EX-99 8 hme8k9-2006kfors3ex992.htm MGMNT'S DISC. & ANALYSIS FIN CONDITION/RES. OF OP

Exhibit 99.2

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

Overview

The following discussion should be read in conjunction with the consolidated
financial statements, the notes thereto, and the selected financial data
appearing elsewhere in this Form 10-K. Historical results and percentage
relationships set forth in the consolidated financial statements, including
trends which might appear, should not be taken as indicative of future
operations. The Company considers portions of the information to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
both as amended, with respect to the Company's expectations for future periods.
Some examples of forward-looking statements include statements related to
acquisitions (including any related pro forma financial information) future
capital expenditures, financing sources and availability and the effects of
environmental and other regulations. Although the Company believes that the
expectations reflected in those forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Factors that may cause actual results to differ include general
economic and local real estate conditions, the weather and other conditions that
might affect operating expenses, the timely completion of repositioning
activities within anticipated budgets, the actual pace of future acquisitions
and sales, and continued access to capital to fund growth. For this purpose, any
statements contained in this report that are not statements of historical fact
should be considered to be forward-looking statements. Some of the words used to
identify forward-looking statements include "believes", "anticipates", "plans",
"expects", "seeks", "estimates", and similar expressions. Readers should
exercise caution in interpreting and relying on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond the Company's control and could materially affect the
Company's actual results, performance or achievements.

The Company is engaged primarily in the ownership, management, acquisition,
rehabilitation and development of residential apartment communities in selected
Northeast, Mid-Atlantic, Midwest and Southeast Florida markets. As of December
31, 2005, the Company operated 158 apartment communities with 47,001 apartments.
Of this total, the Company owned 153 communities, consisting of 43,432
apartments, managed as general partner one partnership that owned 868
apartments, and fee managed four properties with 2,701 apartments for third
parties.

Executive Summary

The Company operated during 2005 in an improving economic environment. The
recession, which started in 2001, continued through mid-2004 resulting in job
losses in many parts of the country. For historical reference, Home Properties'
markets experienced negative job growth of -0.4% in 2001 and -0.9% in 2002. For
2003, the Company's markets, as well as the country as a whole, experienced flat
job growth. For 2004 and 2005, both the Company's markets and the country as a
whole experienced positive job growth; 1.0% and 1.1% for the Company, and 1.7%
and 1.5% for the country, respectively. An increase in job growth leads to
household formations, which creates an increase in demand for rental housing. In
addition, the increasing home mortgage interest rate environment made it more
challenging for potential residents who considered making the switch to home
ownership. Home ownership continues to be the number one reason our residents
give for moving out of our communities. In 2001, home purchases represented
17.8% of our move-outs, growing to 18.8% in 2002, 19.6% in 2003, and leveling
off at 19.5% for 2004 and 19.4% in 2005. A continued increase in home mortgage
rates could push this level down, which would positively affect our turnover
rates and improve occupancy. As referenced in our Market Demographics table on
page 9 of this report, job growth for our markets improved in 2005 with 1.1%
growth over 2004, on top of the 1.0% growth in 2004 over 2003. As there is
usually a lag between job growth and household formation, this recovery did not
create a measurable increased demand for our apartments until the second half of
2005. During the first six months of 2005, same property rent was up 1.4% and
total property revenue was up 1.8%. These improved to 2.5% for rent and 4.0% for
total revenue for the second six months of 2005.

The reason for using rent concessions, and the ultimate level of those
concessions, has changed over the past few years. Concessions for 2003 were 119
basis points of rental revenue, which dropped to 87 basis points for all of
2004, and increased to 105 basis points for 2005. In 2003, the Company
positioned itself to improve occupancy, which resulted in less aggressive rental
rate increases and a greater use of rent concessions. In 2004, we were able to
maintain and improve occupancies while reducing concessions as the economy
improved. In 2005, the overall level of concessions increased to help soften the
much more aggressive rental increases and significant use of water and sewer
expense recovery which the Company started to pass through to the residents
during 2005.

