note requires semiannual interest payments on June 27 and December 27 of each year until maturity and is subject to various covenants and maintenance of certain financial ratios.  Although the covenants of the note do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the note and the line are identical.

Exchangeable Senior Notes

On November 1, 2011, the Company repurchased at face value $135 million principal amount of exchangeable senior notes (“Senior Notes”), plus accrued interest of $2.8 million, that were presented by the holders for repurchase in accordance with the October 2006 Senior Notes Indenture Agreement (the “Indenture”).  On December 21, 2011 the remaining outstanding balance of $5 million principal amount of the Senior Notes was repurchased by the Company, at face value plus accrued interest at the Company’s option in accordance with the Indenture.  There were no outstanding Senior Notes as of December 31, 2012 or 2011.

46

Liquidity and Capital Resources (continued)

Indebtedness

As of December 31, 2012, the weighted average interest rate on the Company’s total indebtedness of $2.8 billion was 4.55% with staggered maturities averaging approximately five years.  Approximately 87% of total indebtedness is at fixed rates.  This limits the exposure to changes in interest rates, minimizing the effect of interest rate fluctuations on the Company’s results of operations and cash flows.

Unencumbered Assets

The Company increased the percentage of unencumbered assets of the total property pool from 33% at the end of 2011, to 39% as of December 31, 2012.  Higher levels of unsecured assets add borrowing flexibility because more capacity is available for unsecured debt under the terms of the Company’s unsecured line of credit agreement, and/or for the issuance of additional unsecured senior notes.  It also permits the Company to place secured financing on unencumbered assets if desired.

UPREIT Units

The Company believes that the issuance of UPREIT Units for property acquisitions will continue to be a potential source of capital for the Company. During 2010, the Company issued $4.8 million in 98,728 UPREIT Units as consideration for one acquired property.  During 2011 and 2012, there were no UPREIT Units issued for property acquisitions.

Universal Shelf Registration

On March 3, 2010, the Company filed a Form S-3 universal shelf registration statement with the SEC that registers the issuance, from time to time, of common stock, preferred stock or debt securities.  The Company may offer and sell securities issued pursuant to the universal shelf registration statement after a prospectus supplement, describing the type of security and amount being offered, is filed with the SEC.  Sales of common stock under the Company’s ATM and public equity offerings as described below were made under this registration statement.  A new Form S-3 universal shelf registration statement is expected to be filed, and immediately effective, with the SEC shortly before the expiration of the current registration statement on March 2, 2013.

At-the-Market Equity Offering Programs

On December 3, 2009, the Company initiated an “At-the-Market” (“ATM”) equity offering program through which it was authorized to sell up to 3.7 million shares of common stock (not to exceed $150 million of gross proceeds), from time to time in ATM offerings or negotiated transactions.  From December 2009 through completion of the offering in May 2010, the Company issued 3.2 million shares of common stock at an average price per share of $47.19, for aggregate gross proceeds of $150 million and aggregate net proceeds of $147 million after deducting commissions and other transaction costs of approximately $3 million.

On September 17, 2010, the Company initiated its second ATM equity offering program through which it was authorized to sell up to 3.6 million shares of common stock from time to time in ATM offerings or negotiated transactions.  There were no shares issued from this program during 2010.  During 2011 through completion of the offering in May 2012, the Company issued 3.6 million shares of common stock at an average price per share of $60.71, for aggregate gross proceeds of $219 million and aggregate net proceeds of $214 million after deducting commissions and other transaction costs of approximately $5 million.

On May 14, 2012, the Company filed a prospectus supplement with respect to another ATM equity offering program, with similar terms and conditions as the September 2010 program, through which it is authorized to sell up to 4.4 million shares of common stock, from time to time in ATM offerings or negotiated transactions.  As of December 31, 2012, the Company issued 1,970,824 shares of common stock at an average price per share of $62.64, for aggregate gross proceeds of $123 million and aggregate net proceeds of $121 million after deducting commissions and other transaction costs of approximately $2 million.  Approximately 2.4 million shares remain available under this program as of December 31, 2012.

47

Liquidity and Capital Resources (continued)

At-the-Market Equity Offering Programs (continued)

The Company used the net proceeds from the ATM offerings primarily for general corporate purposes including acquisitions, development and redevelopment of apartment communities.

Public Equity Offering

On September 20, 2011, the Company publicly offered 6 million shares of its common stock at a price of $58.50 per share, for net proceeds of approximately $337 million after underwriting discounts, commissions and offering expenses. All of the 6 million shares offered were purchased and subsequently delivered on September 23, 2011.  The Company used the net proceeds from the offering primarily for acquisitions, development and redevelopment of apartment communities.

Dividend Reinvestment and Direct Stock Purchase Plan (“DRIP”)

The Company’s DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in additional shares of common stock.  In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock.  The maximum monthly investment permitted without prior Company approval is currently $10,000.  The Company can meet share demand under the DRIP through stock repurchases by the transfer agent in the open market on the Company’s behalf or new stock issuances.  Management monitors the relationship between the Company’s stock price and its estimated net asset value (“NAV”).  During times when the difference between these two values is small, resulting in little dilution of NAV by common stock issuances, the Company can choose to issue new shares.  At times when the gap between NAV and stock price is greater, the Company has the flexibility to satisfy the demand for DRIP shares with stock repurchased by the transfer agent in the open market.  In addition, the Company can issue waivers to DRIP participants to provide for investments in excess of the $10,000 maximum monthly investment.  No such waivers were granted during 2011 or 2012.

Stock Repurchase Program

In 1997, the Board approved a stock repurchase program under which the Company may repurchase shares of its common stock or UPREIT Units (“Company Program”).  The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management.  The Board’s action did not establish a target stock price or a specific timetable for repurchase.  There were no repurchases under the Company Program during 2012 and 2011.  The remaining authorization level as of December 31, 2012 is 2.3 million shares.  The Company will continue to monitor stock prices relative to the NAV to determine the current best use of capital among our major uses of capital: stock buybacks, debt paydown to increase the unencumbered pool, acquisitions, rehabilitation and/or redevelopment of owned properties and development of new properties.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes.  In preparing these financial statements, management has utilized information available including industry practice and its own past history in forming its estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality.  It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements may not materialize.  Application of the accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  In addition, other companies may utilize different estimates which may impact comparability of the Company’s financial position and results of operations to those of companies in similar businesses.

The Company’s significant accounting policies are described in Notes 2 and 3 to Consolidated Financial Statements.  These policies were followed in preparing the Consolidated Financial Statements for the year ended December 31, 2012 and are consistent with the year ended December 31, 2011.

The Company has identified the following significant accounting policies as critical accounting policies.  These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates.  With respect to these critical accounting policies, management believes that the application of judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented.

Acquisition of Investments in Real Estate

The Company accounts for its acquisitions of investments in real estate in accordance with the authoritative guidance for the initial measurement, which requires the assets and liabilities acquired to be recognized using fair value.  Typical assets and liabilities acquired include land, building, and personal property and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of resident relationships, based in each case on their fair values.  In making estimates of fair value for purposes of the initial accounting of the purchased real estate, the Company utilizes a number of sources, including our own analysis of recently acquired and existing comparable properties in our portfolio and other market data.  The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

Cost Capitalization

The Company capitalizes the payroll and associated costs of employees directly responsible for the supervision and construction of major capital and rehabilitation projects.  These costs are reflected on the balance sheet as an increase to depreciable property.

For development properties, the Company uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred.  Costs directly related to the development of properties are capitalized.  The Company capitalizes interest, real estate taxes and insurance; and payroll and associated costs for those individuals directly responsible for and who spend all their time on development activities.  Determination of when a development project commences and capitalization begins, and when a development project is substantially complete and capitalization must end involves a degree of judgment.  We begin the capitalization of costs during the pre-construction period which we define as activities that are necessary to the development of the property.  We consider a development property as substantially complete after major construction has ended and the property is available for occupancy.  For properties that are built in phases, we end capitalization on the portion of a property that is considered substantially complete, and we capitalize only those costs associated with the portion under construction.  These costs are reflected on the balance sheet as construction in progress.

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Critical Accounting Policies (continued)

Depreciation of Investments in Real Estate

The Company depreciates the building component of its investment in real estate over a 40-year estimated useful life, building improvements over a 3-year to 20-year estimated useful life and the furniture, fixtures and equipment over a 5-year to 10-year estimated useful life, all of which are judgmental determinations.  These assessments have a direct impact on the Company’s net income.

Impairment of Long-Lived Assets

Management reviews its long-lived assets used in operations for impairment when, in accordance with the authoritative guidance for the accounting for the impairment or disposal of long-lived assets, there is an event or change in circumstances that indicates an impairment in value.  The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company’s ability to hold and its intent with regard to each asset.  Future events could occur which could cause the Company to conclude that impairment indicators exist and an impairment charge is warranted.

Fair Value of Financial Instruments Not Carried at Fair Value

For purposes of disclosure, the Company calculates the fair value of its mortgage notes payable, unsecured term loan, unsecured senior notes and unsecured line of credit facility using a discounted future cash flow technique that incorporates observable market-based inputs, including a market interest yield curve with adjustments for duration, loan to value, and risk profile.  As the valuation of financial instruments requires the Company to make estimates and judgments in the calculation of the fair value of these instruments, the actual fair value of these financial instruments for disclosure purposes may differ materially if these estimates do not prove to be accurate.

Fair Value of Financial Instruments Carried at Fair Value

The fair value of interest rate swaps are determined using the market standard of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rate forward curves derived from observable market interest rate curves.  The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  As the valuation of financial instruments requires the Company to make estimates and judgments in the calculation of the fair value of these instruments, the actual fair value of the interest rate swaps may differ materially if these estimates do not prove to be accurate.

Derivative Instruments and Hedging Activities

Derivative instruments and hedging activities require the Company to make judgments on the nature of its derivatives and their effectiveness as hedges.  These judgments determine if the changes in fair value of the derivative instruments are reported as a component of net income or as comprehensive income and equity.  While the Company believes its judgments are reasonable, a change in a derivative’s effectiveness as a hedge could materially affect expenses, net income and equity.

Recent Accounting Pronouncements

There were no new accounting pronouncements issued or effective during the fiscal year which have had or are expected to have a material impact on the Consolidated Financial Statements.  See Note 3 to the Consolidated Financial Statements for further detail on applicable accounting pronouncements that were adopted in 2012 or will be effective for 2013.

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Derivative Instruments and Hedging Activities

The Company follows authoritative guidance for disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Contractual Obligations and Other Commitments

The primary obligations of the Company relate to its borrowings under the unsecured line of credit, unsecured notes and mortgage notes.  The Company’s line of credit matures in December 2015 (not including a one-year extension, at the option of the Company), and had $162.5 million in loans and letters of credit totaling $16.4 million, outstanding at December 31, 2012.  The $450 million in unsecured notes have maturities ranging from four to nine years.  The $2.2 billion in mortgage notes have varying maturities ranging from two months to eighteen years.  The principal and interest payments on the borrowings for the years subsequent to December 31, 2012, are set forth in the table below.

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Contractual Obligations and Other Commitments (continued)

The Company leases its corporate office space from a former affiliate and the office space for its regional offices from non-affiliated third parties.  The rent for the corporate office space is a gross rent that includes real estate taxes and common area maintenance.  The regional office leases are net leases which require an annual base rent plus a pro-rata portion of real estate taxes.  These leases are set forth in the table below as “Operating leases.”

Purchase obligations represent those costs that the Company is contractually obligated to pay in the future.  The significant components of this caption are costs for capital improvements at the Company’s properties, as well as costs for normal operating and maintenance expenses at the site level that are tied to contracts such as utilities, landscaping and grounds maintenance and advertising.  The purchase obligations include amounts tied to contracts, some of which expire in 2013.  It is the Company’s intention to renew these normal operating contracts, however, there has been no attempt to estimate the length or future costs of these contracts.

Tabular Disclosure of Contractual Obligations:

			Payments Due by Period (in thousands)
Contractual Obligations (1)	Total		2013		2014		2015		2016		2017		Thereafter
Mortgage notes, principal (2)	$	2,165,027	$	224,607	$	106,377	$	276,400	$	345,791	$	276,684	$	935,168
Mortgage notes, interest (3)	492,045		103,870		93,613		85,507		63,690		53,878		91,487
Unsecured notes, principal (2)	450,000		—		—		—		250,000		—		200,000
Unsecured notes, interest (3) (5)	84,141		14,125		14,125		14,125		13,795		9,094		18,877
Line of credit, principal (2) (4)	162,500		—		—		162,500		—		—		—
Line of credit, interest (3)	7,398		2,519		2,519		2,360		—		—		—
Operating leases	7,459		1,860		1,840		1,844		1,621		294		—
Purchase obligations	4,778		4,574		105		66		33		—		—
Total	$	3,373,348	$	351,555	$	218,579	$	542,802	$	674,930	$	339,950	$	1,245,532

(1)The contractual obligations and other commitments in the table are set forth as required by Item 303(a)(5) of Regulation S-K promulgated by the SEC in January of 2003 and are not prepared in accordance with generally-accepted accounting principles.

(2)Amounts include principal payments only.  The Company will pay interest on outstanding indebtedness based on the rates and terms summarized in Note 6, 7 and 9 to Consolidated Financial Statements.

(3)Amounts include interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, 2012.  For floating rate debt, the current rate in effect for the most recent payment through December 31, 2012 is assumed to be in effect through the respective maturity date of each instrument.

(4)The payment in 2015 reflects the line of credit agreement as described in Note 9 to Consolidated Financial Statements, and does not include the one-year extension at the Company’s option.

(5)For $250,000 unsecured notes subject to interest rate swaps, the swapped rates are assumed as more fully described in Note 11 to Consolidated Financial Statements.

The Company has a secondary guarantee through 2015 on certain low income housing tax credits to limited partners in a partnership in which it previously was a general partner totaling approximately $3 million.  With respect to the guarantee of the low income housing tax credits, the new unrelated general partner assumed operating deficit guarantee and primary tax credit guarantee positions, as more fully described in Note 17 to Consolidated Financial Statements.  The Company believes the property’s operations conform to the applicable requirements and does not anticipate any payment on the guarantee; therefore, the secondary guarantee is excluded from the table above.

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Off-Balance Sheet Arrangements

As of December 31, 2012, the Company did not have any off-balance sheet transactions, arrangements, or obligations, including contingent obligations, other than those disclosed under contractual obligations.

Contingencies

The Company is not a party to any legal proceedings which are expected to have a material adverse effect on the Company’s liquidity, financial position or results of operations.  The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability and property insurance.  Various claims of employment and resident discrimination are also periodically brought, most of which also are covered by insurance.  While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

Environmental Issues

Phase I environmental site assessments have been completed on substantially all of the Properties.  As of December 31, 2012, there were no recorded amounts resulting from environmental liabilities as there were no known obligations with respect thereto.  Furthermore, no condition is known to exist that would give rise to a material liability for site restoration or other costs that may be incurred with respect to the sale or disposal of a property.

Capital Improvements (dollars in thousands, except unit and per unit data)

Effective January 1, 2012, the Company updated its estimate of the amount of recurring, non-revenue enhancing capital expenditures incurred on an annual basis for a standard garden style apartment. The Company now estimates that the amount of these capital expenditures is $848 per apartment unit compared to $800 per apartment unit in the prior year. This new amount better reflects current actual costs since the last update.

The Company’s policy is to capitalize costs related to the construction, development, rehabilitation and improvement of properties.  Capital improvements are costs that increase the value and extend the useful life of an asset.  Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred.  Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn.  Recurring capital improvements typically include appliances, carpeting and flooring, HVAC equipment, kitchen and bath cabinets, new roofs, site improvements and various exterior building improvements.  Non-recurring, revenue generating capital improvements include community centers, new windows, and kitchen and bath apartment upgrades.  Revenue generating capital improvements are expected to directly result in rental earnings or expense savings.  The Company capitalizes interest and certain internal personnel costs related to the communities under rehabilitation and construction.

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Capital Improvements (continued)

The table below is a list of the items that management considers recurring, non-revenue enhancing capital and maintenance expenditures for a standard garden style apartment.  Included are the per unit replacement cost and the useful life that management estimates the Company incurs on an annual basis.

						Maintenance
				Capitalized		Expense		Total
	Capitalized			Expenditure		Cost per		Cost per
	Cost per		Useful	Per Unit		Unit		Unit
Category	Unit		Life(1)	Per Year(2)		Per Year(3)		Per Year
Appliances	$	1,624	9	$	180	$	13	$	193
Blinds, shades	135		3	45		5		50
Carpets, cleaning	760		4	190		142		332
Computers, equipment, misc.(4)	120		6	20		2		22
Contract repairs	—		—	—		250		250
Exterior painting (5)	84		3	28		—		28
Flooring	250		9	28		24		52
Furnace, air (HVAC)	854		24	36		24		60
Hot water heater	293		7	42		—		42
Interior painting	—		—	—		178		178
Kitchen, bath cabinets upgrade	1,200		15	80		—		80
Landscaping site	—		—	—		120		120
New roof	880		24	37		—		37
Parking lot site	750		15	50		—		50
Pool, exercise facility	147		15	10		38		48
Windows major	1,663		20	83		—		83
Miscellaneous (6)	326		17	19		—		19
Total	$	9,086		$	848	$	796	$	1,644

(1)Estimated weighted average actual physical useful life of the expenditure capitalized.

