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10-K 1 d265923d10k.htm 10-K 10-K

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, 2011

¨	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 ¨

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ 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 ¨

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 ¨

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. x

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):

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

The aggregate market value of the 40,180,199 shares of common stock held by non-affiliates was $2,446,170,515 based on the closing sale price of $60.88 per share on the New York Stock Exchange on June 30, 2011.

As of February 16, 2012, there were 48,371,215 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 May 1, 2012		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
	Item 4A.	Executive Officers		27

PART II.

	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		29
	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		54
	Item 8.	Financial Statements and Supplementary Data		54
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		55
	Item 9A.	Controls and Procedures		55
	Item 9B.	Other Information		55

PART III.

	Item 10.	Directors, Executive Officers and Corporate Governance		56
	Item 11.	Executive Compensation		56
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters		56
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		56
	Item 14.	Principal Accounting Fees and Services		56

PART IV.

	Item 15.	Exhibits, Financial Statement Schedules		57

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 54 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, 2011, the Company held 81.8% (77.1% at December 31, 2010) of the limited partnership units in the Operating Partnership (“UPREIT Units”).

Home Properties, through its affiliates described above, as of December 31, 2011, owned and operated 124 communities with 41,951 apartment units (the “Owned Properties”).

The Owned Properties are concentrated in the following market areas:


Market Area	Communities Owned		Apartments Owned
Suburban Washington, D.C.		30		12,230
Baltimore, MD		25		9,984
Suburban New York City		28		7,225
Philadelphia, PA		20		5,806
Boston, MA		10		2,684
Chicago, IL		7		2,566
Southeast Florida		2		836
Portland, ME		2		620


Totals		124		41,951

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.

The Company (continued)

The Company’s long-term business strategies include:

•

aggressively 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 raw land, on land adjacent to existing owned communities, and, where there are density opportunities, to replace existing garden apartments with mid- or high-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 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, 2011, it held an 81.8% partnership interest in the Operating Partnership comprised of: a 1.0% interest as sole general partner; and an 80.8% 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 18.2% 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 and Directors 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.

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 the service and physical amenities available at each community every year;

•

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 216 communities, containing more than 59,000 units. The rehabilitation and revitalization process targets a minimum 10% return on repositioning investments. It is expected that capital expenditures on repositioning investments will increase slightly from 2011 levels, which returned to historic levels 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 include 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. Where 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.

Acquisition, Development and Sale Strategies

The Company’s strategy is to grow primarily through acquisitions in the suburbs of major metropolitan markets that 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, young adults in their twenties and early thirties, and seniors over age 55. The Company currently expects that 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 2011, the Company acquired eight communities with a total of 2,817 units for an aggregate consideration of $501 million, or an average of approximately $178,000 per apartment unit. The weighted average expected first year capitalization rate for the acquired communities was 5.5%. 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. Four acquisitions were in suburban Washington, D.C.; and one each in the suburbs of Baltimore, Boston, Chicago and Philadelphia.

The Company believes that it will have the opportunity to make acquisitions during 2012 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 raw land and on land adjacent to existing Owned Properties, as well as to increase the density of units at some communities currently owned. The Company plans one construction start in 2012 with approximately $90 million in spending, in addition to two developments started in 2011.

During 2011, the Company did not sell any communities. The Company has not specifically identified communities for sale in 2012 but will continue to evaluate the sale of its communities. The Company expects to dispose of between $50 million and $150 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.

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 45% 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, 2011, the Company’s debt was approximately $2.7 billion and the debt-to-total market capitalization ratio was 43.9% based on the year-end closing price of the Company’s common stock of $57.57. The weighted average interest rate on the Company’s mortgage debt as of December 31, 2011 was 5.13% and the weighted average maturity was approximately six years. Debt maturities are staggered, ranging from February 2012, through June 2034. As of December 31, 2011, 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 $2.5 million outstanding on the line of credit.

To further strengthen the Company’s balance sheet and increase its financial flexibility, during 2011 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 22% to 33%. 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. The Company satisfied a large portion of debt maturing in 2012 early, reducing the level of secured loans maturing in 2012 from $122 million to $39 million. In total, $116 million of mortgage debt was paid off in 2011 with a weighted average interest rate of 5.71%.

•

The Company sold 3.2 million shares of common stock through its second at-the-market (“ATM”) equity offering program, generating $190 million in net proceeds.

•

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.

•

The Company renegotiated and extended the unsecured line of credit facility twice during 2011.

•

On February 10, 2011, the Company renegotiated the $175 million line of credit facility and extended the maturity one year to August 31, 2012. Pricing was less expensive, and moved from interest rate spreads ranging from 2.50% to 3.25% over the one-month LIBOR and a LIBOR floor of 1.50% to interest rate spreads ranging from 1.90% to 2.63% over the one-month LIBOR without a LIBOR floor. In addition, as a result of the renegotiation, the capitalization rate used for valuing assets was reduced as was the unused facility fee.

•

In December 2011, the $175 million line of credit facility was increased to $275 million and now matures December 8, 2015. 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, 2011, based on the Company’s leverage ratio, the LIBOR margin was 1.30%, and the one-month LIBOR was 0.31%; resulting in an effective rate of 1.61% for the Company.

•

The Company repaid the $140 million exchangeable senior notes that had a put/call option in November 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 loan bears monthly interest at 1.3% above the one-month LIBOR and has covenants that align with the unsecured line of credit facility.

Financing and Capital Strategies (continued)

•

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%; and, Series B: $60 million with a ten-year term due December 19, 2021 at a fixed interest rate of 5.00%. 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 capital market initiatives described above allowed the Company to achieve stronger key debt and credit metrics at December 31, 2011 versus December 31, 2010 as follows:

•

total debt to value was reduced to 46.9% from 53.9%.⁽¹⁾

•

total secured debt to value was reduced to 39.7% from 49.8%.⁽¹⁾

•

interest coverage ratio was increased from 2.3 times to 2.8 times.

•

fixed charge coverage ratio was increased from 2.2 times to 2.7 times.

•

value of unencumbered asset pool was increased from $1.0 billion to $1.9 billion; or from 21.7% to 33.3% of total value, respectively.⁽¹⁾

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

For 2012, the Company plans to continue to increase the level of the value of unencumbered properties to over 35% 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, 2011 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, 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 underlying NAV, thereby continuing to build value for long-term shareholders. At December 31, 2011, there was approval remaining to purchase 2.3 million shares. The 2012 guidance assumes no additional share repurchases.

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.

Competition (continued)

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

•

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.

Market Environment

The markets in which Home Properties operates could be characterized long term as stable, with moderate levels of job growth. During 2010 and expected to continue through 2012, many regions of the United States are experiencing varying degrees of economic recovery resulting in improving job growth for both the country as a whole and the Company’s markets.

The Company’s markets experienced results similar to the country as a whole in 2010 with job growth of 0.8%. In 2011, the Company’s markets were slightly behind the U.S. average with 0.7% job growth versus 1.3%, respectively, although both the Baltimore, MD and Boston, MA markets matched the national average. In addition, the unemployment rate for the Company’s markets of 6.9% continues to compare favorably to the country average of 8.3%. The Company’s Northern VA/DC market continues to experience the lowest unemployment rate of 5.5% at December 31, 2011. This market represents 29.2% of the Company’s total apartment unit count. These two favorable comparisons help explain why the Company’s markets helped the Company outperform all of its public company multifamily peers on a measurement of same store NOI in 2010 and tie for the fourth best in 2011.