The Company owned 116 communities with 33,422 apartment units throughout 2004
and 2005 where comparable operating results are available for the years
presented (the "2005 Core Properties"). Occupancies at the 2005 Core Properties
increased slightly by 10 basis points, from 93.4% to 93.5%. Occupancies in the
fourth quarter of 2005 averaged 93.7%, compared to 92.7% a year ago. The Company
uses a measurement referred to as Available to Rent, or ATR. This is a leading
indicator to assess future occupancy rates by reference 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 middle of February, 2006,
our ATR was 7.0%, compared to the same time period a year ago when ATR was 7.8%.
The fact that ATR is 0.8% better than 2005 is not surprising, given the fact
that the fourth quarter of 2005 was 1.0% ahead the previous year in occupancy.
This is a positive trend as we enter 2006.

Total Same Store Properties (including Detroit) rental revenue growth for 2005
was projected to be 3.3%, consisting of 2.5% in rental rate growth, 0.3% in
occupancy improvement, and 0.5% in reduction to concessions. Actual results were
2.2% in rental rate growth, 0.1% drop in occupancy, and 0.2% increase to
concessions, totaling 1.9% total rental revenue growth. It is difficult to
compare rental growth without including the utility recovery revenue which is
classified as property other income. The Company recorded $3.2 million of
recovery revenue in 2005 verses only $100,000 in 2004. This put pressure on the
ability to raise base rent, as this initiative was not originally budgeted at
the beginning of 2005. Actual results, including utility recovery revenue, were
3.0% in rental rate growth, 0.1% drop in occupancy, and 0.2% increase to
concessions, totaling 2.7% total rental revenue growth including utility
recovery income.

In November 2005, the Company announced its intention to sell its Detroit
portfolio to focus on its target core markets. The operating results for Detroit
produced negative year over year growth in 2005. This was a large contributing
factor in results not achieving the 2005 revenue growth of 3.3% that had been
projected. If Detroit results are left out, as those properties are classified
as held for sale, the balance of the 2005 Core Properties achieved the following
(including utility recovery revenue): 3.2% in rental rate growth, 0.1% increase
in occupancy, and 0.2% increase to concessions, netting out to 3.1% total rental
revenue growth.

The guidance for 2006 Same Store Properties (apartment units owned throughout
2005 and 2006) revenue growth is 4.8%. Rental rates are projected to increase
3.4%, including above-average rental increases at certain communities resulting
from the continued efforts to upgrade the properties. The effect from the
utility recovery revenue program is included in rental rate growth, which adds
0.4% of the 3.4% increase. Occupancies are expected to increase 0.3% for the
year, and concessions are projected to slow down slightly, adding 0.1% to net
rental income, such that rental revenues are projected to increase 3.8%.
Property other income is expected to increase substantially year over year,
increasing the 3.8% rental revenue growth to 4.8% total revenue growth. The
items driving the property other income growth are a $3.9 million marginal
increase in water and sewer recovery revenue and a $1.3 million marginal
increase in heating cost recovery revenue from the utility recovery initiatives.

Expenses for 2006 Same Store Properties are projected to increase 5.3%. See
below under "Results of Operations" for more details on expense comparisons.

These revenue and expense projections result in 2006 Same Store Properties net
operating income ("NOI") growth of 4.3% at the mid-point of 2006 guidance.
Markets where the Company expects above average NOI growth include: Florida
(+9.0%); Washington, D.C. (+7.5%); Baltimore (+5.9%); Philadelphia (+5.5%).
Average growth is expected in the New York City Metro area (+4.0%). Markets with
below average expectations include: Upstate New York (+3.0%); Boston (+2.7%);
Chicago (0.0%); and Detroit (-1.5%). Certain historical demographic information
for these markets may be found in the tables on pages 9 and 10 of this report.

Of the two items making up NOI - revenue and operating expenses, the revenue
component is likely to be more volatile. An improving economy could create
higher demand for rental housing above that projected. An economic recovery that
stumbles or creates little new job growth could put pressure on the Company's
ability to reach the mid-point of guidance. The Company has given FFO guidance
for 2006 with a range of $2.88 to $3.00 per share.

The Company has anticipated closing on acquisitions of $150 million in its
budget for 2006. The Company is committed to a disciplined approach to
acquisitions, but at the same time recognizes that the continued long term low
interest rate levels allow the Company flexibility to adjust hurdle rates and
bids to reflect market conditions. The Company is also targeting $250 million in
dispositions, mostly from the sale of its entire Detroit portfolio. While the
acquisition market will likely continue to be very competitive, the Company is
confident that the 2006 acquisition goal of $150 million is achievable.