(2)This amount is not necessarily incurred each and every year.  Some years will be higher, or lower depending on the timing of certain longer life expenditures.

(3)These expenses are included in the Operating and Maintenance line item of the Consolidated Statement of Operations.  Maintenance labor costs are not included in the $796 per unit estimate.  All personnel costs for site supervision, leasing agents, and maintenance staff are combined and disclosed in the Company’s Core Properties expense detail schedule.

(4)Includes computers, office equipment, furniture, and maintenance vehicles.

(5)The level of exterior painting may be lower than other similar titled presentations as the Company’s portfolio has a significant amount of brick exteriors. In addition, the other exposed surfaces are most often covered in aluminum or vinyl.

(6)Includes items such as balconies, siding, and concrete sidewalks.

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Capital Improvements (continued)

The breakdown of costs above reflects the Company’s unique strategies to improve every property every year regardless of age, and to purchase older properties and rehabilitate and reposition them to enhance internal rates of return.  These strategies result in higher costs of capital expenditures and maintenance costs which permit the Company to realize higher revenue growth, higher net operating income growth and a higher rate of property appreciation.

The Company estimates that approximately $848 and $800 per unit was spent on recurring capital expenditures in 2012 and 2011, respectively.  The table below summarizes the breakdown of capital improvements by major categories between recurring and non-recurring, revenue generating capital improvements as follows:

	For the year ended December 31,
	2012												2011
	Recurring		(a)		Non-recurring		(a)		Total Capital		(a)		Total Capital		(a)
	Cap Ex		Per Unit		Cap Ex		Per Unit		Improvements		Per Unit		Improvements		Per Unit
New buildings	$	—	$	—	$	1,352	$	34	$	1,352	$	34	$	986	$	27
Major bldg improvements	5,221		130		22,085		550		27,306		680		15,814		427
Roof replacements	1,486		37		2,739		68		4,225		105		3,678		99
Site improvements	2,410		60		15,860		395		18,270		455		15,600		422
Apartment upgrades	5,020		125		49,209		1,225		54,229		1,350		44,148		1,193
Appliances	7,229		180		726		18		7,955		198		6,770		183
Carpeting, flooring	8,755		218		6,494		162		15,249		380		12,896		349
HVAC, mechanicals	3,132		78		11,766		293		14,898		371		13,743		371
Miscellaneous	803		20		3,841		96		4,644		116		3,717		100
Totals	$	34,056	$	848	$	114,072	$	2,841	$	148,128	$	3,689	$	117,352	$	3,171

(a)Calculated using the weighted average number of units owned, including 36,214 core units, 2011 acquisition units of 2,817, and 2012 acquisition units of 1,129 for 2012; and 36,214 core units and 2011 acquisition units of 784 for 2011.

The schedule below summarizes the breakdown of total capital improvements between core and non-core:

	For the year ended December 31,
	2012												2011
	Recurring		(b)		Non-recurring		(b)		Total Capital		(b)		Total Capital		(b)
	Cap Ex		Per Unit		Cap Ex		Per Unit		Improvements		Per Unit		Improvements		Per Unit
Core Communities	$	30,710	$	848	$	98,335	$	2,715	$	129,045	$	3,563	$	113,779	$	3,142
2012 Acquisition Communities	957		848		3,482		3,084		4,439		3,932		—		—
2011 Acquisition Communities	2,389		848		12,255		4,350		14,644		5,198		3,573		4,557
Subtotal	34,056		848		114,072		2,841		148,128		3,689		117,352		3,171
2012 Disposed Communities	1,125		848		717		540		1,842		1,388		3,611		2,263
Corporate office (1)	—		—		—		—		2,803		—		2,245		—
Totals	$	35,181	$	848	$	114,789	$	2,767	$	152,773	$	3,615	$	123,208	$	3,134

(1)No distinction is made between recurring and non-recurring expenditures for corporate office.  Corporate office expenditures include principally computer hardware, software, office furniture, fixtures and leasehold improvements.  Corporate office expenditures are excluded from per unit figures.

(b)Calculated using the weighted average number of units owned, including 36,214 core units, 2011 acquisition units of 2,817, 2012 acquisition units of 1,129, and 2012 disposed units of 1,327 for 2012; and 36,214 core units, 2011 acquisition units of 784, and 2012 disposed units of 1,596 for 2011.

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Inflation

Substantially all of the leases at the communities are for a term of one year or less, which enables the Company to seek increased rents upon renewal of existing leases or commencement of new leases.  These short-term leases minimize the potential adverse effect of inflation on rental income, although residents may leave without penalty at the end of their lease terms and may do so if rents are increased significantly.

Forward-Looking Statements

This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended.  Some examples of forward-looking statements include statements related to acquisitions (including any related pro forma financial information), future capital expenditures, potential development and redevelopment opportunities, projected costs and rental rates for development and redevelopment projects, financing sources and availability, and the effects of environmental and other regulations.  Although management believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that expectations will be achieved.  Factors that may cause actual results to differ include general economic and local real estate conditions, the weather and other conditions that might affect operating expenses, the timely completion of repositioning activities and development within anticipated budgets, the actual pace of future development, acquisitions and sales, and continued access to capital to fund growth.  For this purpose, any statements contained in this Form 10-K that are not statements of historical fact should be considered to be forward-looking statements.  Some of the words used to identify forward-looking statements include “believes”, “anticipates”, “plans”, “expects”, “seeks”, “estimates”, “intends”, and any other similar expressions.  Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect the Company’s actual results, performance or achievements.

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk exposure is interest rate risk.  The Company’s debt is summarized as follows:

	December 31, 2012								December 31, 2011
	Amount (Millions)			Weighted- Average Maturity Years	Weighted- Average Interest Rate		Percentage of Total		Amount (Millions)			Weighted- Average Maturity Years	Weighted- Average Interest Rate		Percentage of Total
Fixed rate secured debt	$	1,967		4.94	5.30	%	70.8	%	$	2,059		5.84	5.34	%	77.3	%
Variable rate secured debt	198			5.48	2.77	%	7.1	%	202			6.44	2.98	%	7.6	%
Fixed rate unsecured debt	450		(a)	5.30	3.12	%	16.2	%	150			8.17	4.68	%	5.6	%
Variable rate unsecured debt	163			2.94	1.55	%	5.9	%	252		(b)	4.93	1.61	%	9.5	%
Total	$	2,778		4.92	4.55	%	100.0	%	$	2,663		5.93	4.77	%	100.0	%

(a)Includes $250 million of variable rate debt that the one-month LIBOR was swapped to a fixed rate of 0.685% at December 31, 2012.

(b)Includes debt in (a) which was not swapped to a fixed rate at December 31, 2011.

The Company uses a combination of fixed and variable rate secured and unsecured debt.  The Company intends to use net cash flow provided by operating activities and its existing bank line of credit to repay indebtedness and fund capital expenditures.  On occasion, the Company may use its unsecured line of credit in connection with a property acquisition with the intention to refinance at a later date.  The Company believes that increases in interest expense as a result of inflation would not significantly impact the Company’s distributable cash flow.

On July 19, 2012, the Company entered into interest rate swap agreements that effectively convert the one-month LIBOR portion of a $250 million five-year variable rate unsecured term loan, due on December 8, 2016, from a variable rate of one-month LIBOR plus a spread of 1.00% to 2.00% based on the Company’s leverage ratio to a fixed rate of 0.685% plus the applicable spread.  The Company is exposed to credit risk in the event of non-performance by the counterparties to the swaps.  The Company minimizes this risk exposure by limiting counterparties to major banks and investment brokers who meet established credit and capital guidelines.

At December 31, 2012 and December 31, 2011, the fair value of the Company’s total debt, including the unsecured notes payable and line of credit, amounted to a liability of $2.97 billion and $2.83 billion, respectively, compared to its carrying amount of $2.78 billion and $2.66 billion, respectively.  The Company estimates that a 100 basis point increase in market interest rates at December 31, 2012 would have changed the fair value of the Company’s total debt to a liability of $2.85 billion and would result in $3.6 million higher interest expense on the variable rate debt on an annualized basis.

The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio and may enter into swap positions based upon market fluctuations.  Accordingly, the cost of obtaining such interest rate protection agreements in relation to the Company’s access to capital markets will continue to be evaluated.  The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes.  In addition, the Company believes that it has the ability to obtain funds through additional debt and equity offerings and the issuance of UPREIT Units.  As of December 31, 2012, the Company had no other material exposure to market risk.

Additional disclosure about market risk is incorporated herein by reference to the discussion under the heading “Results of Operations” in Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 8.   Financial Statements and Supplementary Data

The financial statements and supplementary data are listed under Item 15(a) and filed as part of this report on the pages indicated.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the officers who certify the Company’s financial reports and to the other members of senior management and the Board.

The principal executive officer and principal financial officer evaluated, as of December 31, 2012, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and have determined that such disclosure controls and procedures are effective.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with the United States of America generally accepted accounting principles.

Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on its evaluation under that framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.  In addition, management has not identified any material weaknesses in the Company’s internal controls.

Attestation Report of the Registered Public Accounting Firm

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal controls over financial reporting that occurred during the fourth quarter of the year ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

58

PART III

Items 10, 11, 12, 13 and 14.             Directors, Executive Officers and Corporate Governance;  Executive Compensation;  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;  Certain Relationships and Related Transactions, and Director Independence; and Principal Accounting Fees and Services

The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to the Company’s Proxy Statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on April 30, 2013.  The proxy statement will be filed within 120 days after the end of the Company’s last fiscal year.

59

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) 1 and (a) 2.  Financial Statements and Schedules

The financial statements and schedules listed below are filed as part of this annual report on the pages indicated.

HOME PROPERTIES, INC.

Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	61
Consolidated Balance Sheets as of December 31, 2012 and 2011	62
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010	63
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010	64
Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011 and 2010	65
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010	66
Notes to Consolidated Financial Statements	67
Schedule II:
Valuation and Qualifying Accounts	99
Schedule III:
Real Estate and Accumulated Depreciation	100
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(a) 3. Exhibits
See Exhibit Index.	105

60

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Home Properties, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Home Properties, Inc. and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 22, 2013

61

HOME PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 and 2011

(Dollars in thousands, except per share data)

	2012			2011
ASSETS
Real estate:
Land	$	791,604		$	721,542
Construction in progress	83,241			64,201
Buildings, improvements and equipment	4,580,381			4,256,581
	5,455,226			5,042,324
Less: accumulated depreciation	(1,108,840		)	(983,759		)
Real estate, net	4,346,386			4,058,565
Cash and cash equivalents	21,092			8,297
Cash in escrows	26,971			32,604
Accounts receivable, net	13,406			12,142
Prepaid expenses	19,504			15,994
Deferred charges, net	13,429			16,322
Other assets	10,704			9,282
Total assets	$	4,451,492		$	4,153,206
LIABILITIES AND EQUITY
Mortgage notes payable	$	2,165,027		$	2,260,836
Unsecured notes payable	450,000			400,000
Unsecured line of credit	162,500			2,500
Accounts payable	22,691			20,953
Accrued interest payable	9,974			10,286
Accrued expenses and other liabilities	33,887			29,474
Security deposits	19,146			19,513
Total liabilities	2,863,225			2,743,562
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 80,000,000 shares authorized; 51,508,142 and 48,321,305 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively	515			483
Excess stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding	—			—
Additional paid-in capital	1,709,919			1,545,563
Distributions in excess of accumulated earnings	(388,397		)	(392,378		)
Accumulated other comprehensive income (loss)	(1,069		)	—
Total common stockholders’ equity	1,320,968			1,153,668
Noncontrolling interest	267,299			255,976
Total equity	1,588,267			1,409,644
Total liabilities and equity	$	4,451,492		$	4,153,206

The accompanying notes are an integral part of these consolidated financial statements.

62

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Dollars in thousands, except per share data)

	2012			2011			2010
Revenues:
Rental income	$	591,933		$	515,780		$	457,819
Property other income	52,105			45,621			40,864
Other income	310			155			106
Total revenues	644,348			561,556			498,789
Expenses:
Operating and maintenance	235,040			217,069			203,421
General and administrative	34,174			29,145			25,138
Interest	125,809			127,618			120,652
Depreciation and amortization	165,642			140,713			122,772
Other expenses	2,741			3,225			2,871
Total expenses	563,406			517,770			474,854
Income from continuing operations	80,942			43,786			23,935
Discontinued operations:
Income from discontinued operations	2,148			3,878			2,396
Gain (loss) on disposition of property	80,532			—			(13		)
Discontinued operations	82,680			3,878			2,383
Net income	163,622			47,664			26,318
Net income attributable to noncontrolling interest	(28,320		)	(9,808		)	(6,237		)
Net income attributable to common stockholders	$	135,302		$	37,856		$	20,081
Basic earnings per share data:
Income from continuing operations	$	1.34		$	0.83		$	0.50
Discontinued operations	1.38			0.07			0.05
Net income attributable to common stockholders	$	2.72		$	0.90		$	0.55
Diluted earnings per share data:
Income from continuing operations	$	1.33		$	0.82		$	0.49
Discontinued operations	1.36			0.07			0.05
Net income attributable to common stockholders	$	2.69		$	0.89		$	0.54
Weighted average number of shares outstanding:
Basic	49,744,636			41,860,139			36,682,191
Diluted	50,382,636			42,545,082			37,169,886

The accompanying notes are an integral part of these consolidated financial statements.

63

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Dollars in thousands)

	2012			2011			2010
Net income	$	163,622		$	47,664		$	26,318
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap agreements	(1,296		)	—			—
Other comprehensive income (loss)	(1,296		)	—			—
Comprehensive income	162,326			47,664			26,318
Net income attributable to noncontrolling interest	(28,320		)	(9,808		)	(6,237		)
Other comprehensive (income) loss attributable to noncontrolling interest	227			—			—
Comprehensive income attributable to common stockholders	$	134,233		$	37,856		$	20,081

The accompanying notes are an integral part of these consolidated financial statements.

64

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Dollars in thousands)

									Distributions			Accumulated
						Additional			in Excess of			Other			Non-
	Common Stock					Paid-In			Accumulated			Comprehensive			controlling
	Shares		Amount			Capital			Earnings			Income (Loss)			Interest			Total
Balance, December 31, 2009	34,655,428		$	347		$	922,078		$	(261,313	)	$	0		$	226,962		$	888,074
Net income	—		—			—			20,081			—			6,237			26,318
Issuance of common stock, net	2,827,856		28			123,728			—			—			—			123,756
Stock-based compensation	6,206		—			7,647			—			—			—			7,647
Repurchase of common stock	(68,265	)	(1		)	(3,273		)	—			—			—			(3,274		)
Conversion of UPREIT Units for common stock	528,004		5			10,229			—			—			(10,234		)	0
Issuance of UPREIT Units associated with property acquisition	—		—			—			—			—			4,845			4,845
Adjustment of noncontrolling interest	—		—			(13,084		)	—			—			13,084			0
Dividends and distributions paid	—		—			—			(85,579		)	—			(26,653		)	(112,232		)
Balance, December 31, 2010	37,949,229		$	379		$	1,047,325		$	(326,811	)	$	0		$	214,241		$	935,134
Net income	—		—			—			37,856			—			9,808			47,664
Issuance of common stock, net	3,881,833		39			216,564			—			—			—			216,603
Issuance of common stock through public offering, net	6,000,000		60			336,700			—			—			—			336,760
Stock-based compensation	21,457		—			10,105			—			—			—			10,105
Repurchase of common stock	(96,723	)	(1		)	(5,769		)	—			—			—			(5,770		)
Conversion of UPREIT Units for common stock	565,509		6			11,393			—			—			(11,399		)	0
Adjustment of noncontrolling interest	—		—			(70,755		)	—			—			70,755			0
Dividends and distributions paid	—		—			—			(103,423		)	—			(27,429		)	(130,852		)
Balance, December 31, 2011	48,321,305		$	483		$	1,545,563		$	(392,378	)	$	0		$	255,976		$	1,409,644
Net income	—		—			—			135,302			—			28,320			163,622
Unrealized gain (loss) on interest rate swap agreements	—		—			—			—			(1,069		)	(227		)	(1,296		)
Issuance of common stock, net	2,966,742		30			165,938			—			—			—			165,968
Stock-based compensation	4,199		—			13,923			—			—			—			13,923
Repurchase of common stock	(68,284	)	(1		)	(4,244		)	—			—			—			(4,245		)
Conversion of UPREIT Units for common stock	284,180		3			6,896			—			—			(6,899		)	0
Adjustment of noncontrolling interest	—		—			(18,157		)	—			—			18,157			0
Dividends and distributions paid	—		—			—			(131,321		)	—			(28,028		)	(159,349		)
Balance, December 31, 2012	51,508,142		$	515		$	1,709,919		$	(388,397	)	$	(1,069	)	$	267,299		$	1,588,267

The accompanying notes are an integral part of these consolidated financial statements.