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 2011, Home Properties’ markets represented 27.9% of the total estimated existing U.S. multifamily housing stock, but only 20.3% 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 27.4% of net new demand, creating an environment where both pricing and/or occupancy could improve. The relationship in the Company’s markets is much better, where net new supply after obsolescence is expected to meet only 7.1% of the expected increasing demand for rental housing.

Market Demographics


CBSA Market Area	% of Owned Units			2011 Number of Households		2011 Job Growth			2011 vs. 2010 Job Growth % Change			December Unemployment Rate			2011 Median Home Value		2011 Multifamily Units as a % of Total Housing Units Stock ⁽⁵⁾			2011 Multifamily Housing Stock ⁽⁶⁾
Northern VA/DC		29.2	%		2,110,582		13,400			0.4	%		5.5	%	$	364,452		29.0	%		651,082
Baltimore, MD		23.8	%		1,052,313		17,100			1.3	%		6.8	%		271,299		19.5	%		221,809
Suburban New York City ⁽¹⁾		17.2	%		6,885,345		47,900			0.6	%		8.2	%		408,024		37.4	%		2,771,948
Eastern PA ⁽²⁾		13.8	%		2,615,403		(4,400	)		(0.1	%)		7.9	%		217,348		14.9	%		418,437
Boston, MA ⁽³⁾		7.9	%		1,974,919		35,500			1.3	%		5.7	%		569,471		21.2	%		448,808
Chicago, IL		6.1	%		3,433,721		15,700			0.4	%		9.3	%		223,278		24.7	%		914,330
Southeast Florida ⁽⁴⁾		2.0	%		2,103,361		26,700			1.2	%		9.6	%		195,502		38.9	%		949,946

Home Properties Markets		100.0	%		20,175,644		151,900			0.7	%		6.9	%	$	333,572		29.1	%		6,376,360

United States					116,862,390		1,671,000			1.3	%		8.3	%	$	172,751		17.5	%		22,851,748

⁽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 Nielsen 2011 estimates calculated from the 2000 U.S. Census figures.

⁽⁶⁾	2011 Multifamily Housing Stock is from Nielsen 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 February 1, 2012 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.

Nielsen 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.

Multifamily Supply and Demand


CBSA Market Area	Estimated 2011 New Supply of Multifamily ⁽⁷⁾		Estimated 2011 Multifamily Obsolescence ⁽⁸⁾		Estimated 2011 Net New Multifamily Supply ⁽⁹⁾			Estimated 2011 New Multifamily Household Demand ⁽¹⁰⁾			Estimated Net New Multifamily Supply as a % of New Multifamily Demand			Estimated Net New Multifamily Supply as a % of Multifamily Stock			Expected Excess Demand ⁽¹¹⁾			Expected Excess Revenue Growth ⁽¹²⁾
Northern VA/DC		8,916		3,255		5,661			2,592			218.4	%		0.9	%		(3,069	)		(0.5	%)
Baltimore, MD		1,929		1,109		820			2,224			36.9	%		0.4	%		1,404			0.6	%
Suburban New York City ⁽¹⁾		12,626		13,860		(1,234	)		11,949			(10.3	%)		0.0	%		13,183			0.5	%
Eastern PA ⁽²⁾		2,094		2,092		2			(437	)		(0.5	%)		0.0	%		(439	)		(0.1	%)
Boston, MA ⁽³⁾		2,330		2,244		86			5,020			1.7	%		0.0	%		4,934			1.1	%
Chicago, IL		3,186		4,572		(1,386	)		2,587			(53.6	%)		(0.2	%)		3,973			0.4	%
Southeast Florida ⁽⁴⁾		2,993		4,750		(1,757	)		6,928			(25.4	%)		(0.2	%)		8,685			0.9	%

Home Properties Markets		34,074		31,882		2,192			30,863			7.1	%		0.0	%		28,671			0.4	%

United States		167,627		114,259		53,368			195,047			27.4	%		0.2	%		141,679			0.6	%

(1)-(6) see footnotes prior page

⁽⁷⁾	Estimated 2011 New Supply of Multifamily = Multifamily permits (2011 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 2011 Multifamily Obsolescence = Estimated 2011 Multifamily Housing Stock multiplied by the estimated % of obsolescence (0.5%).

⁽⁹⁾	Estimated 2011 Net New Multifamily Supply = Estimated 2011 New Supply of Multifamily - Estimated 2011 Multifamily Obsolescence.

⁽¹⁰⁾

Estimated 2011 New Multifamily Household Demand = 2011 job growth (Nonfarm, not seasonally adjusted payroll employment figures) (12/31/2010-12/31/2011) 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 2011 New Multifamily Household Demand - Estimated 2011 Net New Multifamily Supply.

⁽¹²⁾

Expected Excess Revenue Growth = Expected Excess Demand divided by 2011 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.

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” 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, paper copies 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.” Copies of these documents are 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.

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 54 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 economic conditions; local real estate considerations (such as oversupply of or reduced demand for apartments); 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 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 fail to meet our expectations. 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.

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 fifteen 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.

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 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.

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, for which the Company may not have insurance coverage. If an uninsured loss occurred, 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.

Real Estate Investment Risks (continued)

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 Southeast Florida, we have exposure to severe storms which could also increase the need for maintenance and repair of our communities in that region.

We may incur costs due to environmental contamination or non-compliance.

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.

Real Estate Investment Risks (continued)

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. We do not currently anticipate that we will incur any material liabilities as a result of the presence of lead paint at our communities.

All of the Owned 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, either under existing laws and regulations or future changes to such requirements.

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. There have been only limited cases of mold identified to us. We do not currently anticipate that we will incur any material liabilities relating to mold.

Additionally, 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.

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.

Financing and compliance requirements could limit our income and the ability to raise rents.

As a requirement relating to some of our financing, or, in some instances, relating to zoning or other municipal approvals, we have committed to make some of the apartments in a community available to households whose income does not exceed certain thresholds and/or to limit rent increases. As of December 31, 2011, approximately 9% of our apartment units were under some form of such limitations. These commitments typically expire after a period of time, and may limit our ability to raise rents aggressively and, in consequence, can also limit increases in the value of the communities subject to these restrictions.

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, 2011, we had approximately $2.3 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:


2012		$ 39 million
2013		192 million
2014		100 million
2015		260 million
2016		344 million
Thereafter		1,326 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 2011, the Company did not add any secured debt, instead adding $400 million of unsecured debt and increasing its unsecured line of credit by $100 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.

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, 2011, 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 $2.5 million outstanding under the credit facility on December 31, 2011.

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 2011, the Company entered into a $250 million five-year unsecured term loan with M&T Bank as lead bank. It also issued $90 million of seven-year unsecured notes and $60 million of ten-year unsecured notes. 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, 2011, approximately 83% 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.

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.

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 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).

Other Risks

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.