During 2005, the Company increased its level of stock buy-back activity
substantially, repurchasing approximately 2.8 million shares at a weighted price
slightly in excess of $40.00 per share. The Company's strategy is to
opportunistically repurchase shares at a discount to its underlying net asset
value, thereby continuing to build value for shareholders. The Company estimates
its net asset value per share at December 31, 2005 to be $52.45, based on
capitalizing at 6.3% the annualized and seasonally adjusted fourth quarter
property net income, plus a 3% growth factor, minus a management fee. With the
difficult and competitive acquisition environment described above, the Company
believes buying back stock is a logical use of funds. The Company will continue
to monitor stock prices, the published net asset value and acquisition
alternatives to determine the current best use of capital between stock buyback
and acquisitions.

During 2006, the Company anticipates increasing leverage to a level of
approximately 49% of debt-to-total market capitalization in order to meet the
above-described acquisition goals. Finally, although not contemplated based on
the announced level of acquisitions of $150 million, if the acquisition pace
were to increase, the Company would consider a combination of increased sales of
under-performing or isolated apartment communities and issuance of cumulative
redeemable preferred stock to raise additional capital.

Results of Operations

Comparison of year ended December 31, 2005 to year ended December 31, 2004.

The Company owned 116 communities with 33,422 apartment units throughout 2004
and 2005 where comparable operating results are available for the years
presented (the "2005 Core Properties"). For the year ended December 31, 2005,
the 2005 Core Properties showed an increase in rental revenues of 2.4% and a net
operating income increase of 2.9% over the 2004 year-end period. Property level
operating expenses increased 3.8%. Average economic occupancy for the 2005 Core
Properties increased from 93.4% to 93.5%, with average monthly rental rates
increasing 2.4% to $1,000 per apartment unit.

A summary of the 2005 Core Property NOI is as follows:

2005 2004 $ Change % Change
---- ---- -------- --------
Rental Income $374,816,000 $366,085,000 $8,731,000 2.4%
------------ ------------ ---------- ---

Utility Recovery Revenue 2,756,000 95,000 2,661,000 2801.1%
Other Income 19,150,000 17,918,000 1,232,000 6.9%
------------ ------------ ---------- ---
Total Property Other Income 21,906,000 18,013,000 3,893,000 21.6%
------------ ------------ ---------- ---
Total Revenue 396,722,000 384,098,000 12,624,000 3.3%

Operating and Maintenance (176,339,000) (169,954,000) (6,385,000) (3.8%)
------------ ------------ ---------- ---
Net Operating Income $220,383,000 $214,144,000 $6,239,000 2.9%
============ ============ ========== ===

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, Home Properties 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. Home Properties 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 properties. 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.

During 2005, the Company acquired a total of 2,430 apartment units in seven
communities (the "2005 Acquisition Communities"). In addition, the Company
experienced full-year results for the 2,394 apartment units in eight apartment
communities (the "2004 Acquisition Communities") acquired during 2004 which were
held and used through December 31, 2005. The inclusion of these acquired
communities generally accounted for the significant changes in operating results
for the year ended December 31, 2005. In addition, effective April 1, 2004, the
reported income from operations include the consolidated results of one
investment where the Company is the managing general partner that has been
determined to be a Variable Interest Entity ("VIE").

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

2005 2004 $ Change % Change
---- ---- -------- --------

Rental Income $416,709,000 $387,280,000 $29,429,000 7.6%
------------ ------------ ---------- ---
Utility Recovery Revenue 3,128,000 133,000 2,995,000 2251.9%
Other Income 20,419,000 18,554,000 1,865,000 10.1%
------------ ------------ ---------- ---
Total Property Other Income 23,547,000 18,687,000 4,860,000 26.0%
------------ ------------ ---------- ---
Total Revenue 440,256,000 405,967,000 34,289,000 8.4%

Operating and Maintenance (198,487,000) (180,827,000) (17,660,000) (9.8%)
------------ ------------ ---------- ---
Net Operating Income $241,769,000 $225,140,000 $16,629,000 7.4%
============ ============ =========== ===

During 2005, the Company disposed of four properties with a total of 816 units,
which had partial results for 2005 (the "2005 Disposed Communities"). Also
during 2005, the Company placed twenty-one properties with a total of 5,138
units into held for sale status, 5,046 of which had full year results for 2005
and 2004 and 92 of which were acquired during 2004 (the "2005 Held for Sale
Communities"). The results of these disposed and held for sale properties have
been reflected in discontinued operations and are not included in the table
above.