65

HOME PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Dollars in thousands)

	2012			2011			2010
Cash flows from operating activities:
Net income	$	163,622		$	47,664		$	26,318
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	172,558			148,630			132,215
Amortization of senior note debt discount	—			1,782			2,082
Accreted debt discount on repurchase of exchangeable senior notes	—			(9,765		)	—
Loss (gain) on disposition of property	(80,532		)	—			13
Stock-based compensation	13,923			10,105			7,647
Carrying amount of assets and liabilities disposed in connection with sale of general partnership interest	—			—			(1,728		)
Changes in assets and liabilities:
Cash in escrows, net	1,881			813			(4,087		)
Other assets	(8,250		)	(296		)	(2,823		)
Accounts payable and accrued liabilities	4,378			(1,228		)	382
Total adjustments	103,958			150,041			133,701
Net cash provided by operating activities	267,580			197,705			160,019
Cash flows from investing activities:
Purchase of properties, net of mortgage notes assumed and UPREIT Units issued	(289,759		)	(498,558		)	(186,284		)
Purchase of land for development	—			(12,750		)	—
Capital improvements to properties including redevelopment	(164,987		)	(126,786		)	(97,590		)
Additions to construction in progress	(61,806		)	(32,038		)	(45,981		)
Additions to predevelopment	(535		)	(1,310		)	—
Proceeds from (payments for) sale of properties, net	149,783			5,426			(13		)
Proceeds from notes receivable	—			1,015			—
Purchase of notes receivable	—			—			(1,433		)
Withdrawals from (additions to) cash held in escrow, net	1,301			658			(3,238		)
Net cash used in investing activities	(366,003		)	(664,343		)	(334,539		)
Cash flows from financing activities:
Proceeds from sale of common stock, net	165,968			216,603			123,756
Proceeds from issuance of common stock through public offering, net	—			336,760			—
Repurchase of common stock	(4,245		)	(5,770		)	(3,274		)
Proceeds from mortgage notes payable	—			—			628,154
Payments of mortgage notes payable	(103,197		)	(163,395		)	(456,192		)
Proceeds from unsecured notes payable	150,000			400,000			—
Payments on unsecured notes payable	(100,000		)	—			—
Payment for repurchase of exchangeable senior notes	—			(130,235		)	—
Proceeds from unsecured line of credit	524,000			522,000			449,000
Payments on unsecured line of credit	(364,000		)	(576,000		)	(446,000		)
Proceeds from unsecured term loan	—			135,000			—
Payments on unsecured term loan	—			(135,000		)	—
Payments of deferred loan costs, net	(410		)	(4,953		)	(6,324		)
Withdrawals from (additions to) cash held in escrow, net	2,451			(5		)	(395		)
Dividends and distributions paid	(159,349		)	(130,852		)	(112,232		)
Net cash provided by financing activities	111,218			464,153			176,493
Net increase (decrease) in cash and cash equivalents	12,795			(2,485		)	1,973
Cash and cash equivalents:
Beginning of year	8,297			10,782			8,809
End of year	$	21,092		$	8,297		$	10,782

The accompanying notes are an integral part of these consolidated financial statements.

66

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1              ORGANIZATION AND BASIS OF PRESENTATION

Organization

Home Properties, Inc. (the “Company”) was formed in November 1993, as a Maryland corporation and is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities primarily in selected Northeast and Mid-Atlantic regions of the United States.  The Company completed an initial public offering of 5,408,000 shares of common stock on August 4, 1994 and is traded on the New York Stock Exchange (“NYSE”) under the symbol “HME”.  The Company is included in Standard & Poor’s MidCap 400 Index.

The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership.  As of December 31, 2012, the Company owned and operated 121 apartment communities with 42,635 apartments.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its ownership of 83.2% of the limited partnership units in the Operating Partnership (“UPREIT Units”) at December 31, 2012 (81.8% at December 31, 2011).  The remaining 16.8% is included as noncontrolling interest in these consolidated financial statements at December 31, 2012 (18.2% at December 31, 2011).  The Company periodically adjusts the carrying value of noncontrolling interest to reflect its share of the book value of the Operating Partnership.  Such adjustments are recorded to additional paid in capital as a reallocation of noncontrolling interest in the accompanying consolidated statements of equity.  The Company owns a 1.0% general partner interest in the Operating Partnership and the remainder indirectly as a limited partner through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, which is the limited partner.  Home Properties Trust was formed in September 1997, as a Maryland real estate trust and as a qualified REIT subsidiary (“QRS”), and owns the Company’s share of the limited partner interests in the Operating Partnership.

The accompanying consolidated financial statements include the accounts of Home Properties Resident Services, Inc. (“HPRS”).  HPRS is a wholly owned subsidiary of the Company.  All significant inter-company balances and transactions have been eliminated in these consolidated financial statements.

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Real Estate

Real estate is recorded at cost.  Costs related to the development, construction and improvement of properties are capitalized.  Recurring capital replacements typically include carpeting and tile, appliances, HVAC equipment, new roofs, site improvements and various exterior building improvements.  Non-recurring upgrades include, among other items, community centers, new windows, kitchens and bathrooms.  Costs incurred on a lease turnover due to normal wear and tear by the resident are expensed on the turn.  Ordinary repairs and maintenance that do not extend the life of the asset are expensed as incurred.  When retired or otherwise disposed of, the related asset cost and accumulated depreciation are cleared from the respective accounts and the net difference, less any amount realized from disposition, is reflected in income.

The Company capitalizes the payroll and associated costs of employees directly responsible for the supervision and construction of development properties, major capital and rehabilitation projects.  Interest costs for development properties, major capital projects and properties under rehabilitation are capitalized during the construction period.  These costs are reflected on the balance sheet as an increase to depreciable property.  Payroll and associated costs capitalized were $3,895, $3,028 and $3,007 for the years ended December 31, 2012, 2011 and 2010, respectively.

67

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Real Estate (continued)

For development properties, the Company uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred.  Costs directly related to the development of properties are capitalized.  The Company capitalizes interest, real estate taxes, insurance; and payroll including associated costs for those individuals directly responsible for and who spend all their time on development activities.  Determination of when a development project commences and capitalization begins, and when a development project is substantially complete and capitalization must end involves a degree of judgment.  We begin the capitalization of costs during the pre-construction period which we define as activities that are necessary to the development of the property.  We consider a development property as substantially complete after major construction has ended and the property is available for occupancy.  For properties that are built in phases, we end capitalization on the portion of a property that is considered substantially complete, and we capitalize only those costs associated with the portion under construction.  These costs are reflected on the balance sheet as construction in progress.

The interest rate used for capitalization is the weighted average interest rate for all Company indebtedness, including amortization of debt issuance costs.  In connection with development properties, major capital projects and rehabilitation projects, there was $4,380, $5,255 and $9,384 of interest capitalized for the years ended December 31, 2012, 2011 and 2010, respectively.

Management reviews its long-lived assets used in operations for impairment when, in accordance with the authoritative guidance for the accounting for the impairment or disposal of long-lived assets, there is an event or change in circumstances that indicates an impairment in value.  An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset’s carrying value.  If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value.  The Company records impairment losses and reduces the carrying amounts of assets held for sale when the carrying amounts exceed the estimated selling proceeds less the costs to sell.

The Company accounts for its acquisitions of investments in real estate in accordance with the authoritative guidance for business combinations, which requires the assets and liabilities acquired to be recognized using fair value.  Typical assets and liabilities acquired include land, building, and personal property and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and value of resident relationships, based in each case on their fair values.  Additionally, acquisition related costs are expensed in the periods in which the costs are incurred and the services are received.  The Company considers acquisitions of operating real estate assets to be businesses as that term is defined in the authoritative guidance.

The Company determines the fair value of the tangible assets of an acquired property (which includes the land, building, and personal property) by valuing the property as if it were vacant.  The as-if-vacant value is assigned to land, buildings, and personal property based on management’s determination of the relative fair values of these assets.

Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.  The capitalized above-market lease values are included in other assets and are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases.  The capitalized below-market lease values are included in accrued expenses and other liabilities and are amortized as an increase to rental income over the initial term of the respective leases.

68

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Real Estate (continued)

The fair value of in-place leases is based upon the Company’s evaluation of the specific characteristics of the leases.  Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases.  The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.  In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods depending on the property acquired.

The fair value of resident relationships is based on management’s evaluation of the specific characteristics of the residential leases and the Company’s resident retention history.

The in-place leases and resident relationships are amortized and included in depreciation and amortization expense over a 6 month and a three year period, respectively.

Exchange of UPREIT Units for shares

Exchanges of UPREIT Units for shares of the Company’s common stock are recorded under the historical cost method with UPREIT Units acquired reflected at their book value (“exchange value”).  The exchange value of UPREIT Units is allocated to common stock and additional paid in capital.

There were 284,180, 565,509 and 528,004 shares of UPREIT Units exchanged for common stock, during 2012, 2011 and 2010, respectively.  The Company made adjustments within equity in the amount of $6,899, $11,399 and $10,234, during 2012, 2011 and 2010, respectively, to record the exchange value of the transactions.

Costs Incurred for Stock Issuances

Costs incurred in connection with the Company’s stock issuances are reflected as a reduction of additional paid in capital.

Discontinued Operations

The Company reports its property dispositions as discontinued operations as prescribed by the authoritative guidance.  Pursuant to the definition of a component of an entity in the authoritative guidance for discontinued operations, assuming no significant continuing involvement by the former owner after the sale, the sale of an apartment community is considered a discontinued operation.  In addition, apartment communities classified as held for sale are also considered a discontinued operation.  The Company generally considers assets to be held for sale when all significant contingencies surrounding the closing have been resolved, which often corresponds with the actual closing date.  For purposes of the discontinued operations presentation, the Company includes interest expense and losses from early extinguishment of debt associated with specific mortgage indebtedness of the properties that are considered discontinued operations.

69

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Depreciation

The Company is required to make subjective assessments as to the useful lives of its properties and improvements for purposes of determining the amount of depreciation to record on an annual basis.  These assessments have a direct impact on the Company’s net income.

Assets are depreciated using a straight-line method over the following estimated useful lives:

Land improvements	3-20 years
Buildings and improvements	3-40 years
Furniture, fixtures and equipment	5-10 years
Computer software	5 years

Depreciation expense charged to operations was $163,024, $139,167 and $121,738 from continuing operations and $3,355, $4,105 and $4,728 from discontinued operations for the years ended December 31, 2012, 2011 and 2010, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and highly liquid investments purchased with original maturities of three months or less.  The Company estimates that the fair value of cash equivalents approximates the carrying value due to the relatively short maturity of these instruments.  The majority of the Company’s cash and cash equivalents are held at major commercial banks which at times may exceed the Federal Deposit Insurance Corporation limit of $250.  The Company has not experienced any losses to date on its invested cash.

Cash in Escrows

Cash in escrows consists of cash restricted under the terms of various loan agreements to be used for the payment of property taxes and insurance as well as required replacement reserves, resident security deposits for residential properties and occasionally funds held in escrow from tax-free exchanges.

Accounts Receivable and Allowance for Doubtful Receivables

Accounts receivable are generally comprised of amounts receivable from residents and other miscellaneous receivables from non-affiliated entities.  We evaluate the collectability of accounts receivable from residents and establish an allowance for accounts greater than 60 days past due for current residents and all receivables due from former residents, after the application of security deposits.  The allowance for doubtful resident receivables was $2,778 and $2,869 as of December 31, 2012 and 2011, respectively.

Deferred Charges

Costs relating to the financing of properties are deferred and amortized over the life of the related financing agreement.  The straight-line method, which approximates the effective interest method, is used to amortize all financing costs; such amortization is reflected as interest expense in the consolidated statements of operations, with remaining terms ranging from 2 months to 9 years.  Unamortized financing costs are written off when the financing agreement is retired before the maturity date.  Accumulated amortization was $11,050 and $8,231, as of December 31, 2012 and 2011, respectively.

70

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Intangible Assets

Intangible assets of $14,300 and $12,518 at December 31, 2012 and 2011, respectively, included in other assets, consist solely of intangible assets recorded in connection with the authoritative guidance for the acquisition of real estate assets.  These intangible assets are amortized on a straight-line basis over their estimated useful lives of 6 months to 3 years.  Accumulated amortization of intangible assets was $12,797 and $10,194 as of December 31, 2012 and 2011, respectively.  Amortization expense charged to operations was $2,618, $1,547 and $1,034 from continuing operations and $0, $0 and $7 from discontinued operations for the years ended December 31, 2012, 2011 and 2010, respectively.  The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets are less than their carrying value.

Insurance Reserves

The Company has self insured retentions and aggregates up to certain limits for general liability, workers’ compensation and property claims.  The Company relies on third-party actuaries in the development of reserve requirements.  Reserves are currently funded for the estimated cost of claims incurred, both reported and unreported.

Derivative Instruments and Hedging Activities

The Company follows authoritative guidance for disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

71

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

The Company leases its residential apartment units under leases with terms generally one year or less.  Rental income is recognized on a straight-line basis over the related lease term.  As a result, deferred rents receivable are created when rental income is recognized during the concession period of certain negotiated leases and amortized over the remaining term of the lease. In accordance with the authoritative guidance for business combinations, the Company recognizes rental revenue of acquired in-place “above and below” market leases at their fair value over the weighted average remaining lease term.  Property other income, which consists primarily of income from operation of laundry facilities, utility recovery, administrative fees, garage and carport rentals and miscellaneous charges to residents, is recognized when earned (when the services are provided, or when the resident incurs the charge).

Other Income

Other income for the years ended December 31, 2012, 2011 and 2010 is primarily comprised of other real estate service fees.

Other Expenses

Other expenses for the years ended December 31, 2012, 2011 and 2010 are the transaction costs from the apartment communities acquired during 2012, 2011 and 2010 that were expensed according to authoritative guidance for business combinations.  These costs, which are primarily transfer taxes and title fees, represent 0.90%, 0.64% and 0.85% of the total purchase price of the apartment communities acquired during 2012, 2011 and 2010, respectively.

Gain on Real Estate Sales

Gain on disposition of properties is recognized using the full accrual method in accordance with the authoritative guidance, provided that various criteria relating to the terms of sale and any subsequent involvement by the Company with the properties sold are met.

Advertising

Advertising expenses are charged to operations during the year in which they are incurred.  Advertising expenses incurred and charged to operations were $5,304, $4,665 and $4,417 from continuing operations, and $151, $191 and $189 from discontinued operations, for the years ended December 31, 2012, 2011 and 2010, respectively.

72

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Federal Income Taxes

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. As a result, the Company generally is not subject to federal or state income taxation at the corporate level to the extent it distributes annually at least 90% of its REIT taxable income to its shareholders and satisfies certain other requirements.  For the years ended December 31, 2012, 2011 and 2010, the Company distributed in excess of 100% of its taxable income; accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements.  Stockholders of the Company are taxed on dividends and must report distributions from the Company as either ordinary income, capital gains, or as return of capital; as more fully described in Note 12.

The Company follows the authoritative guidance for accounting for uncertainty in income taxes which addresses the recognition and measurement of assets and liabilities associated with tax positions taken or expected to be taken in a tax return.  The Company reviewed its potential uncertain tax positions and made no adjustments to its existing financial and tax accounting treatment for all periods presented.  The authoritative guidance also requires a public enterprise to disclose the aggregate difference in the basis of its net assets for financial and tax reporting purposes.  The tax basis of assets is less than the amounts reported in the accompanying consolidated financial statements by approximately $483,031 and $420,930 at December 31, 2012 and 2011, respectively.

The following table reconciles net income to taxable income for the years ended December 31, 2012, 2011 and 2010:

	2012			2011			2010
	(Estimate)			(Actual)			(Actual)
Net income	$	163,622		$	47,664		$	26,318
Net income attributable to noncontrolling interest	(28,320		)	(9,808		)	(6,237		)
Net loss of taxable REIT Subsidiary included in net income	5			4			54
Net loss of taxable VIE, including impairment of real property	—			—			821
Net income from REIT operations	135,307			37,860			20,956
Book to tax differences:
Book depreciation and amortization	139,067			114,138			96,153
Tax depreciation and amortization	(143,893		)	(117,822		)	(96,158		)
Gains/losses from capital transactions	(62,507		)	(22		)	(86		)
Carrying value of mortgages	(784		)	(575		)	(322		)
Equity compensation	(857		)	(3,928		)	(1,770		)
Amortization of debt discount	—			1,409			1,586
Property acquisition costs	2,210			2,551			2,188
Other, net	(1,934		)	1,912			1,609
Adjusted taxable income subject to 90% REIT dividend requirement	$	66,609		$	35,523		$	24,156

The Company made actual distributions in excess of 100% of taxable income before capital gains.  All adjustments to net income from REIT operations are net of amounts attributable to noncontrolling interest and the taxable REIT subsidiary, HPRS.