In December 2009, the Company filed a Prospectus Supplement pursuant to a previously filed registration statement. Pursuant to the Prospectus Supplement, the Company was authorized to sell up to 3.7 million common shares from time to time in “at the market offerings” or negotiated transactions (not to exceed $150 million of gross proceeds). By June, 2010, all of the shares available under this offering had been sold. In September 2010, the Company filed an additional Prospectus Supplement pursuant to which it may sell up to 3.6 million additional common shares. During 2011, the Company issued 3.2 million shares for $194 million gross proceeds under this second offering. At December 31, 2011, approximately 0.4 million shares remain available under this offering. In addition, the Board of Directors recently authorized the sale of up to an additional 4.4 million common shares in “at the market offerings.” The Company has not yet filed a Prospectus Supplement relating to these additional shares as it deems the remaining shares under the prior Prospectus Supplement to be sufficient for its short-term needs. 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.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

As of December 31, 2011, the Owned Properties consisted of 124 multifamily residential communities containing 41,951 apartment units. In 2011, the Company acquired eight communities with a total of 2,817 units in eight transactions for total consideration of $500.7 million. In 2010, the Company acquired nine communities with a total of 2,614 units in eight transactions for total consideration of $339.1 million.

The Owned Properties are generally located in established markets in suburban neighborhoods and are well maintained and well leased. Average physical occupancy at the Owned Properties was 94.8% for 2011. “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. “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 Owned 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 Owned Properties was approximately 39% for 2011, which is significantly below the national average of approximately 53% 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 Owned Properties collateralize mortgage loans. See Schedule III contained herein (pages 91 to 93).

The table on the following pages illustrates certain of the important characteristics of the Owned Properties as of December 31, 2011.

Communities Wholly Owned by Home Properties


Regional Area		# Of Apts		Age In Years		Year Acq/Dev		Average Apt Size (Sq Ft)		(2) 2011 % Resident Turnover			(3) 2011 Average % Occupancy			(3) 2010 Average % Occupancy			2011 Avg Mo Rent Rate per Apt		2010 Avg Mo Rent Rate per Apt		12/31/2011 Total Cost (000)
	Core Communities ⁽¹⁾
FL - Southeast	The Hamptons		668		22		2004		1,052		50	%		95	%		93	%	$	979	$	982	$	71,984
FL - Southeast	Vinings at Hampton Village		168		22		2004		1,207		42	%		96	%		94	%		1,104		1,110		18,621
IL - Chicago	Blackhawk Apartments		371		50		2000		793		46	%		95	%		97	%		871		840		26,027
IL - Chicago	Courtyards Village		224		40		2001		674		47	%		98	%		98	%		843		809		18,633
IL - Chicago	Cypress Place		192		41		2000		852		33	%		97	%		98	%		944		907		16,024
IL - Chicago	The Colony		783		38		1999		704		44	%		97	%		96	%		867		855		58,811
IL - Chicago	The New Colonies		672		37		1998		657		57	%		96	%		96	%		756		724		37,982
MA - Boston	Gardencrest Apartments		696		63		2002		847		31	%		96	%		96	%		1,548		1,507		116,171
MA - Boston	Highland House		172		42		2006		733		34	%		96	%		97	%		1,170		1,136		20,692
MA - Boston	Liberty Place		107		23		2006		994		39	%		96	%		97	%		1,447		1,405		17,786
MA - Boston	Stone Ends Apartments		280		32		2003		815		33	%		95	%		94	%		1,250		1,215		41,004
MA - Boston	The Heights at Marlborough		348		38		2006		876		44	%		94	%		96	%		1,187		1,151		57,205
MA - Boston	The Meadows at Marlborough		264		39		2006		855		41	%		95	%		96	%		1,147		1,108		39,924
MA - Boston	The Townhomes of Beverly		204		41		2007		1,103		43	%		96	%		98	%		1,485		1,424		41,316
MA - Boston	The Village at Marshfield		276		39		2004		735		50	%		96	%		97	%		1,158		1,113		39,447
MA - Boston	Westwoods		35		21		2007		904		34	%		97	%		97	%		1,232		1,182		4,524
MD - Baltimore	Bonnie Ridge Apartments		960		45		1999		998		40	%		95	%		95	%		1,105		1,059		87,459
MD - Baltimore	Canterbury Apartments		618		33		1999		934		42	%		95	%		95	%		974		946		42,583
MD - Baltimore	Country Village Apartments		344		40		1998		776		48	%		97	%		97	%		993		926		25,585
MD - Baltimore	Dunfield Townhouses		312		24		2007		916		45	%		96	%		94	%		1,153		1,120		38,253
MD - Baltimore	Falcon Crest Townhomes		396		42		1999		993		36	%		96	%		93	%		998		980		25,897
MD - Baltimore	Fox Hall Apartments		720		35		2007		946		39	%		92	%		92	%		870		827		74,541
MD - Baltimore	Gateway Village Apartments		132		22		1999		963		41	%		96	%		96	%		1,336		1,298		11,853
MD - Baltimore	Heritage Woods Apartments		164		38		2006		965		42	%		97	%		97	%		1,136		1,061		17,797
MD - Baltimore	Mill Towne Village		384		38		2001		812		39	%		94	%		94	%		904		878		32,201
MD - Baltimore	Morningside Heights Apartments		1,050		46		1998		864		39	%		93	%		92	%		896		862		70,443
MD - Baltimore	Owings Run Apartments		504		16		1999		1,136		44	%		96	%		96	%		1,242		1,200		49,712
MD - Baltimore	Ridgeview at Wakefield Valley		204		23		2005		916		45	%		95	%		96	%		1,208		1,162		24,689
MD - Baltimore	Saddle Brooke		468		38		2008		889		37	%		93	%		93	%		1,036		995		58,249
MD - Baltimore	Selford Townhomes		102		24		1999		987		48	%		94	%		94	%		1,364		1,306		9,168
MD - Baltimore	The Coves at Chesapeake		469		29		2006		986		38	%		92	%		92	%		1,234		1,199		75,910
MD - Baltimore	Timbercroft Townhomes & Apts		284		39		1999		998		13	%		99	%		100	%		939		916		16,005
MD - Baltimore	Top Field		156		38		2006		1,149		27	%		97	%		97	%		1,270		1,194		22,451
MD - Baltimore	Village Square Townhomes & Apts.		370		43		1999		948		38	%		96	%		94	%		1,166		1,126		27,834
MD - Baltimore	Woodholme Manor Apartments		177		42		2001		817		29	%		94	%		94	%		894		871		11,981
ME - Portland	Liberty Commons		120		5		2006		1,064		47	%		97	%		97	%		1,267		1,198		14,824
ME - Portland	Redbank Village Apartments		500		67		1998		735		48	%		96	%		97	%		906		863		30,072
NJ - Northern	Barrington Gardens		148		38		2005		922		43	%		97	%		96	%		1,198		1,140		13,820