For the year ended December 31, 2005, income from operations (income before
equity in earnings (losses) of unconsolidated affiliates, minority interest,
discontinued operations and gain (loss) on disposition of property and business)
decreased by $4,354,000 when compared to the year ended December 31, 2004. The
decrease was primarily attributable to the following factors: an increase in
rental income of $29,429,000, an increase in property other income of
$4,860,000, a decrease in general and administrative expense of $4,326,000 and a
decrease in impairment of assets held as general partner of $716,000. These
changes were more than offset by an increase in operating and maintenance
expense of $17,660,000, an increase in interest expense of $14,820,000, an
increase in depreciation and amortization of $10,546,000 and a decrease in
interest and other income of $659,000. Each of the items are described in more
detail below.

Of the $29,429,000 increase in rental income, $11,451,000 is attributable to the
2004 Acquisition Communities, $8,180,000 is attributable to the 2005 Acquisition
Communities and $1,067,000 is attributable to the consolidation of the VIE. The
balance of $8,731,000 relates to a 2.4% increase from the 2005 Core Properties
due primarily to an increase of 2.4% in weighted average rental rates,
accompanied by an increase in average economic occupancy from 93.4% to 93.5%.

In the current improving economic environment, it is very difficult to project
rental rate and occupancy results. The Company has provided guidance for 2006,
which, at the mid-point of the range, anticipates same store revenue growth of
4.8%, including above-average rental increases from the continued efforts to
upgrade the properties. Occupancy levels are expected to slowly improve from the
level at the end of the fourth quarter of 2005, producing an expected average
for 2006 Same Store Properties of 93.7%, 30 basis points higher than all of
2005.

Property other income, which consists primarily of income from utility recovery
charges, 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 in 2005 by
$4,860,000. Of this increase, $661,000 is attributable to the 2004 Acquisition
Communities, $287,000 is attributable to the 2005 Acquisition Communities and
$19,000 is attributable to the VIE. The balance of $3,893,000 represents a 21.6%
increase attributable to the 2005 Core Properties. Included in the 2005 Core
Properties increase is $2,661,000 which represents increased utility recovery
revenue compared to 2004.

Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased in 2005 by $759,000. This is due
primarily to a decrease in the level of management activity as a result of the
sale of the affordable limited partnerships partially offset by increases in
other fee managed properties.

Of the $17,660,000 increase in operating and maintenance expenses, $6,439,000 is
attributable to the 2004 Acquisition Communities, $3,750,000 is attributable to
the 2005 Acquisition Communities and $1,086,000 is attributable to the VIE. The
balance for the 2005 Core Properties, a $6,385,000 increase in operating
expenses or 3.8%, is primarily a result of increases in utilities, personnel and
real estate taxes, offset in part by reductions in advertising, repairs and
maintenance, and property insurance.

The breakdown of operating and maintenance costs for the 2005 Core Properties by
line item is listed below (in thousands):

2005 2004 $ Variance % Variance
---- ---- ---------- ----------
Electricity $ 7,114 $ 6,934 $ (180) (2.6%)
Gas 20,839 17,423 (3,416) (19.6%)
Water & Sewer 10,244 9,644 (600) (6.2%)
Repairs & Maintenance 25,394 25,622 228 0.9%
Personnel Expense 36,925 36,427 (498) (1.4%)
Site Level Incentive Compensation 2,501 1,544 (957) (62.0%)
Advertising 7,058 7,309 251 3.4%
Legal & Professional 1,292 1,308 16 1.2%
Office & Telephone 4,998 5,252 254 4.8%
Property Insurance 5,120 6,230 1,110 17.8%
Real Estate Taxes 40,166 38,404 (1,762) (4.6%)
Snow 1,280 1,099 (181) (16.5%)
Trash 2,515 2,441 (74) (3.0%)
Property Management G&A 10,893 10,317 (576) (5.6%)
-------- -------- ------- ----
Total $176,339 $169,954 $(6,385) (3.8%)
======== ======== ======= ====