73

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Federal Income Taxes (continued)

Included in total assets on the consolidated balance sheets are deferred tax assets of $13,168 and $13,185 as of December 31, 2012 and 2011, respectively.  The deferred tax assets were a result of the net losses associated with the affordable property portfolio sales during 2004 and 2003.  Management does not believe it is more likely than not that these deferred assets will be used, and accordingly has recorded a reserve against the deferred tax assets of $13,168 and $13,185 for the years ended December 31, 2012 and 2011, respectively.  The deferred tax assets are associated with HPRS which performed certain residential and development activities of the Company.  HPRS historically provided commercial management services and provided loan advances to affordable housing entities owned through general partnership interests.  As these activities are no longer provided, Management does not currently believe there is a source for future material taxable earnings for HPRS that would give rise to value for the deferred tax assets.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

3              RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between GAAP and IFRS.  ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS.  ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs.  ASU 2011-04 became effective for the Company on January 1, 2012. The Company’s adoption of this authoritative guidance did not have any impact on its operating results or financial position.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity.  In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which deferred the new requirement to present components of reclassifications of other comprehensive income on the face of the income statement.  Both ASU 2011-05 and ASU 2011-12 became effective for the Company on January 1, 2012.  The Company’s adoption of this authoritative guidance did not have a material impact on its operating results or financial position.

74

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

3              RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS (continued)

Recently Issued Accounting Standards

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements in a single note or on the face of the financial statements.  ASU 2013-02 will be effective for the Company on January 1, 2013.  The Company’s adoption of this authoritative guidance is not expected to have a material impact on its operating results or financial position.

4              VARIABLE INTEREST ENTITIES

On October 13, 2010, the Company sold its general partnership interest in its one remaining variable interest entity (“VIE”).  Previously, the VIE was consolidated in accordance with authoritative guidance for consolidation of VIE’s.  The consideration for the sale included the assumption of the existing $15,762 non-recourse loan.  The sale was recorded in the fourth quarter of 2010, generating other income of $669, which was included in income from discontinued operations, and is the difference between the consideration received of $50 and the carrying value of the net assets and liabilities of $1,728, less sale related expenses of $1,109, which included payments to the limited partners of $800.

Through October 12, 2010, the Company was the general partner in the VIE which was initially syndicated using low income housing tax credits under Section 42 of the Internal Revenue Code.  As general partner, the Company managed the day-to-day operations of the partnership for a management fee.  In addition, the Company had an operating deficit guarantee and an approximate $3,000 tax credit guarantee to the limited partners of that partnership.  As a result of the sale, the Company no longer manages the day-to-day operations and the tax credit guarantee was reduced to approximately a $3,000 secondary guarantee through 2015, with the new general partner assuming the management of operations and primary tax credit guarantee.  The VIE is included in discontinued operations within the consolidated statements of operations for the year ended December 31, 2010.

5              ACQUISITIONS AND DEVELOPMENT

Property Acquisitions

During the years ended December 31, 2012 and 2011, the Company acquired the communities listed below:

							Cost of
		Date	Year	Number	Cost of		Acquisition
Apartment Community	Region	Acquired	Constructed	of Units	Acquisition		Per Unit
Hunters Glen	Suburban D.C.	4/19/2011	1984	108	$	7,000	$	65
Waterview	Philadelphia	7/14/2011	1968	203	$	24,600	$	121
The Commons at Haynes Farm	Boston	7/15/2011	1991	302	$	40,500	$	134
The Apts at Cambridge Court	Baltimore	8/23/2011	1999-2002	544	$	90,400	$	166
Somerset Park	Suburban D.C.	10/11/2011	2006	108	$	20,250	$	188
Newport Village	Suburban D.C.	10/17/2011	1969	937	$	205,000	$	219
The Courts at Dulles	Suburban D.C.	11/30/2011	2000	411	$	92,750	$	226
The Gates of Deer Grove	Chicago	12/15/2011	1974	204	$	20,200	$	99
The Manor East	Suburban D.C.	5/11/2012	1964	164	$	16,200	$	99
Woodway at Trinity Centre	Suburban D.C.	5/17/2012	1997	504	$	96,000	$	190
Howard Crossing	Baltimore	6/28/2012	1968-1975	1,350	$	186,000	$	138

75

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

5              ACQUISITIONS AND DEVELOPMENT (continued)

Property Acquisitions (continued)

All of the 2012 and 2011 acquired apartment communities were recorded at fair value which approximated actual purchase price.  None of the acquisitions were subject to bargain purchase options or resulted in goodwill being recorded.  In connection with these acquisitions, closing costs of $2,741 and $3,225 were incurred and are included in other expenses for the years ended December 31, 2012 and 2011, respectively.

Included in the consolidated statements of income for the years ended December 31, 2012 and 2011, are total revenues of $63,873 and $12,386, respectively, and net income attributable to common shareholders of $19,094 and $3,054, respectively, since the respective date of acquisition through December 31, 2012 for the 2012 and 2011 acquired apartment communities.

Pro Forma Information

The following unaudited pro forma information was prepared as if the 2012 and 2011 transactions related to the acquisition of apartment communities occurred as of January 1 of the preceding year.  The pro forma financial information is based upon the historical consolidated financial statements of the Company and the acquired communities, and is not necessarily indicative of the consolidated results which actually would have occurred if the transactions had been consummated at January 1, 2011, nor does it purport to represent the results of operations for future periods.  Adjustments to the pro forma financial information for the years ended December 31, 2012 and 2011 consist principally of providing net operating activity and recording interest, depreciation and amortization from January 1, 2011 to the acquisition date as appropriate.  Acquisition related costs in the amount of $2,741 were excluded from the 2012 Pro forma net income attributable to common stockholders.  An adjustment was made to include these costs in the 2011 Pro forma net income attributable to common stockholders.

	2012 (Unaudited)		2011 (Unaudited)
Pro forma total revenues	$	656,624	$	621,755
Pro forma net income attributable to common stockholders	139,698		40,481
Pro forma earnings per common share:
Basic	$	2.81	$	0.97
Diluted	2.77		0.95

Development

During 2012, the Company completed construction at The Apartments at Cobblestone Square located in Fredericksburg, Virginia, consisting of eight, four-story buildings and a refurbished rail depot, for a total of 314 apartment units.  The total cost for this community was $48,609 for an average cost per apartment unit of $155.

76

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

5              ACQUISITIONS AND DEVELOPMENT (continued)

Development (continued)

During the fourth quarter of 2011, the Company started construction on Eleven55 Ripley, located in Silver Spring, Maryland, consisting of two buildings, a 21 story high-rise and a 5 story mid-rise, for a total of 379 apartment units.  Construction is expected to be completed in the first quarter of 2014 with initial occupancy in the third quarter of 2013.  The construction in progress for this development was $62,502 as of December 31, 2012.

During the second quarter of 2012, the Company started construction on The Courts at Spring Mill Station, located in Conshohocken, Pennsylvania, a suburb of Philadelphia. The mid-rise project, consisting of two buildings, will have a total of 385 apartment units.  Construction is expected to be completed in the second half of 2014 with initial occupancy in the first quarter of 2014.  The construction in progress for this development was $20,739 as of December 31, 2012.

Redevelopment

The Company has one project under redevelopment.  Arbor Park, located in Alexandria, Virginia, has 851 garden apartments in fifty-two buildings built in 1967.  The Company plans to extensively renovate all of the units over several years on a building by building basis.  As of December 31, 2012, there were five buildings with 90 units under renovation and twenty-six buildings with 391 units completed and 290 units occupied.  As of December 31, 2012, the Company has incurred costs of $14,006 for the renovation which is included in buildings, improvements and equipment.  The entire project is expected to be completed in 2014.

The Company has one project in the pre-redevelopment phase.  Falkland Chase, located in Silver Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939.  The Company has obtained the necessary approvals to redevelop the North parcel which allows for an increase of units from 182 to approximately 1,185 units.  The cost associated with this project was $4,762 as of December 31, 2012 and is included in other assets.

Acquisition of Notes Receivable

On September 22, 2010, the Company purchased two non-performing mortgage notes from a community bank for $1,433 in an arm’s length transaction.  Both notes were in default.  They were purchased at face value plus accrued interest and late fees and were collateralized by real property.  One of the notes, originally purchased by the Company for $1,015, was repaid in its entirety on January 28, 2011.  The second note was purchased for $418 and was collateralized by vacant land.  On December 3, 2012, the Company completed foreclosure on the remaining note and took ownership of a parcel of vacant land located in Wall Township, NJ.  The total cost of the parcel, including legal fees, is $608 and is included in land as of December 31, 2012.

6              MORTGAGE NOTES PAYABLE

The Company’s mortgage notes payable are summarized as follows:

	2012		2011
Fixed rate mortgage notes payable	$	1,967,026	$	2,058,724
Variable rate mortgage notes payable	198,001		202,112
Mortgage notes payable	$	2,165,027	$	2,260,836

77

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

6              MORTGAGE NOTES PAYABLE (continued)

For 2012 and 2011, mortgage notes payable are collateralized by certain apartment communities as detailed in Schedule III.  The mortgage notes payable outstanding as of December 31, 2012 mature at various dates from 2013 through 2030, with a weighted average remaining term of approximately five years.  The weighted average interest rate of the Company’s fixed rate notes was 5.30% and 5.34% at December 31, 2012 and 2011, respectively.  The weighted average interest rate of the Company’s variable rate notes was 2.77% and 2.98% at December 31, 2012 and 2011, respectively.

Principal payments on the mortgage notes payable for years subsequent to December 31, 2012 are as follows:

2013	$	224,607
2014	106,377
2015	276,400
2016	345,791
2017	276,684
Thereafter	935,168
	$	2,165,027

Prepayment penalties of $2,202, $13 and $190 were incurred for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in interest expense.  Included in the 2012 prepayment penalties of $2,202, are penalties of $2,115 which were incurred in connection with the sale of property and are included in discontinued operations.

Deferred financing costs of $45, $72 and $340 were written off for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in interest expense.  For 2010, deferred financing costs written off of $216 were incurred in connection with the deconsolidation of the VIE and are included in discontinued operations.  For 2012, deferred financing costs written off of $42 were incurred in connection with the sale of property and are included in discontinued operations.  For 2012, 2011 and 2010, deferred financing costs written off of $3, $72 and $124, respectively, were incurred in connection with the repayment of mortgages and are included in interest expense from continuing operations.

7              UNSECURED NOTES PAYABLE

Unsecured Term Loan

In December 2011, the Company entered into a five-year unsecured term loan for $250,000 with M&T Bank as lead bank, and ten other participating lenders.  The loan bears monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  On July 19, 2012, the Company entered into interest rate swap agreements that effectively convert the variable LIBOR portion of this loan to a fixed rate of 0.685%, as more fully described in Note 11.  As of December 31, 2012, based on the Company’s leverage ratio, the spread was 1.30%, and the one-month LIBOR was swapped at 0.685%; resulting in an effective rate of 1.99% for the Company.  The loan has covenants that align with the unsecured line of credit facility.  The Company was in compliance with these financial covenants for all periods presented.

Unsecured Demand Note

On June 27, 2012, the Company entered into a loan agreement with M&T Bank with a maximum principal amount of $100,000 and monthly interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  The Company borrowed the maximum amount of $100,000.  Proceeds from this demand note were utilized to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012.  During the fourth quarter, 2012, the Company repaid the $100,000 balance on the note from property disposition proceeds.

78

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

7              UNSECURED NOTES PAYABLE (continued)

Unsecured Senior Notes

In December 2011, the Company issued $150,000 of unsecured senior notes.  The notes were offered in a private placement in two series: Series A: $90,000 with a seven-year term due December 19, 2018 at a fixed interest rate of 4.46% (“Series A”); and, Series B: $60,000 with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00% (“Series B”).

On June 27, 2012, the Company issued another private placement note in the amount of $50,000 with a seven-year term, a fixed rate of 4.16% and a June 27, 2019 due date.  The proceeds from this note were used to partially fund the purchase of a 1,350 unit apartment community on June 28, 2012.

The unsecured senior notes are subject to various covenants and maintenance of certain financial ratios.  Although the covenants of the notes do not duplicate all the covenants of the unsecured line of credit facility, any covenants applicable to both the notes and the line are identical. The Company was in compliance with these financial covenants for all periods presented.

8              EXCHANGEABLE SENIOR NOTES

In October 2006, the Company issued $200,000 principal amount of exchangeable senior notes (“Senior Notes”) under an Indenture, with a coupon rate of 4.125%.  In the fourth quarter of 2008, the Company repurchased $60,000 principal amount of the Senior Notes, leaving $140,000 outstanding.  The Senior Notes were exchangeable into cash equal to the principal amount of the notes and, at the Company’s option, cash or common stock for the exchange value, to the extent that the market price of common stock exceeded the initial exchange price of $73.34 per share, subject to adjustment and generally not redeemable by the Company until November 1, 2011.  Prior to the maturity date of November 1, 2026, holders of the Senior Notes had the right to require the Company to repurchase the notes on November 1, 2011, 2016 and 2021, and the occurrence of certain events.

On November 1, 2011, the Company repurchased at face value $135,000 of the Senior Notes, plus accrued interest of $2,784, that were presented by the holders for repurchase in accordance with the Indenture.  On December 21, 2011 the remaining outstanding balance of $5,000 principal amount of the Senior Notes was repurchased by the Company, at face value plus accrued interest of $29, at the Company’s option in accordance with the Indenture.  There were no outstanding Senior Notes as of December 31, 2012 or 2011.

The following table provides additional information about the Senior Notes for the years ended December 31, 2011 and 2010:

	2011		2010
Coupon interest	$	4,835	$	5,775
Issuance cost amortization	456		547
Discount amortization	1,782		2,082
Total interest expense	$	7,073	$	8,404

The effective interest rate was 5.75% for the years ended 2011 and 2010.  The conversion price per share, as adjusted, was $72.87 for the year ended 2010 and as of the November 1, 2011 and December 21, 2011 repurchase dates.

79

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

9              UNSECURED LINE OF CREDIT

On December 9, 2011, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), which provides for a $275,000 revolving credit facility with an initial maturity date of December 8, 2015 and a one-year extension at the Company’s option.  The Credit Agreement amended its prior $175,000 facility, which was scheduled to expire on August 31, 2012, not including a one-year extension at the Company’s option.  The Credit Agreement is with M&T Bank and U.S. Bank National Association as joint lead arrangers, M&T Bank as administrative agent and nine other commercial banks as participants.  The Company had $162,500 outstanding under the credit facility on December 31, 2012.  Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  As of December 31, 2012, based on the Company’s leverage ratio, the LIBOR margin was 1.30%, and the one-month LIBOR was 0.25%; resulting in an effective rate of 1.55% for the Company.

The Credit Agreement requires the Company to maintain certain financial ratios and measurements including a limitation on outstanding indebtedness and a minimum interest coverage ratio.  The Company was in compliance with these financial covenants for all periods presented.

The Credit Agreement also provides the ability to issue up to $20,000 in letters of credit.  While the issuance of letters of credit does not increase borrowings outstanding under the line of credit, it does reduce the amount available.  At December 31, 2012, the Company had outstanding letters of credit of $16,432 and the amount available on the credit facility was $96,068.

10FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Carried at Fair Value

The fair value of interest rate swaps, which are more fully described in Note 11, are determined using the market standard of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rate forward curves derived from observable market interest rate curves (level 2 inputs, as defined by the authoritative guidance).  The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  The Company has determined that the significant inputs used in this model are observable in active markets, therefore considers the interest rate swap liability valuation of $1,296 at December 31, 2012 classified in level 2 of the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

The Company follows the authoritative guidance for fair value measurements when valuing its financial instruments for disclosure purposes.  The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments.

Cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, deferred charges, other assets, accounts payable, accrued interest payable, accrued expenses and other liabilities, except for interest rate swaps, are all carried at their face amounts, which approximate their fair values due to their relatively short-term nature and high probability of realization.

80

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

10           FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Financial Instruments Not Carried at Fair Value (continued)

The Company determined the fair value of its mortgage notes payable, unsecured term loan, unsecured senior notes and unsecured line of credit facility using a discounted future cash flow technique that incorporates observable market-based inputs, including a market interest yield curve with adjustments for duration, loan to value (level 2 inputs), and risk profile (level 3 inputs).  In determining the market interest yield curve, the Company considered its BBB credit rating (level 2 inputs).  The Company has determined that the significant inputs used in this model are observable in active markets, therefore considers the valuation classified in level 2 of the fair value hierarchy.  At December 31, 2012 and December 31, 2011, the fair value of the Company’s total debt, consisting of the mortgage notes, the unsecured term loan, unsecured senior notes and unsecured line of credit, amounted to a liability of $2,968,865 and $2,826,006, respectively, compared to its carrying amount of $2,777,527 and $2,663,336, respectively.

11DERIVATIVE AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company has entered into interest rate swaps to minimize significant unplanned fluctuations in earnings that can be caused by interest rate volatility.  The Company does not utilize these arrangements for trading or speculative purposes.

On July 19, 2012, the Company entered into interest rate swap agreements that effectively convert the one-month LIBOR portion of a $250,000 five-year variable rate unsecured term loan, due on December 8, 2016, from a variable rate of one-month LIBOR plus a spread of 1.00% to 2.00% based on the Company’s leverage ratio to a fixed rate of 0.685% plus the applicable spread.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of December 31, 2012:

Derivative Type	Balance Sheet Location	December 31, 2012
Interest rate swaps	Accrued expenses and other liabilities	$	1,296

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

81

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

11           DERIVATIVE AND HEDGING ACTIVITIES (continued)

Cash Flow Hedges of Interest Rate Risk (continued)

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  During 2012, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt.  The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings.  During the year ended December 31, 2012 the Company did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  The Company estimates that an additional $1,100 will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next twelve months.