Communities Wholly Owned by Home Properties


Regional Area		# Of Apts		Age In Years		Year Acq/Dev		Average Apt Size (Sq Ft)		(2) 2011 % Resident Turnover			(3) 2011 Average % Occupancy			(3) 2010 Average % Occupancy			2011 Avg Mo Rent Rate per Apt		2010 Avg Mo Rent Rate per Apt		12/31/2011 Total Cost (000)
NJ - Northern	Chatham Hill Apartments		308		44		2004		944		36	%		95	%		94	%		1,764		1,686		64,915
NJ - Northern	East Hill Gardens		33		53		1998		654		33	%		95	%		96	%		1,555		1,519		3,560
NJ - Northern	Hackensack Gardens		198		63		2005		636		33	%		98	%		94	%		1,119		1,078		20,121
NJ - Northern	Jacob Ford Village		270		63		2007		842		28	%		97	%		95	%		1,247		1,177		34,918
NJ - Northern	Lakeview Apartments		106		62		1998		492		39	%		96	%		96	%		1,380		1,358		9,982
NJ - Northern	Northwood Apartments		134		46		2004		937		31	%		97	%		97	%		1,339		1,296		20,012
NJ - Northern	Oak Manor Apartments		77		55		1998		918		35	%		95	%		96	%		1,797		1,751		9,051
NJ - Northern	Pleasant View Gardens		1,142		43		1998		746		36	%		96	%		96	%		1,151		1,121		89,335
NJ - Northern	Pleasure Bay Apartments		270		40		1998		685		44	%		95	%		95	%		1,041		1,013		18,628
NJ - Northern	Royal Gardens Apartments		550		43		1997		874		34	%		96	%		96	%		1,246		1,220		40,032
NJ - Northern	Wayne Village		275		46		1998		760		26	%		97	%		97	%		1,402		1,378		25,712
NJ - Northern	Windsor Realty Company		67		58		1998		628		43	%		97	%		96	%		1,287		1,199		6,500
NY - Long Island	Bayview & Colonial		160		44		2000		884		34	%		98	%		96	%		1,260		1,218		16,174
NY - Long Island	Cambridge Village Associates		82		44		2002		747		28	%		98	%		98	%		1,789		1,697		8,704
NY - Long Island	Devonshire Hills		656		43		2001		767		34	%		97	%		97	%		1,584		1,545		122,503
NY - Long Island	Hawthorne Court		434		43		2002		678		35	%		97	%		97	%		1,439		1,391		55,734
NY - Long Island	Heritage Square		80		62		2002		718		34	%		98	%		98	%		1,744		1,699		10,329
NY - Long Island	Holiday Square		144		32		2002		570		21	%		96	%		96	%		1,223		1,191		12,996
NY - Long Island	Lake Grove Apartments		368		41		1997		836		42	%		96	%		96	%		1,442		1,385		39,301
NY - Long Island	Mid-Island Apartments		232		46		1997		546		26	%		98	%		97	%		1,402		1,348		19,294
NY - Long Island	Sayville Commons		342		10		2005		1,106		16	%		97	%		94	%		1,590		1,558		66,819
NY - Long Island	South Bay Manor		61		51		2000		849		44	%		96	%		96	%		1,642		1,631		8,727
NY - Long Island	Southern Meadows		452		40		2001		845		31	%		96	%		96	%		1,411		1,367		55,487
NY - Long Island	Westwood Village Apartments		242		42		2002		829		37	%		96	%		96	%		2,384		2,289		45,234
NY - Long Island	Woodmont Village Apartments		97		43		2002		704		34	%		97	%		97	%		1,325		1,291		12,321
NY - Long Island	Yorkshire Village Apartments		40		42		2002		779		40	%		98	%		98	%		1,839		1,770		4,915
PA - Philadelphia	Castle Club Apartments		158		44		2000		878		35	%		94	%		94	%		978		954		16,906
PA - Philadelphia	Chesterfield Apartments		247		38		1997		812		39	%		95	%		95	%		914		891		19,829
PA - Philadelphia	Curren Terrace		318		40		1997		782		37	%		95	%		94	%		869		846		22,461
PA - Philadelphia	Glen Brook Apartments		174		48		1999		707		36	%		94	%		95	%		831		809		11,852
PA - Philadelphia	Glen Manor Apartments		174		35		1997		667		37	%		96	%		95	%		813		787		10,021
PA - Philadelphia	Golf Club Apartments		399		42		2000		857		47	%		94	%		94	%		1,094		1,048		43,088
PA - Philadelphia	Hill Brook Place Apartments		274		43		1999		699		35	%		95	%		96	%		905		861		21,229
PA - Philadelphia	Home Properties of Bryn Mawr		316		60		2000		822		71	%		94	%		90	%		1,295		1,162		39,050
PA - Philadelphia	Home Properties of Devon		631		48		2000		917		42	%		94	%		93	%		1,148		1,084		77,098
PA - Philadelphia	New Orleans Park		442		40		1997		685		42	%		95	%		94	%		867		844		30,876
PA - Philadelphia	Racquet Club East Apartments		466		40		1998		911		31	%		95	%		96	%		1,061		1,027		41,152
PA - Philadelphia	Racquet Club South		103		42		1999		816		41	%		95	%		94	%		909		878		7,316
PA - Philadelphia	Ridley Brook Apartments		244		49		1999		925		34	%		94	%		94	%		939		903		16,707

Communities Wholly Owned by Home Properties


Regional Area		# Of Apts		Age In Years		Year Acq/Dev		Average Apt Size (Sq Ft)		(2) 2011 % Resident Turnover			(3) 2011 Average % Occupancy			(3) 2010 Average % Occupancy			2011 Avg Mo Rent Rate per Apt		2010 Avg Mo Rent Rate per Apt		12/31/2011 Total Cost (000)
PA - Philadelphia	Sherry Lake Apartments		298		46		1998		812		38	%		96	%		95	%		1,205		1,150		31,575
PA - Philadelphia	The Brooke at Peachtree Village		146		25		2005		1,261		34	%		96	%		96	%		1,138		1,118		20,662
PA - Philadelphia	The Landings		384		38		1996		912		41	%		96	%		96	%		1,012		963		33,636
PA - Philadelphia	Trexler Park Apartments		250		37		2000		921		47	%		95	%		94	%		1,065		1,033		26,099
PA - Philadelphia	Trexler Park West		216		3		2008		1,049		52	%		96	%		95	%		1,299		1,239		26,009
PA - Philadelphia	William Henry Apartments		363		40		2000		938		51	%		94	%		94	%		1,131		1,059		45,195
VA - Suburban DC	Braddock Lee Apartments		255		56		1998		757		28	%		98	%		98	%		1,334		1,281		22,474
VA - Suburban DC	Cider Mill		864		33		2002		834		33	%		95	%		96	%		1,151		1,103		101,773
VA - Suburban DC	Cinnamon Run		511		51		2005		1,006		28	%		95	%		96	%		1,243		1,211		77,018
VA - Suburban DC	East Meadow Apartments		150		40		2000		1,034		43	%		98	%		98	%		1,354		1,287		17,730
VA - Suburban DC	Elmwood Terrace		504		38		2000		946		41	%		95	%		93	%		926		901		34,253
VA - Suburban DC	Falkland Chase Apartments		450		74		2003		759		34	%		96	%		95	%		1,402		1,351		68,780
VA - Suburban DC	Mount Vernon Square		1,387		37		2006		868		39	%		94	%		95	%		1,245		1,195		158,857
VA - Suburban DC	Park Shirlington Apartments		294		56		1998		858		27	%		97	%		96	%		1,320		1,290		25,192
VA - Suburban DC	Peppertree Farm		879		57		2005		1,051		27	%		93	%		93	%		1,211		1,185		117,450
VA - Suburban DC	Seminary Hill Apartments		296		51		1999		888		30	%		98	%		97	%		1,299		1,253		24,961
VA - Suburban DC	Seminary Towers Apartments		544		47		1999		879		32	%		96	%		96	%		1,361		1,296		49,169
VA - Suburban DC	Tamarron Apartments		132		24		1999		1,075		33	%		95	%		96	%		1,537		1,455		14,391
VA - Suburban DC	The Apartments at Wellington Trace		240		9		2004		1,106		50	%		98	%		97	%		1,323		1,270		31,790
VA - Suburban DC	The Manor Apartments (MD)		435		42		2001		1,004		31	%		95	%		95	%		1,282		1,251		51,124
VA - Suburban DC	The Manor Apartments (VA)		198		37		1999		845		50	%		98	%		96	%		1,037		998		13,873
VA - Suburban DC	The Sycamores		185		33		2002		876		38	%		96	%		98	%		1,371		1,312		25,014
VA - Suburban DC	Virginia Village		344		44		2001		1,010		32	%		98	%		99	%		1,334		1,261		43,468
VA - Suburban DC	West Springfield Terrace		244		33		2002		1,019		41	%		97	%		97	%		1,475		1,396		40,237
VA - Suburban DC	Westchester West		345		39		2008		1,005		34	%		93	%		93	%		1,300		1,268		52,258
VA - Suburban DC	Woodleaf Apartments		228		26		2004		709		30	%		94	%		94	%		1,248		1,197		24,892
	Core Total/Weighted Avg		34,950		40				873		38	%		95	%		95	%	$	1,171	$	1,130	$	3,764,247