The natural gas heating cost variance of 19.6% reflects significant increases in
the cost of natural gas per decatherm. As of December 31, 2005, the Company had
fixed-price contracts covering approximately 75% of its natural gas exposure for
the balance of the 2005/2006 heating season. The Company has fixed-price
contracts covering approximately 49% of its natural gas exposure for calendar
year 2006. Risk is further diversified by staggering contract term expirations.
For the balance of the 2005/2006 heating season, the Company estimates the
average price per decatherm will be approximately $9.64. For calendar year 2006,
where the Company has coverage for 49% of its exposure, the Company's negotiated
average price per decatherm was approximately $8.47. A year ago, the average
commodity cost for the season's contracts was $6.40. The Company has provided
guidance for 2006 which anticipates a 23% increase (or $5,900,000) in natural
gas heating costs. This is based on the thirty-year average for the number of
degrees days for 2006. For guidance, the portion of the calendar year not
covered by fixed price contracts is assumed to be priced at a level that
reflects twelve month strip pricing as of February, 2006. During 2006, the
Company plans on increasing the percentage of fixed price contracts before
entering the 2006/2007 winter heating season.

The over 6% increase in water and sewer costs is a function of municipalities
across all regions looking at ways to increase revenues. The Company initiated a
program to allocate water and sewer costs to residents at a majority of the
Owned Properties in March 2005.

The decrease in repairs and maintenance of 0.9% is mainly attributed to a
$919,000 decrease in sales tax charges between periods. Included in contract
repairs in 2004 is $805,000 of sales tax expense, compared to a reduction in
sales tax expense of $111,000 in 2005. See discussion on page 39 in section
titled Comparison of year ended December 31, 2004 compared to year ended
December 31, 2003. The Company has provided guidance for 2006 which anticipates
a 3.6% increase in repairs and maintenance.

Personnel expense was up 1.4% in 2005 versus 2004. Significant variances were in
workers compensation, up $421,000, or 27%, and health insurance, down $867,000,
or 33%. For 2006 guidance, personnel costs are anticipated to increase 2.5%.

Site level incentive compensation was up $957,000, or 62.0%. This represents an
increased focus on creating a higher level of property management compensation
coming from incentive based performance measures.

Advertising costs were down 3.4% as a result of property management decreasing
spending on major newspaper ads and focusing instead on internet advertising and
resident referral programs.

Property insurance costs were down 17.8% over 2004. The Company renewed the
property and general liability insurance policy for the year beginning November,
2004 at significantly reduced rates, due to a reduced number of claims and
better management of those claims. The guidance for 2006 reflects a 1.6%
decrease in insurance costs.

Real estate taxes were up 4.6% in 2005, reflecting increased assessments and
rates as tax authorities struggle to raise revenues in many regions of the
country. The Company expects real estate taxes to increase only 1.0% in 2006
reflecting successful initiatives to challenge assessments and obtain cost
reductions.

Snow removal costs were up 16.5%. The year 2005 produced normal snowfalls
compared to below normal snowfall in 2004. Snow removal costs are anticipated to
remain at normal levels in 2006.

The operating expense ratio (the ratio of operating and maintenance expense
compared to rental and property other income) for the 2005 Core Properties was
44.4% and 44.2% for 2005 and 2004, respectively. This 0.2% increase resulted
from the 3.3% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential being offset by the 3.8%
increase in operating and maintenance expense. In general, the Company's
operating expense ratio is higher than that experienced in other parts of the
country due to relatively high real estate taxes in its markets and the
Company's practice, typical in its markets, of including heating expenses in
base rent. This ratio could change as the Company rolls out its heating cost
recovery program in 2006 and 2007, charging residents for their share of heating
costs.