As of December 31, 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative	Notional Amount		Fixed Interest Rate		Variable Interest Rate	Maturity Date
Interest rate swap	$	150,000	0.6800	%	One-month LIBOR	December 8, 2016
Interest rate swap	$	100,000	0.6925	%	One-month LIBOR	December 8, 2016

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the year ended December 31, 2012:

	2012
Amount of gain (loss) recognized in accumulated other comprehensive income on interest rate derivatives (effective portion)	$	(1,722	)
Amount of gain (loss) reclassified from accumulated other comprehensive income into income as interest expense (effective portion)	$	(426	)
Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	—

The Company is exposed to credit risk in the event of non-performance by the counterparties to the swaps.  The Company minimizes this risk exposure by limiting counterparties to major banks and investment brokers who meet established credit and capital guidelines.

82

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

11           DERIVATIVE AND HEDGING ACTIVITIES (continued)

Cash Flow Hedges of Interest Rate Risk (continued)

The Company has agreements with each of its derivative counterparties that provide, among other defaults, that if the Company defaults on indebtedness having an aggregate principal amount in excess of $20,000, including default where repayment of the indebtedness has not been accelerated by the lender, the counterparty could declare the Company in default on its derivative obligations.

As of December 31, 2012, the fair value of derivatives in a net liability position including an adjustment for nonperformance risk related to these agreements but excluding accrued interest was $1,296.  As of December 31, 2012, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions.  If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $1,345 at December 31, 2012.

12           STOCKHOLDERS’ EQUITY

Common Stock

In 1997, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase shares of its outstanding common stock and UPREIT Units (“Company Program”).  The shares and units may be repurchased through open market or privately negotiated transactions at the discretion of Company management.  The Board’s action did not establish a target price or a specific timetable for repurchase.  At December 31, 2012 the Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the Company Program.  There were no repurchases in 2012, 2011 or 2010.

In addition, participants in the Company’s stock benefit plans can use common stock of the Company that they already own to pay all or a portion of the exercise price payable to the Company upon the exercise of an option.  In such event, the common stock used to pay the exercise price is returned to authorized but unissued status, and is deemed to have been repurchased by the Company, but does not represent repurchases under the Company Program.

At-The-Market Equity Offering Programs

On December 3, 2009, the Company initiated an “At-the-Market” (“ATM”) equity offering program through which it was authorized to sell up to 3.7 million shares of common stock (not to exceed $150,000 of gross proceeds), from time to time in ATM offerings or negotiated transactions.  The following are issuances of common stock of this program since inception through the completion of the program on May 11, 2010:

Period	Number of Shares Sold	Gross Proceeds		Net Proceeds		Average Sales Price
Fourth quarter 2009	871,600	$	39,830	$	38,916	$	45.70
First quarter 2010	1,285,700	60,092		58,856		46.74
Second quarter 2010	1,021,400	50,078		49,273		49.03
Total	3,178,700	$	150,000	$	147,045	$	47.19

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HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

12           STOCKHOLDERS’ EQUITY (continued)

At-The-Market Equity Offering Programs (continued)

On September 17, 2010, the Company initiated an At-The-Market (“ATM”) equity offering program through which it was authorized to sell up to 3.6 million shares of common stock from time to time in ATM offerings or negotiated transactions.  There were no shares issued from this program during 2010 or during the fourth quarter of 2011.  The following summarizes issuances of common stock from this program since inception through the completion of the program on May 11, 2012:

Period	Number of Shares Sold	Gross Proceeds		Net Proceeds		Average Sales Price
First quarter 2011	841,000	$	47,524	$	46,572	$	56.51
Second quarter 2011	1,485,707	90,102		88,299		60.65
Third quarter 2011	877,400	56,542		55,273		64.44
First quarter 2012	188,393	11,156		10,897		59.22
Second quarter 2012	207,500	13,224		12,957		63.73
Total	3,600,000	$	218,548	$	213,998	$	60.71

On May 14, 2012, the Company initiated another ATM equity offering program through which it is authorized to sell up to 4.4 million shares of common stock from time to time in ATM offerings or negotiated transactions. The following summarizes issuances of common stock from this program since inception through December 31, 2012:

Period	Number of Shares Sold	Gross Proceeds		Net Proceeds		Average Sales Price
Second quarter 2012	698,599	$	42,528	$	41,617	$	60.88
Third quarter 2012	1,262,125	80,303		78,682		63.63
Fourth quarter 2012	10,100	628		609		62.18
Total	1,970,824	$	123,459	$	120,908	$	62.64

The Company used the net proceeds from the ATM offerings primarily for general corporate purposes including acquisitions, development and redevelopment of apartment communities.

Public Equity Offering

On September 20, 2011, the Company publicly offered 6,000,000 shares of its common stock at a price of $58.50 per share, for net proceeds of $336,760 after underwriting discounts, commissions and offering expenses.  All of the 6,000,000 shares offered were purchased and subsequently delivered on September 23, 2011.

Dividend Reinvestment Plan

The Company has a Dividend Reinvestment Plan (the “DRIP”).  The DRIP provides the stockholders of the Company an opportunity to automatically invest their cash dividends in common stock.  In addition, eligible participants may make monthly payments or other voluntary cash investments in shares of common stock.  The maximum monthly investment without prior Company approval is currently $10.  There is no discount offered on the investment.  The Company can meet share demand under the DRIP through share repurchases by the transfer agent in the open market on the Company’s behalf or new share issuance.

84

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

12           STOCKHOLDERS’ EQUITY (continued)

Dividends

Stockholders are taxed on dividends and must report such dividends as ordinary income, capital gains, or return of capital.  The Company has declared and paid a $2.64 distribution per common share (CUSIP 437306103) during its most recent fiscal year.  Pursuant to Internal Revenue Code Section 857(b)(3)(C), for the year ended December 31, 2012, the Company designated the taxable composition of the following cash distributions to holders of common shares in the amounts set forth in the tables below:

					Distribution Type
Declaration Dates	Record Dates	Payable Dates	Distributions Per Share		Ordinary Taxable Dividend		Qualified Dividend		Return of Capital		Long- Term Capital Gain		Unrecaptured Sec. 1250 Gain
2/4/2012	2/16/2012	2/28/2012	$	0.66	75.9761	%	0.0000	%	21.7871	%	1.2194	%	1.0174	%
5/1/2012	5/15/2012	5/25/2012	$	0.66	75.9761	%	0.0000	%	21.7871	%	1.2194	%	1.0174	%
8/1/2012	8/14/2012	8/24/2012	$	0.66	75.9761	%	0.0000	%	21.7871	%	1.2194	%	1.0174	%
10/31/2012	11/15/2012	11/27/2012	$	0.66	75.9761	%	0.0000	%	21.7871	%	1.2194	%	1.0174	%
		Totals	$	2.64	75.9761	%	0.0000	%	21.7871	%	1.2194	%	1.0174	%

The taxable composition of cash distributions for each common share for 2011 and 2010 is as follows:

			Distribution Type
Year	Distributions Per Share		Ordinary Taxable Dividend		Qualified Dividend		Return of Capital		Long- Term Capital Gain		Unrecaptured Sec. 1250 Gain
2011	$	2.48	62.85	%	0.00	%	37.15	%	0.00	%	0.00	%
2010	$	2.32	53.73	%	0.00	%	46.27	%	0.00	%	0.00	%

Total Shares and Units Outstanding

At December 31, 2012, 51,508,142 common shares, and 10,455,593 UPREIT Units were outstanding for a total of 61,963,735 common share equivalents.

85

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

12           STOCKHOLDERS’ EQUITY (continued)

Earnings Per Share

Basic earnings per share (“EPS”) is computed as net income attributable to common stockholders divided by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options (using the treasury stock method) and the conversion of any Senior Notes (through December 21, 2011).  The exchange of an UPREIT Unit for a share of common stock has no effect on diluted EPS as unitholders and stockholders effectively share equally in the net income of the Operating Partnership.  Income from continuing operations and discontinued operations is the same for both the basic and diluted calculation.

The reconciliation of basic and diluted earnings per share for the years ended December 31, 2012, 2011 and 2010, is as follows:

	2012			2011			2010
Numerator:
Income from continuing operations	$	80,942		$	43,786		$	23,935
Less: Income from continuing operations attributable to noncontrolling interest	(14,169		)	(8,997		)	(5,675		)
Income from continuing operations attributable to common stockholders	$	66,773		$	34,789		$	18,260
Discontinued operations	$	82,680		$	3,878		$	2,383
Less: Discontinued operations attributable to noncontrolling interest	(14,151		)	(811		)	(562		)
Discontinued operations attributable to common stockholders	$	68,529		$	3,067		$	1,821
Denominator:
Basic weighted average number of common shares outstanding	49,744,636			41,860,139			36,682,191
Effect of dilutive stock options	566,732			595,708			419,380
Effect of restricted shares	71,268			89,235			68,315
Diluted weighted average number of common shares outstanding	50,382,636			42,545,082			37,169,886
Earnings per common share:
Basic earnings per share:
Income from continuing operations	$	1.34		$	0.83		$	0.50
Discontinued operations	1.38			0.07			0.05
Net income attributable to common stockholders	$	2.72		$	0.90		$	0.55
Diluted earnings per share:
Income from continuing operations	$	1.33		$	0.82		$	0.49
Discontinued operations	1.36			0.07			0.05
Net income attributable to common stockholders	$	2.69		$	0.89		$	0.54

Unexercised stock options to purchase 334,659, 172,810 and 1,702,783 shares of the Company’s common stock were not included in the computations of diluted EPS because the options’ exercise prices were greater than the average market price of the Company’s stock during the years ended December 31, 2012, 2011 and 2010, respectively.  In conjunction with the issuance of the Senior Notes, there were 331,257 potential shares issuable under certain circumstances, none of which were considered dilutive as of December 31, 2010.

86

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN

Description of Stock Benefit Plans

The Company has established stock benefit plans for the purpose of attracting and retaining the services of individuals who are important to the future success of the Company, including key employees, non-employee Directors and other key persons, and to provide them with increased motivation and incentive to exert their best efforts to enhance the long term value of the Company by enlarging their personal stake in its success.

On May 3, 2011, the stockholders of the Company approved the 2011 Stock Benefit Plan (the “2011 Plan”).  The types of awards that may be granted under the 2011 Plan include stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, and dividend equivalent rights.  The 2011 Plan includes an authorization to issue up to 3,000,000 newly authorized shares of the Company’s common stock plus the number of shares available for grant under the 2008 Stock Benefit Plan, which were 521,577 as of December 31, 2012.  The grant of a stock option or stock appreciation right is deemed, for purposes of determining the number of shares available under the 2011 Plan, as an award of one share of common stock for each share of common stock subject to the option or stock appreciation right.  The grant of any full value awards (awards other than stock options or stock appreciation rights) is deemed, for purposes of determining the number of shares available under the 2011 Plan, as an award of 4.28 shares of common stock for each share of common stock subject to the award.  Any forfeitures or cancellations of awards will be returned to the reserved pool under the 2011 Plan in the same manner.  As of December 31, 2012, awards of 3,686 shares which have been forfeited or cancelled have been returned to the 2011 Plan and are available for future grants.  The 2011 Plan succeeds previous plans as described below.

In November 2011, the Company’s Board of Directors approved a multiyear performance-based equity plan (“the 2012 Performance Plan”).  The 2012 Performance Plan is governed by the 2011 Plan.  Awards are in the form of restricted stock units with a service condition and market conditions.

The Company’s 1994 Stock Benefit Plan (the “1994 Plan”) was adopted by the Company at the time of its initial public offering.  On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan, which was subsequently amended (the “2000 Plan”).  On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan and on May 6, 2005, the shareholders approved the Amended and Restated 2003 Stock Benefit Plan (the “2003 Plan”).  On May 1, 2008, the Company adopted the 2008 Stock Benefit Plan (the “2008 Plan”). Participants in each of the above referenced plans (the “Previous Plans”) included officers, non-employee Directors, and key employees of the Company.  The Previous Plans allowed for the award of options, stock appreciation rights and restricted stock; though, no stock appreciation rights were awarded.  No additional awards will be issued under the Previous Plans.

The 2008 Plan limited the number of shares issuable under the plan to 2,450,000.  Stock options awarded reduced the number of shares available for awards by one share for every one share granted.  Awards of restricted stock reduced the number of shares available for award by one share for every one share awarded, up to 250,000; beyond that, restricted stock reduced the number of shares available for award by 3.5 shares for every one share awarded.  During 2009 and 2010, the number of options and shares of restricted stock issued to each non-employee Director were subject to a 2008 Plan provision that they not exceed 6,000 options and 2,000 shares.

87

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN (continued)

Description of Stock Benefit Plans (continued)

Stock options, restricted stock and restricted stock unit awards granted to employees and non-employee Directors under the all stock benefit plans are as follows:

	Employee Awards				Non-Employee Director Awards
Name of Plan	Stock Options Granted	Restricted Stock Granted	Restricted Stock Units Granted(a)	Total Granted	Stock Options Granted	Restricted Stock Granted	Total Granted	Available for Future Grant of Awards
1994 Plan	1,542,381	—	—	1,542,381	153,654	—	153,654	—
2000 Plan	2,101,220	350,702	—	2,451,922	163,760	2,700	166,460	—
2003 Plan	2,737,142	96,822	—	2,833,964	217,723	28,935	246,658	—
2008 Plan	1,354,837	290,131	—	1,644,968	134,146	36,313	170,459	—
2011 Plan	386,609	195,978	114,743	697,330	—	21,003	21,003	1,730,963

(a)Represents service-based awards of 19,119 and market-based awards of 95,624 at the maximum achievable level.

Terms and provisions applicable to an award granted, including vesting provisions, are specified in an award certificate.  Options granted under the 2011 Plan and the 2008 Plan during the years 2012, 2011 and 2010, vest 20% for each year of service until 100% vested on the fifth anniversary and expire after ten years from the date of grant. The exercise price per share for stock options issued under all of the stock benefit plans may not be less than 100% of the closing price of a share of common stock on the date the stock option is granted.  Restricted stock awards granted to Directors vest 100% on the fifth anniversary of the date of grant.  All of the 108,065, 87,913 and 108,252 restricted stock awards granted to employees during 2012, 2011 and 2010 vest 25% on each anniversary of the date of grant for a period of four years.  Vesting conditions for restricted stock unit awards is more fully described under the heading “Restricted Stock Units” below.  The Company has a policy of issuing new shares upon the exercise of stock options and upon the vesting of restricted stock.

Stock Options

Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected dividend yields, volatility, option lives and interest rates.  The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period.  In determining the service period, the Company considers service requirements, the vesting period and retirement eligibility of the grantee.  Authoritative guidance requires the estimation of forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period should actual forfeitures differ from such estimates.  Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and impacts the amount of unamortized compensation expense to be recognized in future periods.

88

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN (continued)

Stock Options (continued)

The following weighted average assumptions were used for the years ended December 31, 2012, 2011 and 2010:

Assumption	2012		2011		2010
Expected dividend yield	4.22	%	4.32	%	5.87	%
Expected volatility	26.53	%	25.98	%	19.31	%
Expected lives of the employee options	6.0 Years		6.0 Years		5.7 Years
Expected lives of the Director options	—		—		6.7 Years
Risk free interest rate	1.03	%	2.36	%	2.75	%

The expected dividend yield was based on the historical dividend growth rates and the historical annual dividends.  The expected volatility was based on the historical volatility of the Company’s common stock.  The weighted average expected option lives, for both employee and Director options, with a lifetime of ten years, was based on the Company’s historical data for prior period stock option exercise and cancellation activity.  The risk free interest rates for the expected life of the options were based on the implied U.S. Treasury yield curve.

A summary of stock option activity for the year ended December 31, 2012 is as follows:

	Number of Options		Weighted Average Exercise Price Per Option		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding at December 31, 2011	2,774,372		$	46.14
Granted	219,799		63.69
Exercised	(436,430	)	41.77
Cancelled	(1,400	)	37.07
Options outstanding at December 31, 2012	2,556,341		$	48.40	5.4	$	33,002
Options exercisable at December 31, 2012	1,721,270		$	47.04	4.4	$	24,563

A summary of unvested stock option activity for the year ended December 31, 2012 is as follows:

	Number of Options		Weighted Average Exercise Price Per Option
Unvested stock options at December 31, 2011	1,078,921		$	47.48
Granted	219,799		63.69
Vested	(462,249	)	48.51
Cancelled	(1,400	)	37.07
Unvested stock options at December 31, 2012	835,071		$	51.20

As of December 31, 2012, there was $1,483 of total unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 1.63 years.