	Redevelopment Communities
VA - Suburban DC	Arbor Park of Alexandria		851		43		2000		1,015		54	%		87	%		95	%	$	1,345	$	1,315	$	106,954

	2010 Acquisition Communities⁽⁴⁾
IL - Chicago	Lakeview Townhomes		120		15		2010		1,050		50	%		94	%		91	%	$	1,153	$	1,131	$	15,653
MD - Baltimore	Annapolis Roads		282		36		2010		978		44	%		90	%		91	%		1,258		1,177		35,945
MD - Baltimore	Charleston Place		858		40		2010		816		35	%		97	%		95	%		1,130		1,061		111,026
MD - Baltimore	Middlebrooke Apartments		208		37		2010		838		32	%		95	%		91	%		942		860		19,385
MD - Baltimore	The Greens at Columbia		168		25		2010		969		36	%		96	%		96	%		1,362		1,293		27,043
MD - Baltimore	Westbrooke Apartments		110		50		2010		651		29	%		95	%		91	%		823		769		7,410
NY - Long Island	Crescent Club Apartments		257		38		2010		873		31	%		97	%		94	%		1,275		1,221		33,618
VA - Suburban DC	1200 East West		247		1		2010		821		38	%		96	%		56	%		1,747		1,805		83,731

Communities Wholly Owned by Home Properties


Regional Area		# Of Apts		Age In Years		Year Acq/Dev		Average Apt Size (Sq Ft)		(2) 2011 % Resident Turnover			(3) 2011 Average % Occupancy			(3) 2010 Average % Occupancy			2011 Avg Mo Rent Rate per Apt		2010 Avg Mo Rent Rate per Apt		12/31/2011 Total Cost (000)
VA - Suburban DC	The Courts at Fair Oaks		364		21		2010		798		41	%		96	%		94	%		1,439		1,371		74,728
VA - Suburban DC	Village at Potomac Falls		247		12		2010		940		43	%		96	%		96	%		1,286		1,260		39,345

	2010 Total/Weighted Avg		2,861		28				860		38	%		95	%		91	%	$	1,251	$	1,198	$	447,884

	2011 Acquisition Communities⁽⁴⁾
IL - Chicago	The Gates of Deer Grove		204		37		2011		897		62	%		94	%		n/a		$	992		n/a	$	20,225
MA - Boston	The Commons at Haynes Farm		302		20		2011		881		50	%		94	%		n/a			1,222		n/a		41,704
MD - Baltimore	The Apartments at Cambridge Court		544		12		2011		960		50	%		92	%		n/a			1,283		n/a		90,346
PA - Philadelphia	Waterview Apartments		203		43		2011		769		60	%		92	%		n/a			1,035		n/a		25,516
VA - Suburban DC	Hunters Glen		108		27		2011		822		40	%		96	%		n/a			909		n/a		7,399
VA - Suburban DC	Newport Village		937		43		2011		1,051		38	%		92	%		n/a			1,514		n/a		204,347
VA - Suburban DC	Somerset Apartments		108		5		2011		967		45	%		95	%		n/a			1,388		n/a		20,210
VA - Suburban DC	The Courts at Dulles		411		11		2011		991		41	%		94	%		n/a			1,482		n/a		92,383

	2011 Construction Communities⁽⁵⁾⁽⁶⁾
VA - Suburban DC	Cobblestone Square ⁽⁵⁾		51		—		2011		923		0	%		51	%		n/a		$	1,261		n/a	$	5,886
VA - Suburban DC	Courts at Huntington Station⁽⁶⁾		421		—		2011		997		22	%		66	%		n/a			2,008		n/a		121,957

	2011 Total/Weighted Avg		3,289		20				967		42	%		82	%		n/a		$	1,489		n/a	$	629,973

	Owned Portfolio Total/Weighted Avg		41,951		38				883		39	%		95	%		95	%	$	1,190	$	1,139	$	4,949,058

(1)	“Core Communities” represents the 34,950 apartment units owned consistently throughout 2011 and 2010.

(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, 2011 and 2010.

(4)	For communities acquired during 2011 and 2010, “Average % Occupancy” is the average physical occupancy from the date of acquisition.

(5)	Cobblestone Square is under construction with 51 units in service at December 31, 2011.

(6)	Courts at Huntington Station construction was completed in 2011 and is currently in lease-up.

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 raw land and on land adjacent to existing Owned Properties, as well as to increase the density of units at some communities currently owned.

Completed developments

•

1200 East West in Silver Spring, Maryland, is a 14-story high rise with 247 apartments and 10,600 square feet of retail or nonresidential space that was completed and placed into service in several phases during 2010 at a total cost of $83 million. Initial occupancy commenced in March 2010 and stabilization (greater than 95% physical occupancy) was achieved as of December 2010.

•

Courts at Huntington Station, just south of Old Town Alexandria in Fairfax County, Virginia, was constructed in two phases from 2008 through 2011, at a total cost of $122 million. It is a podium design, with 421 units, adjacent to the Huntington Metro rail station and consists of four, four-story buildings. Construction on the first phase (202 units) was completed and placed into service during the second quarter of 2010, with initial occupancy occurring in April, 2010. At December 31, 2011 phase one was 93% occupied with average rents of $2,315 per month. Construction on the second phase (219 units) was completed in the second quarter of 2011, with stabilization expected in mid-2012. As of December 31, 2011, phase two occupancy was 51% with average rents of $2,075 per month.

Current construction projects

•

The Apartments at Cobblestone Square, a 314-unit garden style apartment community development consisting of eight, four-story buildings and a refurbished rail depot, is located in Fredericksburg, Virginia. During the first quarter of 2011 rehabilitation on the existing depot building was started and construction commenced on the first apartment building. During the fourth quarter of 2011, construction of the first apartment building, along with the rail depot renovation and amenities, was completed and initial occupancy of 51 apartment units commenced. Construction of the other buildings has begun and the entire project is expected to be completed in the first half of 2012 for a total projected cost of $49 million.

•

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.

Pre-construction

•

Courts at Spring Mill Station, located in Conshohocken, Pennsylvania, is on entitled land which the Company purchased in the fourth quarter of 2011 and plans to develop a combination donut/podium style project with 385 units. The contract for the land acquisition was $11 million. Construction is expected to begin in the second quarter of 2012 with total projected costs of $78 million.

Redevelopment

•

Arbor Park, located in Alexandria, Virginia, currently has 851 garden apartments in fifty-two buildings built in 1967. The Company plans to extensively renovate all of the units over the next four years on a building by building basis. As of December 31, 2011, there were five buildings with 52 units under renovation and eleven buildings with 128 units completed and 103 units occupied.