General and administrative expenses ("G&A") decreased in 2005 by $4,326,000 or
18% from $23,978,000 in 2004 to $19,652,000 in 2005. Of this decrease,
$3,800,000 is attributable to an accrued liability recorded in the fourth
quarter of 2004 relating to the March 2005 settlement of a lawsuit and the
payment of certain related legal fees, as described on page 40 in the section
titled Comparison of year ended December 31, 2004 to year ended December 31,
2003. After taking into account the settlement expense, all other items of G&A
decreased $526,000 year over year. Of this net variance, there was a $481,000
decrease in the level of corporate incentive compensation and a $573,000
decrease in other items of G&A; partially offset by $528,000 increased external
costs incurred specifically to comply with Section 404 of Sarbanes-Oxley. The
total direct external costs incurred during 2005 for Section 404 compliance
totaled approximately $2,300,000. A significant portion of this related to costs
incurred in 2005 to satisfy the first year efforts for Section 404 compliance.
G&A is expected to decrease 2.6% for 2006, based on an expectation of a lower
level of Section 404 costs.

Interest expense increased in 2005 by $14,820,000 as a result of the increased
borrowings in connection with acquisition of the 2005 Acquisition Communities,
and a full year of interest expense for the 2004 Acquisition Communities. In
addition, amortization from deferred charges relating to the financing of
properties totaled $1,975,000 and $1,766,000, and was included in interest
expense for 2005 and 2004, respectively.

Included in interest expense are prepayment penalties which decreased in 2005 by
$158,000 as compared to 2004. During 2005, the Company incurred a total of
$147,000 in prepayment penalties in connection with the refinancing or payoff of
certain mortgages compared to $305,000 in 2004.

Depreciation and amortization expense increased $10,546,000 due to the
additional depreciation expense on the 2005 Acquisition Communities and a full
year of depreciation expense for the 2004 Acquisition Communities, as well as
the incremental depreciation on the capital expenditures for additions and
improvements to the Core Properties in 2005 and 2004 of $71,481,000 and
$81,379,000, respectively.

Impairment of assets held as General Partner decreased from $1,116,000 in 2004
to $400,000 in 2005. During 2005, the Company recorded impairment charges of
$400,000 relating to the Company's estimate of fair market value of the one
remaining VIE. During 2004, the Company recorded impairment charges of
$1,116,000 (all in the first quarter). Of this total, $171,000 represented
advances made during the first quarter of 2004 to certain of the affordable
property limited partnerships which the Company believed would not be repaid
upon the sale of the loans. The remaining $945,000 pertained to an additional
net impairment charge taken on the 38 properties included in the Company's
planned disposition of its affordable portfolio to reduce the investment in the
partnerships based upon the revisions to the sale contract in the first quarter.
In connection with FIN 46R, the Company was required to consolidate the majority
of the affordable limited partnerships results of operations beginning April 1,
2004.

The equity in earnings (losses) of unconsolidated affiliates of ($538,000) in
2004 is primarily the result of the general partner recording a greater share of
the underlying investment's losses due to the loans and advances to certain of
the affordable property limited partnerships where the limited partner had no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses."

Minority interest decreased $686,000 as a direct result of the decrease in
income from operations over the prior year.

Included in discontinued operations for the year-ended December 31, 2005, are
the Disposition Communities and Held for Sale Communities. The Company generally
considers assets to be held for sale when all significant contingencies
surrounding the closing have been resolved, which often corresponds with the
actual closing date. However, the Company has classified as held for sale the
entire Detroit region portfolio of nineteen apartment communities containing
5,046 apartment units. The Company has announced its intention to sell the
portfolio and has met all of the requirements under SFAS 144. In addition, on
April 5, 2006, the Company disposed of two apartment communities containing 92
units. The results of these two properties are classified as held for sale as of
December 31, 2005 and are reflected in discontinued operations.

Included in the $53,975,000 gain on disposition of property reported for the
year 2005 is the sale of four apartment communities where the Company has
recorded a combined gross gain on sale of $73,022,000, net of minority interest
of $24,227,000. In addition, the Company recorded a $7,686,000 gain, net of
minority interest of $2,506,000, during the year related to the disposal of two
affordable partnerships.

In connection with the adoption of FIN 46R, the Company recorded a $321,000
cumulative effect charge of a change in accounting principle in the first
quarter of 2004. This charge was the result of negative capital accounts of
minority interest partners that were absorbed by the Company.

Net income increased $34,490,000 primarily due to the increase in gain on sale
of discontinued operations of $42,558,000 in 2005 compared to 2004; partially
offset by $4,885,000 lower income from the operation of discontinued operations
in 2005 compared to 2004.