89

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN (continued)

Stock Options (continued)

A summary of stock option activity for the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012		2011		2010
Stock-based compensation costs recognized	$	3,052	$	2,813	$	2,818
Fair value of options vested	2,717		2,562		2,457
Cash received from the exercise of options	18,228		23,843		14,090
Intrinsic value of options exercised	8,737		9,288		5,723
Grant date fair value of options granted to employees, per share	9.32		9.95		4.14
Grant date fair value of options granted to Directors, per share	—		—		4.33
Number of options granted to employees	219,799		166,810		352,454
Number of options granted to Directors	—		—		48,490

Restricted Stock

Stock-based compensation cost for restricted stock is measured based on the closing price of the Company’s common stock on the date of grant and is recognized ratably on a straight-line basis over the requisite service period.  In determining the service period, the Company considers service requirements, the vesting period and retirement eligibility of the grantee.

A summary of restricted stock activity for the year ended December 31, 2012 is as follows:

	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding and unvested at December 31, 2011	289,448		$	50.29
Granted	119,604		63.62
Vested and issued	(107,546	)	50.39
Cancelled	(6,472	)	45.05
Restricted stock outstanding and unvested at December 31, 2012	295,034		$	55.77

As of December 31, 2012, there was $5,258 of total unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of 2.14 years.

A summary of restricted stock activity for the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012		2011		2010
Stock-based compensation costs recognized	$	7,659	$	6,226	$	4,527
Fair value of restricted shares vested	6,707		5,246		3,447
Weighted average price of shares granted, per share	63.62		62.09		49.35
Number of restricted shares granted to employees	108,065		87,913		108,252
Number of restricted shares granted to Directors	11,539		9,464		12,760

90

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN (continued)

Restricted Stock Units

On February 14, 2012, awards in connection with the 2012 Performance Plan, with an estimated fair value of $4,084, were granted to executive officers of the Company.  Awards are in the form of restricted stock units with a service condition and market conditions, with dividend equivalent rights.  Seventy-five percent of the total award value is market-based and subject to three Total Shareholder Return (“TSR”) market measures:  50% absolute Home Properties TSR, 25% relative NAREIT All Equity REIT Index, and 25% relative NAREIT Apartment Index.  The remaining twenty-five percent is service-based and vests over three years.  The measurement period for the 2012 Performance Plan began on January 1, 2012 and will end on December 31, 2014.

At the end of the three-year measurement period ending December 31, 2014, the Company’s TSR results will be compared to the Threshold, Target and High hurdles established at the beginning of the three-year measurement period as defined below:

	2012 — 2014 Performance Goals
Market Requirements	Threshold	Target	High
Absolute TSR	7%	9%	11%
All REIT TSR Index	Absolute TSR is within 350 basis points below the index return	Absolute TSR is within 100 basis points below or above the index return	Absolute TSR is greater than 250 basis points above the index return
Apartment TSR Index	Absolute TSR is within 350 basis points below the index return	Absolute TSR is within 100 basis points below or above the index return	Absolute TSR is greater than 250 basis points above the index return

If the Company’s TSR results meet or exceed the Threshold hurdle for any of the three performance measures, an equity award will be granted in accordance with the vesting conditions as outlined in the 2012 Performance Plan.  Actual results achieved that fall between the Threshold and High hurdles will result in a prorated number of awards granted.

91

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

13           STOCK BENEFIT PLAN (continued)

Restricted Stock Units (continued)

The fair value of the restricted stock unit awards was estimated on the date of grant using a multifactor Monte Carlo simulation model, which incorporates various assumptions including the baseline share value, dividend yield, estimated volatility figures and risk free rates over the three-year measurement period.  The Company recognizes compensation expense for the 2012 Performance Plan over the three-year measurement period for 100% of each award with a service condition and 50% of each award with a market condition. For the remaining 50% of each award with a market condition, the Company recognizes compensation expense over a four year period which includes the three-year measurement period and a one-year vesting period subsequent to the end of the measurement period. The recognition of compensation cost takes into account retirement eligibility.

The following weighted average assumptions were used for grants awarded during the year ended December 31, 2012:

Assumption	2012
Baseline share value	$	55.87
Expected dividend yield	4.45		%
Expected volatility	31.24		%
Risk free interest rate	0.22		%
Estimated fair value per share of the market-based awards	$	51.40
Estimated fair value per share of the service-based awards	$	59.32

A summary of unvested restricted stock unit activity for the year ended December 31, 2012 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value Per Share
Restricted stock units unvested at December 31, 2011	—		$	—
Granted (a)	114,743		53.39
Vested and issued (b)	(6,490	)	53.39
Forfeited	(3,245	)	53.39
Restricted stock units unvested at December 31, 2012	105,008		$	53.39

(a)Represents service-based awards of 19,119 and market-based awards of 95,624 at the maximum achievable level.

(b)Awards were issued in connection with the departure of an executive officer of the Company and were calculated in accordance with the 2012 Performance Plan.

During the year ended December 31, 2012, the Company recognized stock-based compensation expense of $3,240 for the 2012 Performance Plan.  As of December 31, 2012, there was $844 of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.7 years.

92

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

14           EMPLOYEE BENEFIT PLANS

401(k) Savings Plan

The Company sponsors a defined contribution plan.  Under the plan, the Company will match 75% of the first 4% of each employee’s contributions not to exceed 3% of that employee’s eligible compensation.  The matching expense under this plan charged to operations were $1,046, $1,021 and $946 from continuing operations, and $20, $22 and $29 from discontinued operations, for the years ended December 31, 2012, 2011 and 2010, respectively.

Incentive Bonus Plans

The Company sponsors two incentive bonus plans.  The quarterly site bonus plan is designed to encourage and reward property operations employees for superior financial performance as measured versus budget.  The annual incentive bonus plan is designed to motivate executive officers and certain other corporate and regional employees to maximize the Company’s annual operating and financial performance as measured in year over year actual financial measures, annual performance as compared to a peer group and, beginning in 2011, attainment of certain individual and team objectives.  The expense under these plans was $7,034, $7,874 and $5,030 for the years ended December 31, 2012, 2011 and 2010, respectively.

Deferred Bonus Plan

The Company sponsors a deferred bonus plan, which permits certain employees to defer receipt of up to 100% of their annual incentive bonus for three, five or ten years.  Under the plan, the Company will match 10% of the amount deferred and the match vests after three years.  Each deferral and match is credited to an individual employee account with the number of shares of the Company’s common stock that could be purchased with the amounts deferred and matched at the common stock closing price the day before the bonus would have otherwise been paid.  An equivalent of dividends on those shares is also credited to the employee account on dividend payment dates based upon the common stock closing price on those dates.  Payments out of deferred accounts are made by issuance of common stock.  The total amounts deferred were $1,390 and $960 at December 31, 2012 and 2011, respectively.  The matching expense under this plan was $10, $15 and $11 for the years ended December 31, 2012, 2011 and 2010, respectively.

Deferred Compensation Plan

In 2011, the Company initiated a deferred compensation plan, which permits certain employees to defer up to 50% of their annual base pay until retirement.  Upon retirement, the employee can elect a lump sum distribution or annual payments over two to ten years.  There is no Company match and all deferred amounts are 100% vested.  The total amount deferred was $405 at December 31, 2012.

15           SEGMENT REPORTING

The Company is engaged in the ownership and management of market rate apartment communities.  Each apartment community is considered a separate operating segment.  Each segment on a standalone basis is less than 10% of the revenues, net operating income and assets of the combined reported operating segment and meets a majority of the aggregation criteria under authoritative guidance.  There is no resident who has one or more leases which, in the aggregate, account for more than 10% of the aggregate gross revenues for the years ended December 31, 2012, 2011 or 2010.  The operating segments are aggregated as Core and Non-core properties.

Non-segment revenue to reconcile to total revenue consists of other income.  Non-segment assets to reconcile to total assets include cash and cash equivalents, cash in escrows, accounts receivable, prepaid expenses, deferred charges and other assets.

93

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

15           SEGMENT REPORTING (continued)

Core properties consist of apartment communities which have been owned more than one full calendar year.  Therefore, the Core properties represent communities owned as of January 1, 2011.  Non-core properties consist of apartment communities acquired, developed or redeveloped during 2011 and 2012, such that comparable operating results are not available.

The Company assesses and measures segment operating results based on a performance measure referred to as net operating income.  Net operating income is defined as total revenues less operating and maintenance expenses.  The accounting policies of the segments are the same as those described in Notes 1, 2 and 3.

The revenues and net operating income for each of the reportable segments are summarized as follows for the years ended December 31, 2012, 2011 and 2010:

	2012			2011			2010
Revenues
Apartments owned
Core properties	$	554,429		$	530,322		$	498,683
Non-core properties	89,609			31,079			—
Reconciling items	310			155			106
Total revenues	$	644,348		$	561,556		$	498,789
Net operating income
Apartments owned
Core properties	$	351,610		$	325,194		$	295,262
Non-core properties	57,388			19,138			—
Reconciling items	310			155			106
Net operating income, including reconciling items	409,308			344,487			295,368
General and administrative expenses	(34,174		)	(29,145		)	(25,138		)
Interest expense	(125,809		)	(127,618		)	(120,652		)
Depreciation and amortization	(165,642		)	(140,713		)	(122,772		)
Other expenses	(2,741		)	(3,225		)	(2,871		)
Income from continuing operations	$	80,942		$	43,786		$	23,935

The assets for each of the reportable segments are summarized as follows as of December 31, 2012 and 2011:

Assets	2012		2011
Apartments owned
Core properties	$	3,207,303	$	3,214,456
Non-core properties	1,139,083		844,109
Reconciling items	105,106		94,641
Total assets	$	4,451,492	$	4,153,206

94

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

16           TRANSACTIONS WITH AFFILIATES

The Company leases its corporate office space from a former affiliate.  The rent for the corporate office space is a gross rent that includes real estate taxes and common area maintenance.  In July 2009, the Company extended the lease on its corporate office space through September 2019 (with a right to terminate the lease in 2016, at the Company’s option), plus two five-year renewal options.  Rental expense was $1,377, $1,350 and $1,353 for each of the years ended December 31, 2012, 2011 and 2010, respectively.

17           COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company has entered into operating leases for office space and office equipment with remaining terms of 1 to 5 years.  Future minimum rental payments under non-cancelable operating leases in effect as of December 31, 2012 were as follows:

2013	$	1,860
2014	1,840
2015	1,844
2016	1,621
2017	294
Thereafter	—
	$	7,459

The Company incurred $2,574, $2,567 and $2,599 of rent expense under operating leases in 2012, 2011 and 2010, respectively.

Letters of Credit

As of December 31, 2012 the Company had issued $16,432 in letters of credit, which were provided under the Company’s $275,000 unsecured Credit Agreement.  The letters of credit were required to be issued under certain tax escrow agreements, construction projects, workers’ compensation and health insurance policies.

Debt Covenants

The unsecured notes payable and unsecured Credit Agreement contain restrictions which, among other things, require maintenance of certain financial ratios.  The Company was in compliance with these financial ratios for all periods presented.

Included in the Company’s consolidated balance sheet at December 31, 2012 are assets of its subsidiary Home Properties Fair Oaks, LLC, owner of The Courts at Fair Oaks, Fairfax County, VA, that are pledged as collateral for specific indebtedness and are not available to satisfy any other obligations of the Company.

Tax Protection Obligations

In connection with various UPREIT transactions, the Company has agreed to maintain certain levels of nonrecourse debt for a period of 5 to 10 years associated with the contributed properties acquired.  In addition, the Company is restricted in its ability to sell certain contributed properties (10% of the owned portfolio at December 31, 2012) for a contract period of 7 to 15 years except through a tax deferred Internal Revenue Code Section 1031 like-kind exchange.  The remaining terms on the sale restrictions range from 3 months to 4.5 years.

95

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

17           COMMITMENTS AND CONTINGENCIES (continued)

Limited Partnership

For periods before October 13, 2010, the Company, through its general partnership interest in an affordable property limited partnership referred to as the VIE, had guaranteed certain low income housing tax credits to limited partners in this partnership through 2015 totaling approximately $3,000.  As more fully described in Note 4, the Company’s general partner interest in this entity was sold on October 13, 2010.  The tax credit guarantee was reduced to a $3,000 secondary guarantee.  As of December 31, 2012, there were no known conditions that would make such payments necessary relating to the tax credit guarantee; therefore, no liability has been recorded in the financial statements.

Executive Retention Plan

The Executive Retention Plan provides for severance benefits and other compensation to be paid to certain employees in the event of a change in control of the Company and a subsequent termination of their employment.

Contingencies

The Company is not a party to any legal proceedings that are expected to have a material adverse effect on the Company’s liquidity, financial position or results of operations.  The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of employment and resident discrimination are also periodically brought, most of which also are covered by insurance.  While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

18           DISCONTINUED OPERATIONS

Included in discontinued operations for the years ended December 31, 2012, 2011 and 2010 are the operating results of six apartment community dispositions, all sold in 2012, and the operating results of the VIE for which the Company’s general partnership interest was sold in 2010.

A summary of 2012 community dispositions is as follows:

Apartment Community	Region	Date Sold	Number of Units	Sales Price		Sales Price Per Unit		Gain on Sale
Chesterfield Apartments	Philadelphia	9/13/2012	247	$	25,155	$	102	$	12,209
Woodholme Manor	Baltimore	9/20/2012	177	16,000		90		7,449
Curren Terrace	Philadelphia	10/11/2012	318	29,793		94		15,872
Falcon Crest	Baltimore	11/8/2012	396	46,000		116		27,801
Timbercroft	Baltimore	12/13/2012	284	29,150		103		12,126
Glen Brook	Philadelphia	12/21/2012	174	13,500		78		5,075
			1,596	$	159,598			$	80,532

96

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

18           DISCONTINUED OPERATIONS (continued)

The operating results of discontinued operations are summarized as follows for the years ended December 31, 2012, 2011 and 2010:

	2012		2011		2010
Revenues:
Rental income	$	14,360	$	16,590	$	19,455
Property other income	1,834		1,826		1,790
Other income	—		—		669
Total revenues	16,194		18,416		21,914
Expenses:
Operating and maintenance	6,201		7,468		10,506
Interest expense, including prepayment penalties	4,490		2,965		4,276
Depreciation and amortization	3,355		4,105		4,736
Total expenses	14,046		14,538		19,518
Income from discontinued operations	2,148		3,878		2,396
Gain (loss) on disposition of property	80,532		—		(13		)
Discontinued operations	$	82,680	$	3,878	$	2,383

19           SUPPLEMENTAL CASH FLOW DISCLOSURES

Supplemental cash flow information including non-cash financing and investing activities for the years ended December 31, 2012, 2011 and 2010 are as follows:

	2012			2011			2010
Supplemental disclosures:
Cash paid for interest, net of capitalized interest	$	127,249		$	126,267		$	117,292
Interest capitalized	4,380			5,255			9,384
Non-cash investing and financing activities:
Note receivable converted to real estate	608			—			—
Mortgage loans assumed associated with property acquisitions	7,284			—			155,639
Mortgage note premium (discount) written off	(104		)	(17		)	270
Issuance of UPREIT Units associated with property acquisitions	—			—			4,845
Exchange of UPREIT Units for common shares	6,899			11,399			10,234
Transfers of construction in progress to buildings, improvements and equipment	42,732			100,266			110,902
Capital improvements to properties included in accounts payable	6,130			6,577			5,292
Net real estate disposed in connection with VIE deconsolidation	—			—			13,837
Other assets disposed in connection with VIE deconsolidation	—			—			1,228
Mortgage debt disposed in connection with VIE deconsolidation	—			—			15,762
Other liabilities disposed in connection with VIE deconsolidation	—			—			1,031

97

HOME PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

20           QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED)

Quarterly financial information for the years ended December 31, 2012 and 2011 are as follows:

	2012
	First		Second		Third		Fourth
Total revenue	$	155,516	$	157,649	$	164,524	$	166,659
Net income attributable to common stockholders	15,388		13,727		36,413		69,774
Basic earnings per share data:
Net income attributable to common stockholders	0.32		0.28		0.72		1.36
Diluted earnings per share data:
Net income attributable to common stockholders	0.31		0.28		0.71		1.34

	2011
	First		Second		Third		Fourth
Total revenue	$	136,764	$	136,168	$	140,030	$	148,594
Net income attributable to common stockholders	7,224		8,195		8,508		13,929
Basic earnings per share data:
Net income attributable to common stockholders	0.19		0.21		0.20		0.29
Diluted earnings per share data:
Net income attributable to common stockholders	0.19		0.20		0.20		0.29

The sum of the quarterly earnings per common share amounts may not equal the annual earnings per common share amounts due primarily to changes in the number of common shares outstanding quarter to quarter.  The quarterly reports for the years ended December 31, 2012 and 2011 have been reclassified to reflect discontinued operations in accordance with authoritative guidance.

21           SUBSEQUENT EVENTS

On January 2, 2013, awards in connection with the 2012 Performance Plan, with an estimated fair value of $3,653, were granted to executive officers of the Company.  Awards are in the form of restricted stock units with a service condition and market conditions.  The measurement period for these awards began on January 1, 2013 and will end on December 31, 2015.  Expense attributed to these awards will be recognized based on the underlying vesting conditions of the awards which substantially vest during the measurement period, taking into account retirement eligibility.