Pre-redevelopment

•

Falkland Chase, located in Silver Spring, Maryland, currently has 450 garden apartments constructed between 1936 and 1939. The Company is planning on redeveloping the North parcel, which will be renamed Falkland North. The Company is making progress on the design and obtaining the necessary approvals to redevelop this parcel into approximately 1,100 units. Construction is expected to start at the earliest during early 2013, with a total projected cost in excess of $300 million. As this is a large project, the Company may decide to pursue a joint venture partner.

Supplemental Property Information

At December 31, 2011, none of our 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 2011. 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 2011.

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.

Item 4A.

Executive Officers

The following table sets forth, as of February 16, 2012, the nine executive officers of the Company, together with their respective ages, positions and offices.


Name	Age	Position

Edward J. Pettinella	60	President and Chief Executive Officer of Home Properties

David P. Gardner	56	Executive Vice President and Chief Financial Officer of Home Properties

Ann M. McCormick	55	Executive Vice President, General Counsel and Secretary of Home Properties

Lisa M. Critchley	50	Senior Vice President, Human Resources of Home Properties

Scott A. Doyle	50	Senior Vice President, Strategic Property Management of Home Properties

Donald R. Hague	60	Senior Vice President, Development of Home Properties

Robert J. Luken	47	Senior Vice President, Chief Accounting Officer and Treasurer of Home Properties

Bernard J. Quinn	55	Senior Vice President, Property Management Operations of Home Properties

John E. Smith	61	Senior Vice President and Chief Investment Officer of Home Properties

Edward J. Pettinella has served as President and Chief Executive Officer of the Company since January 1, 2004. He is also a Director. He joined the Company in 2001 as an Executive Vice President and Director. From 1997 until February 2001, Mr. Pettinella served as President, Charter One Bank of New York and Executive Vice President of Charter One Financial, Inc. From 1980 through 1997, Mr. Pettinella served in several managerial capacities for Rochester Community Savings Bank, Rochester, NY, including the positions of Chief Operating Officer and Chief Financial Officer. Mr. Pettinella serves on the Board of Directors of Manning & Napier, Inc. (NYSE: MN), Rochester Business Alliance, National Multi Housing Council and Syracuse University School of Business and is a member of the Board of Governors of the National Association of Real Estate Investment Trusts. He is also a member of Urban Land Institute. Mr. Pettinella is a graduate of the State University at Geneseo and holds an MBA Degree in Finance from Syracuse University.

David P. Gardner has served as Executive Vice President since 2004 and a Vice President and Chief Financial Officer of the Company since its inception. Mr. Gardner joined Home Leasing in 1984 as Vice President and Controller. In 1989, he was named Treasurer of Home Leasing and Chief Financial Officer in December 1993. From 1977 until joining Home Leasing, Mr. Gardner was an accountant at Cortland L. Brovitz & Co. Mr. Gardner is a graduate of the Rochester Institute of Technology.

Ann M. McCormick has served as Executive Vice President since 2004 and a Vice President, General Counsel and Secretary of the Company since its inception. Mrs. McCormick joined Home Leasing in 1987 and was named Vice President, Secretary and General Counsel in 1991. Prior to joining Home Leasing, she was an associate with the law firm of Nixon Peabody LLP. Mrs. McCormick is a graduate of Colgate University and holds a Juris Doctor from Cornell University.

Lisa M. Critchley has served as Senior Vice President since joining the Company in 2007. Prior to joining the Company, she was employed by ALSTOM Signaling, Inc. as Director of Human Resources since 2004. She was an Assistant Dean at the William E. Simon School of Business Administration from 1999 until 2004. Mrs. Critchley is a graduate of St. John Fisher College and holds an MBA from the E. Phillip Saunders College of Business of the Rochester Institute of Technology. She also is certified as a Senior Professional in Human Resources (SPHR).

Scott A. Doyle has served as Senior Vice President since 2000, and, from 1997 until 2000, was a Vice President of the Company. He joined Home Properties in 1996 as a Regional Property Manager. Mr. Doyle is a Certified Property Manager (CPM) as designated by the Institute of Real Estate Management. Prior to joining Home Properties, he worked with CMH Properties, Inc., Rivercrest Realty Associates and Arcadia Management Company. He is a graduate of State University at Plattsburgh, New York.

Donald R. Hague has served as Senior Vice President since 2008. He joined the Company in 2006 as a Vice President. From 2000 until 2006, Mr. Hague was a Vice President of KSI Services, Inc. Prior to that, he worked with The Evans Company and was a partner in a land development and homebuilding company. He is a graduate of Davidson College and holds an MBA from The George Washington University.

Robert J. Luken has served as Senior Vice President since 2004, and as Chief Accounting Officer since 2005. He has been the Company’s Treasurer since 2000 and became a Vice President in 1997. He joined the Company in 1996, serving as its Controller. Prior to joining the Company, he was the Controller of Bell Corp. and an Audit Supervisor for PricewaterhouseCoopers LLP. Mr. Luken is a graduate of St. John Fisher College and holds an MBA from the William E. Simon Graduate School of Business Administration of the University of Rochester. He is a Certified Public Accountant. He is on the Board of Directors of The Bell Company, LLC.

Bernard J. Quinn has served as Senior Vice President since 2009 and Vice President since 2000. Prior to joining Home Properties, Mr. Quinn was a Regional Property Manager for Millcreek Realty Co. Home Properties purchased Millcreek’s Philadelphia apartment portfolio in 1997. Mr. Quinn is a graduate of Villanova University.

John E. Smith has served as Chief Investment Officer of the Company since 2006 and as Senior Vice President since 2001. From 1998 until 2001, he was a Vice President of the Company. Prior to joining the Company in 1997, Mr. Smith was general manager for Direct Response Marketing, Inc. and Executive Vice President for The Equity Network, Inc. Mr. Smith was Director of Investment Properties at Hunt Commercial Real Estate for 20 years. He has been a Certified Commercial Investment Member (CCIM) since 1982, a New York State Certified Instructor and has taught accredited commercial real estate courses in four states.

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.


2011	High		Low		Dividends
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

2010
Fourth Quarter	$	56.93	$	51.42	$	0.58
Third Quarter	$	53.74	$	42.56	$	0.58
Second Quarter	$	51.46	$	44.03	$	0.58
First Quarter	$	48.64	$	43.09	$	0.58

As of February 16, 2012, the Company had approximately 3,179 shareholders of record; 48,371,215 common shares (plus 10,691,653 UPREIT Units convertible into 10,691,653 common shares) were outstanding, and the closing price of the Company’s common stock on the NYSE was $59.02. 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 4, 2012, the Board declared a dividend of $0.66 per share for the quarter ended December 31, 2011. The dividend is payable February 28, 2012 to shareholders of record on February 16, 2012.

Performance Graph

The following graph compares the cumulative return on the Company’s common stock during the five year period ended December 31, 2011 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 investment on December 31, 2006. 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.

LOGO


	12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011
p HME	$	100.00	$	79.60	$	76.27	$	96.94	$	118.14	$	127.85
n NAREIT Equity	$	100.00	$	84.31	$	52.50	$	67.20	$	85.98	$	93.10
l S&P 500	$	100.00	$	105.49	$	66.46	$	84.05	$	96.71	$	98.76

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.