Comparison of year ended December 31, 2004 to year ended December 31, 2003.

The Company owned 114 communities with 32,708 apartment units throughout 2003
and 2004 where comparable operating results are available for the years
presented (the "2004 Core Properties"). For the year ended December 31, 2004,
the 2004 Core Properties showed an increase in rental revenues of 3.7% and a net
operating income increase of 2.2% over the 2003 year-end period. Property level
operating expenses increased 6.6%. Average economic occupancy for the 2004 Core
Properties increased from 93.0% to 93.4%, with average monthly rental rates
increasing 3.3% to $973 per apartment unit.

A summary of the 2004 Core Property NOI is as follows:

2004 2003 $ Change % Change
---- ---- -------- --------
Rental Income $356,738,000 $343,921,000 $12,817,000 3.7%
Property Other Income 17,585,000 15,563,000 2,022,000 13.0%
------------ ------------ ---------- ---
Total Revenue 374,323,000 359,484,000 14,839,000 4.1%
Operating and Maintenance (166,530,000) (156,150,000) (10,380,000) (6.6%)
------------ ------------ ---------- ---
Net Operating Income $207,793,000 $203,334,000 $4,459,000 2.2%
============ ============ ========== ===

During 2004, the Company acquired a total of 2,486 apartment units in ten
newly-acquired communities, 2,394 which were held and used through December 31,
2005 (the "2004 Acquisition Communities"). In addition, the Company experienced
full-year results for the 730 apartment units in two apartment communities (the
"2003 Acquisition Communities") acquired during 2003. The inclusion of these
acquired communities generally accounted for the significant changes in
operating results for the year ended December 31, 2004. In addition, effective
April 1, 2004, the reported income from operations include the consolidated
results of one investment where the Company is the managing general partner that
has been determined to be a VIE.

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

2004 2003 $ Change % Change
---- ---- -------- --------
Rental Income $387,280,000 $348,895,000 $38,385,000 11.0%
Property Other Income 18,687,000 15,994,000 2,693,000 16.8%
------------ ------------ ----------- ----
Total Revenue 405,967,000 364,889,000 41,078,000 11.3%
Operating and Maintenance (180,827,000) (158,740,000) (22,087,000) (13.9%)
------------ ------------ ----------- ----
Net Operating Income $225,140,000 $206,149,000 $18,991,000 9.2%
============ ============ =========== ====

During 2004, the Company also disposed of five properties with a total of 1,646
units, which had partial results for 2004 (the "2004 Disposed Communities"). The
results of these disposed properties have been reflected in discontinued
operations.

For the year ended December 31, 2004, income from operations (income before
equity in earnings (losses) of unconsolidated affiliates, minority interest,
discontinued operations and gain (loss) on disposition of property and business)
decreased by $3,188,000 when compared to the year ended December 31, 2003. The
decrease was primarily attributable to the following factors: an increase in
rental income of $38,385,000, an increase in property other income of $2,693,000
and a decrease in impairment of assets held as general partner of $1,402,000.
These changes were more than offset by an increase in operating and maintenance
expense of $22,087,000, an increase in general and administrative expense of
$1,371,000, an increase in interest expense of $7,152,000, an increase in
depreciation and amortization of $13,379,000 and a decrease in interest and
other income of $1,679,000. Each of the items are described in more detail
below.

Of the $38,385,000 increase in rental income, $4,410,000 is attributable to the
2003 Acquisition Communities, $18,132,000 is attributable to the 2004
Acquisition Communities and $3,026,000 is attributed to the VIE. The balance of
$12,817,000 relates to a 3.7% increase from the 2004 Core Properties due
primarily to an increase of 3.3% in weighted average rental rates, accompanied
by an increase in average economic occupancy from 93.0% to 93.4%.

The Company focused more on improving occupancy during 2003 and therefore was
less aggressive with rent increases at its Core Properties. The Company reverted
back in 2004 to focusing on rent increases, as seen by the quarter over quarter
trend of more aggressive rents. An additional component of the 3.3% increase in
weighted average rent results from the significant upgrading and repositioning
efforts discussed under "Capital Improvements" below. The Company seeks a
minimum 9% internal rate of return for these revenue-enhancing upgrades, down
from the 12% goal referenced in 2003.