On February 2, 2013, the Board of Directors declared a dividend of $0.70 per share on the Company’s common stock and approved a distribution of $0.70 per UPREIT Unit for the quarter ended December 31, 2012.  The dividend and distribution is payable February 26, 2013, to stockholders and unitholders of record on February 14, 2013.

98

SCHEDULE II

HOME PROPERTIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(Dollars in thousands)

	Balance at		Charged to		Adjustments/
	Beginning		Costs and		Amounts			Balance at
	of Year		Expenses		Written Off			End of Year
Allowance for Doubtful Receivables
2012	$	2,869	$	5,886	$	(5,977	)	$	2,778
2011	3,134		6,593		(6,858		)	2,869
2010	3,220		6,636		(6,722		)	3,134
Deferred Tax Asset Valuation Allowance
2012	$	13,185	$	—	$	(17	)	$	13,168
2011	12,750		—		435			13,185
2010	10,195		—		2,555			12,750

99

SCHEDULE III

HOME PROPERTIES, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2012

(Dollars in thousands)

					UPREIT		Initial Cost		UPREIT		Costs				Total Cost						Total Cost,
					Unit		Buildings,		Unit		Capitalized				Buildings,						Net of		Year of
	Encum-				Alloc.		Improvements		Alloc.		Subsequent to				Improvements				Accumulated		Accumulated		Acquisition or
Community	brances		Land		Land(a)		& Equipment		Bldg.(a)		Acquisition		Land		& Equipment		Total(b)		Depreciation		Depreciation		Completion
1200 East West	$	—	$	13,068	$	—	$	—	$	—	$	71,530	$	13,068	$	71,530	$	84,598	$	5,541	$	79,057	2010	(c)
Annapolis Roads	23,345		14,400		—		18,035		—		6,191		14,400		24,226		38,626		1,966		36,660		2010
Arbor Park of Alexandria	94,345		8,528		429		58,912		4,286		46,589		8,957		109,787		118,744		34,550		84,194		2000
Barrington Gardens	10,597		888		35		6,658		296		6,342		923		13,296		14,219		3,685		10,534		2005
Bayview/Colonial	—		1,600		71		8,471		709		5,650		1,671		14,830		16,501		5,669		10,832		2000
Blackhawk	—		2,968		83		14,568		858		8,408		3,051		23,834		26,885		8,882		18,003		2000
Bonnie Ridge	49,975		4,830		411		42,769		4,147		36,723		5,241		83,639		88,880		34,975		53,905		1999
Braddock Lee	—		3,810		152		8,842		1,488		8,733		3,962		19,063		23,025		8,590		14,435		1998
Cambridge Village	—		2,460		54		3,188		520		2,624		2,514		6,332		8,846		2,246		6,600		2002
Canterbury	41,538		4,944		235		21,384		2,353		15,470		5,179		39,207		44,386		14,543		29,843		1999
Castle Club	—		948		57		8,933		566		6,856		1,005		16,355		17,360		6,024		11,336		2000
Charleston Place	73,633		22,764		—		84,648		—		8,389		22,764		93,037		115,801		6,166		109,635		2010
Chatham Hill	43,164		1,848		286		46,150		2,434		15,467		2,134		64,051		66,185		16,038		50,147		2004
Cider Mill	60,134		15,552		464		65,939		4,549		17,144		16,016		87,632		103,648		26,034		77,614		2002
Cinnamon Run	53,284		7,731		231		59,693		1,934		8,852		7,962		70,479		78,441		14,192		64,249		2005
Country Village	17,975		2,236		113		11,149		1,120		11,793		2,349		24,062		26,411		10,551		15,860		1998
Courts at Huntington Station	—		33,409		53		—		—		88,431		33,462		88,431		121,893		5,665		116,228		2011	(c)
Courtyards Village	—		3,360		—		9,824		525		5,591		3,360		15,940		19,300		5,363		13,937		2001
Crescent Club	—		2,338		—		28,792		—		4,966		2,338		33,758		36,096		2,257		33,839		2010
Cypress Place	9,927		2,304		45		7,861		479		5,959		2,349		14,299		16,648		5,308		11,340		2000
Devonshire Hills	73,745		27,415		574		66,716		5,726		25,929		27,989		98,371		126,360		29,131		97,229		2001
Dunfield	11,003		1,683		—		30,302		—		7,368		1,683		37,670		39,353		5,927		33,426		2007
East Hill Gardens	—		231		24		1,560		241		1,567		255		3,368		3,623		1,439		2,184		1998
East Meadow	14,336		2,250		89		10,803		863		4,328		2,339		15,994		18,333		5,182		13,151		2000
Elmwood Terrace	26,052		6,048		155		14,680		1,561		13,161		6,203		29,402		35,605		10,794		24,811		2000
Falkland Chase	34,601		9,000		327		49,753		3,008		7,274		9,327		60,035		69,362		15,091		54,271		2003
Fox Hall	47,000		9,959		—		51,874		—		16,283		9,959		68,157		78,116		12,079		66,037		2007
Gardencrest	—		24,674		507		61,526		4,974		27,733		25,181		94,233		119,414		29,228		90,186		2002
Gateway Village	—		1,320		71		6,621		695		3,739		1,391		11,055		12,446		4,117		8,329		1999
Glen Manor	7,716		1,044		44		4,565		440		4,241		1,088		9,246		10,334		3,794		6,540		1997
Golf Club	31,984		3,990		187		21,298		1,840		17,368		4,177		40,506		44,683		15,384		29,299		2000
Hackensack Gardens	8,275		2,376		50		10,900		423		6,862		2,426		18,185		20,611		4,732		15,879		2005
Hawthorne Court	32,971		8,940		260		23,446		2,521		22,330		9,200		48,297		57,497		15,633		41,864		2002
Heritage Square	—		2,000		58		4,805		566		3,057		2,058		8,428		10,486		2,722		7,764		2002
Heritage Woods	14,131		1,602		—		12,420		—		4,124		1,602		16,544		18,146		3,337		14,809		2006
Highland House	5,548		3,414		—		14,761		—		3,008		3,414		17,769		21,183		3,423		17,760		2006
Hill Brook Place	12,288		2,192		85		9,118		848		10,105		2,277		20,071		22,348		7,224		15,124		1999
Holiday Square	—		3,575		77		6,108		722		2,840		3,652		9,670		13,322		2,850		10,472		2002

100

			UPREIT	Initial Cost	UPREIT	Costs		Total Cost			Total Cost,
			Unit	Buildings,	Unit	Capitalized		Buildings,			Net of	Year of
	Encum-		Alloc.	Improvements	Alloc.	Subsequent to		Improvements		Accumulated	Accumulated	Acquisition or
Community	brances	Land	Land(a)	& Equipment	Bldg.(a)	Acquisition	Land	& Equipment	Total(b)	Depreciation	Depreciation	Completion
Home Properties of Bryn Mawr	22,785	3,160	154	17,956	1,537	17,415	3,314	36,908	40,222	12,878	27,344	2000
Home Properties of Devon	59,236	6,280	332	35,643	3,280	35,981	6,612	74,904	81,516	27,270	54,246	2000
Howard Crossing	—	46,044	—	138,871	—	2,510	46,044	141,381	187,425	2,255	185,170	2012
Hunters Glen	—	2,239	—	4,729	—	1,037	2,239	5,766	8,005	326	7,679	2011
Jacob Ford Village	—	6,750	—	20,022	—	8,807	6,750	28,829	35,579	5,538	30,041	2007
Lake Grove	—	7,360	254	11,952	2,557	19,216	7,614	33,725	41,339	15,283	26,056	1997
Lakeview	8,841	636	59	4,552	590	4,621	695	9,763	10,458	4,031	6,427	1998
Lakeview Townhomes	—	1,118	—	13,335	—	2,288	1,118	15,623	16,741	1,080	15,661	2010
Liberty Commons	—	1,330	15	—	125	13,459	1,345	13,584	14,929	4,719	10,210	2005	(c)
Liberty Place	—	2,033	—	13,125	—	2,994	2,033	16,119	18,152	3,137	15,015	2006
Mid-Island Estates	18,850	4,160	128	6,567	1,268	7,577	4,288	15,412	19,700	7,096	12,604	1997
Middlebrooke	—	2,888	—	14,369	—	3,175	2,888	17,544	20,432	1,514	18,918	2010
Mill Towne Village	24,239	3,840	154	13,279	1,486	14,135	3,994	28,900	32,894	10,757	22,137	2001
Morningside Heights	—	6,147	406	28,699	4,000	35,833	6,553	68,532	75,085	29,427	45,658	1998
Mount Vernon Square	—	55,810	—	86,946	—	20,971	55,810	107,917	163,727	20,007	143,720	2006
New Orleans Park	22,943	2,920	124	13,215	1,227	14,541	3,044	28,983	32,027	12,088	19,939	1997
Newport Village	—	56,501	—	147,420	—	5,508	56,501	152,928	209,429	5,202	204,227	2011
Northwood	10,219	804	71	14,299	602	4,704	875	19,605	20,480	4,841	15,639	2004
Oak Manor	8,093	616	70	4,111	690	3,834	686	8,635	9,321	3,661	5,660	1998
Owings Run	40,823	5,533	255	32,622	2,538	10,217	5,788	45,377	51,165	16,313	34,852	1999
Park Shirlington	26,151	4,410	157	10,180	1,581	9,211	4,567	20,972	25,539	10,044	15,495	1998
Peppertree Farm	76,123	12,571	317	83,804	2,654	21,165	12,888	107,623	120,511	22,819	97,692	2005
Pleasant View	93,376	5,710	499	47,816	5,021	33,413	6,209	86,250	92,459	34,441	58,018	1998
Pleasure Bay	—	1,620	124	6,234	1,210	11,465	1,744	18,909	20,653	7,284	13,369	1998
Racquet Club East	36,732	1,868	218	23,107	2,137	16,109	2,086	41,353	43,439	15,398	28,041	1998
Racquet Club South	—	309	35	3,891	353	3,223	344	7,467	7,811	3,067	4,744	1999
Redbank Village	17,743	2,000	164	14,030	1,686	13,789	2,164	29,505	31,669	11,549	20,120	1998
Ridgeview at Wakefield Valley	17,749	2,300	72	17,247	635	4,855	2,372	22,737	25,109	5,713	19,396	2005
Ridley Brook	12,808	1,952	74	7,719	748	7,018	2,026	15,485	17,511	5,694	11,817	1999
Royal Gardens	47,000	5,500	258	14,067	2,603	19,103	5,758	35,773	41,531	16,035	25,496	1997
Saddle Brooke	29,441	7,609	—	44,040	—	8,892	7,609	52,932	60,541	6,593	53,948	2008
Sayville Commons	38,045	8,005	187	55,346	1,599	2,701	8,192	59,646	67,838	11,578	56,260	2005
Selford	8,667	1,224	57	4,200	565	3,462	1,281	8,227	9,508	3,283	6,225	1999
Seminary Hill	—	2,960	135	10,194	1,344	10,535	3,095	22,073	25,168	9,154	16,014	1999
Seminary Towers	53,515	5,480	292	19,348	2,868	23,040	5,772	45,256	51,028	17,719	33,309	1999
Sherry Lake	24,932	2,428	165	15,620	1,617	12,591	2,593	29,828	32,421	12,008	20,413	1998
Somerset Park	—	7,253	—	12,937	—	204	7,253	13,141	20,394	449	19,945	2011
South Bay Manor	6,572	1,098	45	1,958	440	5,265	1,143	7,663	8,806	3,096	5,710	2000
Southern Meadows	39,661	9,040	343	31,875	3,397	11,634	9,383	46,906	56,289	15,238	41,051	2001
Stone Ends	24,412	5,600	166	28,468	1,554	6,623	5,766	36,645	42,411	9,708	32,703	2003
Tamarron	14,344	1,320	92	8,474	896	4,331	1,412	13,701	15,113	4,803	10,310	1999
The Apts at Cambridge Court	—	7,378	—	82,641	—	2,219	7,378	84,860	92,238	3,249	88,989	2011
The Apts at Cobblestone Square	—	12,127	—	—	—	36,564	12,127	36,564	48,691	829	47,862	2012	(c)
The Apts at Wellington Trace	22,937	3,060	167	26,305	1,418	1,275	3,227	28,998	32,225	6,775	25,450	2004
The Brooke at Peachtree Village	11,976	992	51	15,137	437	4,714	1,043	20,288	21,331	4,280	17,051	2005
The Colony	—	7,830	197	34,121	2,025	16,220	8,027	52,366	60,393	19,584	40,809	1999

101

					UPREIT		Initial Cost		UPREIT		Costs				Total Cost						Total Cost,
					Unit		Buildings,		Unit		Capitalized				Buildings,						Net of		Year of
	Encum-				Alloc.		Improvements		Alloc.		Subsequent to				Improvements				Accumulated		Accumulated		Acquisition or
Community	brances		Land		Land(a)		& Equipment		Bldg.(a)		Acquisition		Land		& Equipment		Total(b)		Depreciation		Depreciation		Completion
The Commons at Haynes Farm	—		7,550		—		32,771		—		3,532		7,550		36,303		43,853		1,602		42,251		2011
The Courts at Dulles	—		15,413		—		76,946		—		1,437		15,413		78,383		93,796		2,401		91,395		2011
The Courts at Fair Oaks	48,164		12,377		—		61,107		—		2,563		12,377		63,670		76,047		4,031		72,016		2010
The Coves at Chesapeake	—		8,915		—		57,974		—		10,793		8,915		68,767		77,682		12,441		65,241		2006
The Gates of Deer Grove	—		1,247		—		18,973		—		682		1,247		19,655		20,902		579		20,323		2011
The Greens at Columbia	9,270		5,040		—		20,886		—		2,257		5,040		23,143		28,183		1,641		26,542		2010
The Hamptons	48,910		5,749		303		50,489		2,599		15,278		6,052		68,366		74,418		17,321		57,097		2004
The Heights at Marlborough	22,636		6,253		—		44,268		—		9,082		6,253		53,350		59,603		9,251		50,352		2006
The Landings	25,468		2,459		162		16,753		1,595		13,803		2,621		32,151		34,772		13,511		21,261		1996
The Manor - MD	45,078		8,700		257		27,703		2,513		12,860		8,957		43,076		52,033		14,542		37,491		2001
The Manor - VA	13,463		1,386		85		5,738		832		6,713		1,471		13,283		14,754		5,662		9,092		1999
The Manor East	7,136		5,330		—		11,407		—		748		5,330		12,155		17,485		234		17,251		2012
The Meadows at Marlborough	20,643		6,598		—		28,736		—		6,215		6,598		34,951		41,549		6,169		35,380		2006
The New Colonies	—		1,680		151		21,350		1,545		14,279		1,831		37,174		39,005		16,488		22,517		1998
The Sycamores	20,690		4,625		136		15,737		1,283		3,865		4,761		20,885		25,646		5,990		19,656		2002
The Townhomes of Beverly	—		5,820		—		30,465		—		5,826		5,820		36,291		42,111		6,214		35,897		2007
The Village at Marshfield	—		3,113		134		28,354		1,158		7,739		3,247		37,251		40,498		8,718		31,780		2004
Top Field	16,153		1,635		—		16,684		—		4,737		1,635		21,421		23,056		4,014		19,042		2006
Trexler Park	37,417		2,490		114		13,841		1,129		9,657		2,604		24,627		27,231		8,981		18,250		2000
Trexler Park West	—		2,684		—		—		—		23,460		2,684		23,460		26,144		7,736		18,408		2006	(c)
Village at Potomac Falls	—		7,380		—		30,960		—		1,914		7,380		32,874		40,254		2,232		38,022		2010
Village Square	39,285		2,590		191		13,306		1,900		11,280		2,781		26,486		29,267		9,760		19,507		1999
Vinings at Hampton Village	—		1,772		77		12,148		657		4,541		1,849		17,346		19,195		4,553		14,642		2004
Virginia Village	28,279		5,160		207		21,918		2,027		15,932		5,367		39,877		45,244		13,123		32,121		2001
Waterview	—		1,531		—		23,030		—		3,596		1,531		26,626		28,157		1,178		26,979		2011
Wayne Village	25,038		1,849		177		12,895		1,744		9,828		2,026		24,467		26,493		10,083		16,410		1998
West Springfield	25,228		2,440		194		31,766		1,845		5,446		2,634		39,057		41,691		10,557		31,134		2002
Westbrooke	—		1,103		—		5,229		—		1,635		1,103		6,864		7,967		649		7,318		2010
Westchester West	33,508		6,978		—		41,513		—		4,597		6,978		46,110		53,088		5,547		47,541		2008
Westwood Village	45,329		7,260		270		22,757		2,629		12,945		7,530		38,331		45,861		12,432		33,429		2002
Westwoods	—		1,260		—		2,694		—		700		1,260		3,394		4,654		604		4,050		2007
William Henry	27,838		4,666		187		22,277		1,839		17,539		4,853		41,655		46,508		14,531		31,977		2000
Windsor Realty	—		402		34		3,300		337		2,639		436		6,276		6,712		2,710		4,002		1998
Woodleaf	—		2,862		122		17,720		1,028		3,326		2,984		22,074		25,058		5,818		19,240		2004
Woodmont Village	9,714		2,880		63		5,699		622		3,405		2,943		9,726		12,669		3,117		9,552		2002
Woodway at Trinity Centre	—		17,136		—		78,253		—		1,182		17,136		79,435		96,571		1,394		95,177		2012
Yorkshire Village	—		1,200		27		2,016		260		1,551		1,227		3,827		5,054		1,249		3,805		2002
Other Assets (d)	—		604		—		—		—		114,443		604		114,443		115,047		23,632		91,415		Various
	$	2,165,027	$	777,649	$	13,955	$	3,075,206	$	134,922	$	1,453,494	$	791,604	$	4,663,622	$	5,455,226	$	1,108,840	$	4,346,386

(a)In 2008 and prior periods, authoritative guidance required the exchange of noncontrolling interests(UPREIT Units) for shares to be   recorded under the purchase method with the difference between the fair value and book value of an exchanged UPREIT Unit allocated to real estate.