Issuer Purchases of Equity Securities

In 1997, the Board 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 specific target stock price or a specific timetable for share repurchase. At December 31, 2011, the Company had authorization to repurchase 2,291,160 shares of common stock and UPREIT Units under the Company Program and during the three months ended December 31, 2011, the Company did not repurchase any shares or units under the Company Program.

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.

There were no shares or units repurchased by the Company during the quarter ended December 31, 2011.

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).


	2011			2010			2009			2008			2007
Revenues:
Rental income	$	532,365		$	473,833		$	457,690		$	447,877		$	430,185
Other income ⁽¹⁾		47,608			42,746			41,486			41,890			38,438

Total revenues		579,973			516,579			499,176			489,767			468,623


Expenses:
Operating and maintenance		224,537			211,038			207,293			203,571			192,927
General and administrative		29,145			25,138			24,476			25,489			23,412
Interest		130,583			124,126			121,765			118,263			116,476
Depreciation and amortization		144,819			126,668			118,573			110,194			102,521
Other expenses ⁽²⁾		3,225			2,871			—			—			—

Total expenses		532,309			489,841			472,107			457,517			435,336


Income from operations before gain on early extinguishment of debt		47,664			26,738			27,069			32,250			33,287
Gain on early extinguishment of debt		—			—			—			11,304			—

Income from continuing operations		47,664			26,738			27,069			43,554			33,287
Discontinued operations:
Income (loss) from discontinued operations		—			(407	)		(4,305	)		(1,909	)		7,096
Gain (loss) on disposition of property		—			(13	)		24,314			51,560			42,126

Discontinued operations		—			(420	)		20,009			49,651			49,222

Net income		47,664			26,318			47,078			93,205			82,509
Net income attributable to noncontrolling interest		(9,808	)		(6,237	)		(12,659	)		(27,124	)		(22,712	)
Preferred dividends		—			—			—			—			(1,290	)
Preferred stock issuance costs written off		—			—			—			—			(1,902	)

Net income attributable to common stockholders	$	37,856		$	20,081		$	34,419		$	66,081		$	56,605


Basic earnings per share data:
Income from continuing operations	$	0.90		$	0.56		$	0.60		$	0.97		$	0.65
Discontinued operations		—			(0.01	)		0.44			1.10			1.06

Net income attributable to common stockholders	$	0.90		$	0.55		$	1.04		$	2.07		$	1.71


Diluted earnings per share data:
Income from continuing operations	$	0.89		$	0.55		$	0.60		$	0.95		$	0.63
Discontinued operations		—			(0.01	)		0.44			1.09			1.04

Net income attributable to common stockholders	$	0.89		$	0.54		$	1.04		$	2.04		$	1.67

Cash dividends declared per common share	$	2.48		$	2.32		$	2.68		$	2.65		$	2.61


Balance Sheet Data:
Real estate, before accumulated depreciation	$	5,042,324		$	4,377,730		$	3,915,979		$	3,872,390		$	3,680,155
Total assets		4,153,206			3,634,703			3,268,034			3,317,094			3,216,199
Total debt		2,663,336			2,618,932			2,302,281			2,317,500			2,178,305
Common stockholders’ equity		1,153,668			720,893			661,112			650,778			675,683

Other Data:
Net cash provided by operating activities	$	197,705		$	160,019		$	149,624		$	160,081		$	162,558
Net cash used in investing activities		(664,343	)		(334,539	)		(47,565	)		(80,584	)		(87,553	)
Net cash provided by (used in) financing activities		464,153			176,493			(99,817	)		(79,039	)		(187,108	)
Funds From Operations - Diluted, as adjusted by the Company ⁽³⁾		189,723			151,134			146,171			161,318			148,617

Weighted average number of shares/units outstanding:
Shares - Basic		41,860,139			36,682,191			33,040,839			31,991,817			33,130,067
Shares - Diluted		42,545,082			37,169,886			33,172,116			32,332,688			33,794,526
Shares/units - Basic		52,926,968			48,201,751			45,274,376			45,200,405			46,520,695
Shares/units - Diluted		53,611,911			48,689,446			45,405,653			45,541,276			47,185,154

Total communities owned at end of year		124			116			105			110			123
Total apartment units owned at end of year		41,951			38,861			35,797			37,130			37,496

⁽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.

⁽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):


	2011		2010		2009			2008^(a)			2007

Net income attributable to common stockholders	$	37,856	$	20,081	$	34,419		$	66,081		$	56,605
Real property depreciation and amortization		142,059		124,803		118,480			114,260			110,536
Real property impairment charges		—		—		—			4,000			—
Noncontrolling interest		9,808		6,237		12,659			27,124			22,712
Loss (gain) on disposition of property		—		13		(24,314	)		(51,560	)		(42,126	)

FFO - Basic and Diluted, as defined by NAREIT		189,723		151,134		141,244			159,905			147,727
Loss from early extinguishment of debt in connection with sale of real estate		—		—		4,927			1,413			890

FFO - Basic and Diluted, as adjusted by the Company	$	189,723	$	151,134	$	146,171		$	161,318		$	148,617


Weighted average common shares/units outstanding^(b):
Basic		52,927.0		48,201.8		45,274.4			45,200.4			46,520.7

Diluted		53,611.9		48,689.4		45,405.7			45,541.3			47,185.2


FFO - Diluted, as adjusted by the Company per share/unit	$	3.54	$	3.10	$	3.22		$	3.54		$	3.15

^(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.

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 54. 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, 2011, the Company owned and operated 124 apartment communities with 41,951 apartments.

Executive Summary

The Company operated during 2011 in a recovering economic environment, where the Company’s markets and the country as a whole experienced job growth of 0.7% and 1.3%, respectively. This is slightly less than the job growth in the Company’s markets of 0.8% in 2010. However, in 2008 and 2009, there were actual job losses for both the Company’s markets and the country as a whole. 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 to number two in 2007, number three in 2008, number four in 2009, number five in 2010 and number six in 2011. In the three-year period from 2004 to 2006, home purchases represented, on average, over 19% of our move-outs. In 2007 and 2008, we experienced the first significant drop in years, with move out for home purchase declining to 15.5% and 12.0%, respectively. During 2008 and right through 2011, we have seen stabilization of this measurement, with the percentage staying at the same 12% level in 2008 and 2009, dropping down slightly to 11.0% in 2010 and 10.4% in 2011. As there is usually a lag between job growth and its effect on household formation, the increase in jobs in 2010 did not create a measurable increased demand for our apartments until the second half of 2010. After experiencing slightly negative growth in rental income for the first two quarters of 2010, starting in the third quarter of 2010 and continuing each quarter through 2011, we experienced increasing rental income growth.

The Company owned 103 communities with 34,950 apartment units throughout 2010 and 2011 where comparable operating results are available for the years presented (the “2011 Core Properties”). Occupancies at the 2011 Core Properties increased slightly, by 30 basis points, from 95.2% to 95.5%. Including bad debt in the calculation to arrive at “economic occupancy”, this metric increased by 40 basis points to 94.3% for 2011 from 93.9% in 2010. The level of bad debt improved to 120 basis points in 2011 compared to 133 basis points in 2010. For 2012, we are projecting bad debt to be 115 basis points of rent potential.

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 January, 2012, our ATR was 5.8%, similar to the same time period a year ago when ATR was 5.6%. We have been more aggressive in pushing through higher rental increases, resulting in the slight rise in ATR. For 2012, we are projecting physical occupancy to be 20 basis points lower than 2011, as a result of a more aggressive approach to rent increases.

Total 2011 Core Properties rental revenue growth for 2011 was projected to be 3.6%, consisting of an increase of 3.4% in rental rate growth with economic occupancy to increase 0.2%. Actual results were positive 3.7% in rental rate growth and 0.4% increase in economic occupancy, resulting in 4.1% total rental revenue growth, or 50 basis points higher than guidance.

The guidance for 2012 Core Properties (apartment units owned throughout 2011 and 2012, the “2012 Core Properties”) total revenue growth is 4.5% at the midpoint of guidance. Rental rates are projected to increase 4.7%, including above-average rental increases at certain communities resulting from continued efforts to upgrade the properties. Economic occupancies are expected to decrease 0.1% for the year, such that rental revenues are projected to increase 4.6%. Property other income is expected to rise slightly at 2.1% year over year, decreasing the 4.6% rental revenue increase to 4.5% total revenue growth. Expenses for 2012 Core Properties are projected to increase 3.5% at the midpoint of guidance.

These revenue and expense projections result in 2012 Core Properties NOI growth of 5.0% at the mid-point of 2012 guidance. Markets where the Company expects NOI results above the average include: Philadelphia 6.2%, Boston 6.2%, Baltimore 5.2%, and Washington, D.C. 5.1%. Markets with below average expectations include: New York City Metro area 4.1%, Chicago 3.0 %, and Florida 1.8%. 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 revenue component is likely to be more volatile. It is difficult to predict how robust the recovery will be, including factors such as job growth and housing demand. A worsening economic environment is not expected.

The Company has anticipated acquisitions in the range of $200 million to $300 million in its budget for 2012. The Company is committed to a disciplined approach to acquisitions, and following two very successful years in acquisitions (2011 was a record year at $501 million in transactions) we will be prudent in underwriting. If cap rates stabilize, interest rates continue to be historically low, and NOI growth rate improves, we may take a more aggressive approach.

During 2012, the Company will target leverage at approximately 44% or less 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 2011.

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

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

The Company owned 103 communities with 34,950 apartment units throughout 2010 and 2011 where comparable operating results are available for the years presented (the “2011 Core Properties”). The Company has one property with 851 units undergoing significant renovations beginning in 2011 such that the operating results are not comparable to 2010 due to units being taken out of service during the redevelopment period (the “Redevelopment Property”) and has reclassified the operating results of the Redevelopment Property from Core Properties for 2010 and 2011. For the year ended December 31, 2011, the 2011 Core Properties showed an increase in total revenues of 4.2% and a net operating income increase of 7.6% 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 $1,171 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	$	463,211		$	444,969		$	18,242		4.1	%

Utility recovery revenue		21,165			19,790			1,375		6.9	%


Rent including recoveries		484,376			464,759			19,617		4.2	%

Other income		21,590			20,663			927		4.5	%


Total revenue		505,966			485,422			20,544		4.2	%

Operating and maintenance		(196,855	)		(198,260	)		1,405		0.7	%


Net operating income	$	309,111		$	287,162		$	21,949		7.6	%

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 13 to Consolidated Financial Statements, under Part IV, Item 15 of this Form 10-K.

During 2011, the Company acquired eight apartment communities with 2,817 units and placed into service another 270 units at two development communities (the “2011 Acquisition Communities”). In addition, the Company experienced full year results for the nine apartment communities with 2,614 units acquired and 449 units placed into service at two development communities during 2010 (the “2010 Acquisition Communities”). The inclusion of these acquired and developed communities generally accounted for the significant changes in operating results for the year ended December 31, 2011.

Results of Operations (continued)

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


	2011			2010			$ Variance			% Variance

Rent	$	532,365		$	473,833		$	58,532			12.4	%

Utility recovery revenue		22,939			20,762			2,177			10.5	%


Rent including recoveries		555,304			494,595			60,709			12.3	%

Other income		24,515			21,878			2,637			12.1	%


Total revenue		579,819			516,473			63,346			12.3	%

Operating and maintenance		(224,537	)		(211,038	)		(13,499	)		(6.4	%)


Net operating income	$	355,282		$	305,435		$	49,847			16.3	%

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. The results of the 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 $20,926 when compared to the year ended December 31, 2010. The increase was primarily attributable to the following factors: an increase in rental income of $58,532, and an increase in property other income of $4,814. These changes were partially offset by increases in operating and maintenance expense of $13,499, general and administrative expense of $4,007, interest expense of $6,457, depreciation and amortization of $18,151 and other expenses of $354. Each of the items are described in more detail below.

Of the $58,532 increase in rental income, $26,311 is attributable to the 2010 Acquisition Communities, $14,873 is attributable to the 2011 Acquisition Communities, partially offset by an $894 reduction for the Redevelopment Property. The balance, an increase of $18,242, 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 $1,130 to $1,171 per apartment unit.

Of the $2,177 increase in utility recovery revenue, $505 is attributable to the 2010 Acquisition Communities, $562 is attributable to the 2011 Acquisition Communities, partially offset by a $265 reduction for the Redevelopment Property. The balance, an increase of $1,375, relates to a 6.9% increase from the 2011 Core Properties as the result of a 0.4% increase in economic occupancy from 93.9% to 94.3% 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 $2,637. 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 $927 is attributable to the 2011 Core Properties.

Of the $13,499 increase in operating and maintenance expenses, $9,516 is attributable to the 2010 Acquisition Communities, $6,037 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 $1,405 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.

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	$	7,307	$	7,549	$	242			3.2	%
Gas		15,726		16,123		397			2.5	%
Water & sewer		16,207		15,151		(1,056	)		(7.0	%)
Repairs & maintenance		29,968		28,408		(1,560	)		(5.5	%)
Personnel expense		45,174		46,411		1,237			2.7	%
Advertising		3,929		3,984		55			1.4	%
Legal & professional		1,809		1,576		(233	)		(14.8	%)
Office & telephone		5,500		5,630		130			2.3	%
Property insurance		4,659		6,460		1,801			27.9	%
Real estate taxes		47,456		47,112		(344	)		(0.7	%)
Snow		1,486		2,195		709			32.3	%
Trash		2,956		3,224		268			8.3	%
Property management G&A		14,678		14,437		(241	)		(1.7	%)

Total	$	196,855	$	198,260	$	1,405			0.7	%

Electricity costs were down $242, or 3.2% 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 $397, 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, causing boilers to remain on longer into the spring season. 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.

As of the middle of January, 2012, the Company has fixed-price contracts covering 100% of its natural gas exposure for the balance of the 2011/2012 heating season. Risk is further diversified by staggering contract term expirations. For the balance of the 2011/2012 heating season, the Company estimates the average price per decatherm will be approximately $5.70, excluding transportation, which has historically approximated $3.00 per decatherm. For the 2012/2013 heating season, the Company has fixed-priced contracts covering approximately 95% of its natural gas exposure for an estimated weighted average cost for fixed and floating rate contracts of $5.13 per decatherm, excluding transportation.

Water & sewer costs were up $1,056, or 7.0%, 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 $525, or 1.8% from a year ago, excluding the accounting for involuntary conversions related to fires and the associated insurance claims at certain properties. 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. The Company has provided guidance for 2012 which anticipates a 0.9% increase in repairs and maintenance.

Personnel expenses were down $1,237, or 2.7%, 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. <

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