(b)The aggregate cost for federal income tax purposes was approximately $4,972,195.

(c)Property was constructed by the Company and completed in the year indicated.

(d)Includes construction in progress of $83,241 and corporate office assets of $31,202.

102

SCHEDULE III

HOME PROPERTIES, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2012

(Dollars in thousands)

Depreciation and amortization of the Company’s investments in real estate assets reflected in the consolidated statements of operations are calculated over the estimated useful lives of the assets as follows:

Land improvements	3-20 years
Buildings and improvements	3-40 years
Furniture, fixtures and equipment	5-10 years
Computer software	5 years

The changes in total real estate assets are as follows:

	2012			2011			2010
Balance, beginning of year	$	5,042,324		$	4,377,730		$	3,915,979
New property acquisitions	297,650			511,308			346,770
Additions	226,348			160,109			146,645
Disposals associated with deconsolidation of the VIE (1)	—			—			(27,464		)
Disposals and retirements	(111,096		)	(6,823		)	(4,200		)
Balance, end of year	$	5,455,226		$	5,042,324		$	4,377,730

The changes in accumulated depreciation are as follows:

	2012			2011			2010
Balance, beginning of year	$	983,759		$	841,801		$	733,142
Depreciation	166,339			143,093			126,249
Disposals associated with deconsolidation of the VIE (1)	—			—			(13,627		)
Disposals and retirements	(41,258		)	(1,135		)	(3,963		)
Balance, end of year	$	1,108,840		$	983,759		$	841,801

(1) Refer to Note 4 for discussion of the Company’s sale of its general partnership interest in the VIE and the resulting deconsolidation of the VIE.

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOME PROPERTIES, INC.
By:	/s/ Edward J. Pettinella
	Edward J. Pettinella
	President and Chief Executive Officer
Date:	February 22, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of Home Properties, Inc. and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Edward J. Pettinella	Director, President and Chief Executive Officer	February 22, 2013
Edward J. Pettinella
/s/ David P. Gardner	Executive Vice President, Chief Financial Officer	February 22, 2013
David P. Gardner	(Principal Financial Officer)
/s/ Robert J. Luken	Senior Vice President, Chief Administrative Officer,	February 22, 2013
Robert J. Luken	Chief Accounting Officer and Treasurer
	(Principal Accounting Officer)
/s/ Kenneth O. Hall	Vice President and Controller	February 22, 2013
Kenneth O. Hall
/s/ Stephen R. Blank	Director	February 22, 2013
Stephen R. Blank
/s/ Alan L. Gosule	Director	February 22, 2013
Alan L. Gosule
/s/ Leonard F. Helbig, III	Director	February 22, 2013
Leonard F. Helbig, III
/s/ Charles J. Koch	Director	February 22, 2013
Charles J. Koch
/s/ Thomas P. Lydon, Jr.	Director	February 22, 2013
Thomas P. Lydon, Jr.
/s/ Clifford W. Smith, Jr.	Director	February 22, 2013
Clifford W. Smith, Jr.

104

HOME PROPERTIES, INC.

FORM 10-K

For The Year Ended December 31, 2012

Exhibit Index

Except as otherwise indicated, the exhibits listed below are filed as part of this report.  References to exhibits or other filings under the caption “Location” indicate that exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference.

Exhibit
Number	Exhibit	Location
2.1	Agreement among Home Properties of New York, Inc. and Philip J. Solondz, Daniel Solondz and Julia Weinstein Relating to Royal Gardens I, together with Amendment No. 1	Incorporated by reference to the Form 8-K filed by Home Properties of New York, Inc. dated 6/6/97 (the “6/6/97 8-K”)
2.2	Agreement among Home Properties of New York, Inc. and Philip Solondz and Daniel Solondz relating to Royal Gardens II, together with Amendment No. 1	Incorporated by reference to the 6/6/97 8-K
2.3	Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Braddock Lee Limited Partnership and Tower Construction Group, LLC	Incorporated by reference to the Form 8-K filed by Home Properties of New York, Inc., dated 3/24/98 (the “3/24/98 8-K”)
2.4	Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Park Shirlington Limited Partnership and Tower Construction Group, LLC	Incorporated by reference to the 3/24/98 8-K
3.1	Articles of Amendment and Restatement of Articles of Incorporation of Home Properties of New York, Inc.	Incorporated by reference to Home Properties of New York, Registration Statement on Form S-11, File No. 33-78862 (the “S-11 Registration Statement”)
3.2	Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.	Incorporated by reference to the Home Properties of New York, Inc. Registration Statement on Form S-3 File No. 333-52601 filed 5/14/98
3.3	Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.	Incorporated by reference to Form 8-K filed by Home Properties of New York, Inc. dated 7/2/99
3.4	Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.	Incorporated by reference to the Form 10-Q filed by Home Properties, Inc. for the quarter ended 3/31/04
3.5	Second Amended and Restated By-laws of Home Properties, Inc.	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. dated 11/2/07
3.6	By-Laws of Home Properties Management, Inc.	Incorporated by reference to S-11 Registration Statement
3.7	Articles of Incorporation of Conifer Realty Corporation	Incorporated by reference to Form 10-K filed by Home Properties of New York, Inc. for the period ended 12/31/95 (the “12/31/95 10-K”)

105

Exhibit
Number	Exhibit	Location
3.8	Articles of Amendment to the Articles of Incorporation of Conifer Realty Corporation Changing the name to Home Properties Resident Services, Inc.	Incorporated by reference to the Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/00
3.9	By-Laws of Conifer Realty Corporation (now Home Properties Resident Services, Inc.)	Incorporated by reference to the 12/31/95 10-K
3.10	Home Properties Trust Declaration of Trust, dated September 19, 1997	Incorporated by reference to the Form 8-K filed by Home Properties of New York, Inc. dated 9/26/97 (the “9/26/97 8-K”)
4.1	Form of certificate representing Shares of Common Stock	Incorporated by reference to the Form 10- K filed by Home Properties of New York, Inc. for the period ended 12/31/94 (the “12/31/94 10-K”)
4.2	Agreement of Home Properties of New York, Inc. to file instruments defining the rights of holders of long-term debt of it or its subsidiaries with the Commission upon request	Incorporated by reference to the 12/31/94 10-K
4.3	Indenture, dated October 24, 2006 between Home Properties, Inc., Home Properties, L.P. and Wells Fargo Bank, N.A., as trustee including the form of 4.125% Exchangeable Senior Notes due 2026 of Home Properties, L.P. and the Guarantee of Home Properties, Inc. with respect thereto	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 10/25/06 (the “10/25/06 8-K”)
4.4	Registration Rights Agreement, dated October 24, 2006, between Home Properties, Inc., Home Properties, L.P. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear Stearns & Co., Inc.	Incorporated by reference to the 10/25/06 8-K
10.1	Second Amended and Restated Agreement of Limited Partnership of Home Properties of New York, L.P.	Incorporated by reference to the 9/26/97 8-K
10.2	Amendment No. Four to the Second Amended and Restated Agreement of Limited Partnership of Home Properties of New York, L.P.	Incorporated by reference to Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/97
10.3	Amendment No. Sixty-Two to the Second Amended and Restated Limited Partnership Agreement	Incorporated by reference to Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/03
10.4	Indemnification Agreement between Home Properties of New York, Inc. and certain officers and Directors*	Incorporated by reference to the Form 10-Q filed by Home Properties of New York, Inc. for the quarter ended 6/30/94
10.5	Indemnification Agreement between Home Properties of New York, Inc. and Alan L. Gosule*	Incorporated by reference to the Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/96

106

Exhibit
Number	Exhibit	Location
10.6	Master Credit Facility Agreement by and among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp., dated as of August 28, 1998	Incorporated by reference to Form 10-Q filed by the Home Properties of New York, Inc. for the quarter ended 9/30/98
10.7	First Amendment to Master Credit Facility Agreement, dated as of December 11, 1998 among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae	Incorporated by reference to the Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/98
10.8	Second Amendment to Master Credit Facility Agreement, dated as of August 30, 1999 among Home Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp. and Fannie Mae	Incorporated by reference to Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/99 (the “12/31/99 10-K”)
10.9	Amended and Restated Employment Agreement, dated November 20, 2006 between Edward J. Pettinella and Home Properties, Inc.*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 11/21/06
10.10	Amendment No. One to Employment Agreement between Edward J. Pettinella and Home Properties, Inc.*	Incorporated by reference to the Form 10-Q filed by Home Properties, Inc. for the period ended 9/30/08 (the “9/30/08 10-Q”)
10.11	Amendment No. 2 to Employment Agreement between Edward J. Pettinella and Home Properties, Inc.*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 11/2/09
10.12	Articles of Merger of Home Properties Management, Inc. into Home Properties Resident Services, Inc.	Incorporated by reference to the Form 10-K filed by Home Properties, Inc. for the annual period ended 12/31/06
10.13	Purchase Agreement, dated October 18, 2006 between Home Properties, Inc., Home Properties, L.P. and Merrill Lynch & Co., Merrill Lynch, Pierce Fenner & Smith and Bear Stearns & Co., Inc.	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 10/19/06
10.14	2000 Stock Benefit Plan*	Incorporated by reference to the 12/31/99 10-K
10.15	Home Properties of New York, Inc. Amendment No. One to 2000 Stock Benefit Plan*	Incorporated by reference to the Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/01 (the “12/31/01 10-K”)
10.16	Home Properties of New York, Inc. Amendment No. Two to 2000 Stock Benefit Plan*	Incorporated by reference to the 12/31/01 10-K
10.17	Home Properties of New York, Inc. Amendment No. Three to 2000 Stock Benefit Plan*	Incorporated by reference to the Form 10-K filed by Home Properties of New York, Inc. for the annual period ended 12/31/03
10.18	Amendment No. Four to Home Properties, Inc. 2000 Stock Benefit Plan*	Incorporated by reference to the 9/30/08 10-Q

107

Exhibit
Number	Exhibit	Location
10.19	Amended and Restated 2003 Stock Benefit Plan*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. dated 5/6/05
10.20	Amendment No. One to Amended and Restated Home Properties, Inc. 2003 Stock Benefit Plan*	Incorporated by reference to the 9/30/08 10-Q
10.21	Home Properties, Inc. 2008 Stock Benefit Plan*	Incorporated by reference to the Schedule 14A filed on 3/24/08
10.22	Amendment No. One to Home Properties, Inc. 2008 Stock Benefit Plan*	Incorporated by reference to the 9/30/08 10-Q
10.23	Seventh Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 9/28/06
10.24	Deferred Bonus Plan (Amended and Restated as of January 1, 2008)*	Incorporated by reference to the Form 10-K filed by Home Properties, Inc. for the period ended 12/31/07 (the “12/31/07 10-K”)
10.25	Director Deferred Compensation Plan (Amended and Restated as of January 1, 2008)*	Incorporated by reference to the 12/31/07 10-K
10.26	Amendment No. One to Home Properties, Inc. Deferred Bonus Plan (Amended and Restated January 1, 2008)*	Incorporated by reference to the Form 10-K filed by Home Properties, Inc. for the period ended 12/31/09 (the “12/31/09 10-K”)
10.27	Indemnification Agreement between Home Properties, Inc. and Stephen R. Blank*	Incorporated by reference to the Form 10-K filed by Home Properties, Inc. for the period ended 12/31/08
10.28	Amended and Restated Lease Agreement Between Clinton Square Asset Holding Associates, L.P. and Home Properties, L.P. dated July 6, 2009	Incorporated by reference to the Form 10-Q filed by Home Properties, Inc. for the quarter ended 6/30/09
10.29	Amendment No. Eighty-Nine to Second Amended and Restated Limited Partnership Agreement	Incorporated by reference to the 12/31/09 10-K
10.30	Indemnification Agreement between Home Properties, Inc. and Charles J. Koch*	Incorporated by reference to the 12/31/09 10-K
10.31	Employment Agreement between Edward J. Pettinella, the Company’s President and Chief Executive Officer and Home Properties, Inc. effective January 1, 2011*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 12/29/10
10.32	Amended and Restated Executive Retention Plan*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 2/16/11 (the “2/16/11 8-K”)
10.33	Executive Stock Ownership Guidelines, adopted February 12, 2011	Incorporated by reference to the 2/16/11 8-K
10.34	Indemnification Agreement between Home Properties, Inc. and Thomas P. Lydon, Jr.*	Incorporated by reference to the Form 10-K filed by Home Properties, Inc. for the period ended 12/31/10

108

Exhibit
Number	Exhibit	Location
10.35	Home Properties, Inc. Incentive Compensation Plan*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 5/5/11
10.36	Home Properties, Inc. 2011 Stock Benefit Plan*	Incorporated by reference to the Home Properties Registration Statement on Form S-8, File No. 333-173947 filed on 5/5/11 (the “5/5/11 S-8”)
10.37	Form of Employee Incentive Stock Option Certificate*	Incorporated by reference to the 5/5/11 S-8
10.38	Form of Director Non-Qualified Stock Option Certificate*	Incorporated by reference to the 5/5/11 S-8
10.39	Form of Employee Non-Qualified Stock Option Certificate*	Incorporated by reference to the 5/5/11 S-8
10.40	Form of Director Restricted Stock Certificate*	Incorporated by reference to the 5/5/11 S-8
10.41	Form of Employee Restricted Stock Certificate*	Incorporated by reference to the 5/5/11 S-8
10.42	Underwriting Agreement, dated September 20, 2011 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Underwriters	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 9/20/11
10.43	Nonqualified Voluntary Deferred Compensation Plan*	Incorporated by reference to the Form 10-Q filed by Home Properties, Inc. for the quarter ended 9/30/11 (the “9/30/11 10-Q”)
10.44	Amendment Number Two to Deferred Bonus Plan*	Incorporated by reference to the 9/30/11 10-Q
10.45	Amended and Restated Credit Agreement	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 12/13/11 (the “12/13/11 8-K”)
10.46	Amended and Restated Guaranty	Incorporated by reference to the 12/13/11 8-K
10.47	Note Purchase Agreement relating to Series A and Series B Senior Guaranteed Notes	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 12/20/11 (the “12/20/11 8-K”)
10.48	Affiliate Guaranty	Incorporated by reference to the 12/20/11 8-K
10.49	Home Properties, Inc. 2011 Stock Benefit Plan 2012 Restricted Stock Unit Master Agreement*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 2/9/12
10.50	ATM Offering Sales Agreement dated September 17, 2010 between Home Properties, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Stifel, Nicolaus & Company, Incorporated	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 9/17/10
10.51	ATM Equity Offering Sales Agreement dated May 14, 2012 between Home Properties, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Jefferies & Company, Inc., J.P. Morgan Securities LLC and RBS Securities, Inc.	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 5/14/12

109

Exhibit
Number	Exhibit	Location
10.52	Consultation Agreement, Non-Compete and General Release between Home Properties, L.P. and Scott Doyle dated August 31, 2012*	Incorporated by reference to Form 10-Q filed by Home Properties, Inc. for the quarter ended 9/30/2012
10.53	Home Properties, Inc. 2011 Stock Benefit Plan 2013 Restricted Stock Unit Master Agreement and Form of Award Certificate*	Incorporated by reference to the Form 8-K filed by Home Properties, Inc. on 1/3/2013
11	Computation of Per Share Earnings Schedule	Filed herewith
21	List of Subsidiaries of Home Properties, Inc.	Filed herewith
23	Consent of PricewaterhouseCoopers LLP	Filed herewith
31.1	Section 302 Certification of Chief Executive Officer	Filed herewith
31.2	Section 302 Certification of Chief Financial Officer	Filed herewith
32.1	Section 906 Certification of Chief Executive Officer**	Furnished herewith
32.2	Section 906 Certification of Chief Financial Officer**	Furnished herewith
99	Additional Exhibits - Debt Summary Schedule	Filed herewith
101	XBRL (eXtensible Business Reporting Language). The following materials from the Home Properties, Inc. Annual Report on Form 10-K for the period ended December 31, 2012, formatted in XBRL: (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of equity, (v) consolidated statements of cash flows and (vi) notes to consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.	Filed herewith

*Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.

**These exhibits are not incorporated by reference in any registration statement or report which incorporates this Annual Report on Form 10-K for the year ended December 31, 2012.

110