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, utility
recovery charges and miscellaneous charges to residents, increased in 2004 by
$2,693,000. Of this increase, $229,000 is attributable to the 2003 Acquisition
Communities, $377,000 is attributable to the 2004 Acquisition Communities and
$65,000 is attributable to the VIE. The balance of $2,022,000 represents a 13%
increase attributable to the 2004 Core Properties. A significant portion of the
increase (47%) for the 2004 Core Properties is from telephone revenue and cable
revenue, in particular, revenue recognized in the amount of $500,000 associated
with the termination of a contract with a telephone service provider. In
addition, 12% of the increase is from increased laundry revenue as we continue
to increase the percentage of owned laundry equipment at the properties.

Other income, which primarily reflects management and other real estate service
fees recognized by the Company, decreased in 2004 by $1,644,000. This is due
primarily to a decrease in the level of management activity as a result of the
sale of the affordable limited partnerships.

Of the $22,087,000 increase in operating and maintenance expenses, $1,730,000 is
attributable to the 2003 Acquisition Communities, $7,895,000 is attributable to
the 2004 Acquisition Communities and $2,082,000 is attributable to the VIE. The
balance for the 2004 Core Properties, a $10,380,000 increase in operating
expenses or 6.6%, is primarily a result of increases in utilities, repairs and
maintenance, personnel, property insurance and real estate taxes, offset in part
by reductions in advertising and snow removal costs.

The breakdown of operating and maintenance costs for the 2004 Core Properties by
line item is listed below (in thousands):

2004 2003 $ Variance % Variance
---- ---- ---------- ----------
Electricity $ 6,839 $ 6,361 $ (478) (7.5%)
Gas 17,173 15,963 (1,210) (7.6%)
Water & Sewer 9,400 8,482 (918) (10.8%)
Repairs & Maintenance 25,083 22,081 (3,002) (13.6%)
Personnel Expense 35,491 32,972 (2,519) (7.6%)
Site Level Incentive Compensation 1,507 1,003 (504) (50.2%)
Advertising 7,206 7,863 657 8.4%
Legal & Professional 1,279 1,216 (63) (5.2%)
Office & Telephone 5,161 5,403 242 4.5%
Property Insurance 6,099 5,242 (857) (16.3%)
Real Estate Taxes 37,838 35,654 (2,184) (6.1%)
Snow 1,042 1,746 704 40.3%
Trash 2,373 2,423 50 2.1%
Property Management G&A 10,039 9,741 (298) (3.1%)
-------- -------- -------- ----
Total $166,530 $156,150 $(10,380) (6.6%)
======== ======== ======== ====

The increase in electric of 7.5% continues a trend of above 5% increases for the
past two years, reflective of market increases versus any substantial shift in
usage.

The natural gas heating cost variance of 7.6% was all a fourth quarter event, as
this line item was breakeven through the third quarter of 2004. The fourth
quarter of 2003 was relatively mild, plus there have been significant increases
in the cost of natural gas per decatherm. As of December 31, 2004, the Company
had fixed-price contracts covering approximately 99% of its natural gas exposure
for the 2004/2005 heating season. The Company has fixed-price contracts covering
approximately 59% of its natural gas exposure for calendar year 2005. Risk is
further diversified by staggering contract term expirations. For the 2004/2005
heating season, where the Company has coverage for approximately 99% of its
exposure, the Company's negotiated average price per decatherm is approximately
$6.08.

The over 10% increase in water and sewer costs are a function of municipalities
across all regions looking at ways to increase revenues. The Company was
focusing on a program to allocate water and sewer costs to residents at a
majority of the Owned Properties.

The increase in repairs and maintenance of 13.6% occurred in contract repairs,
painting and cleaning. Included in contract repairs is $805,000 of sales tax
expense, as described below, which accounted for 27% of the total increase in
repairs and maintenance. Cleaning costs are up $634,000, or 21% of the total
increase in repairs and maintenance. A significant portion of this represents a
shift between personnel costs and repairs and maintenance as more of this
function was performed by outside contractors versus in-house personnel.

During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861,000 (including $173,000 of interest expense) for sales tax not charged to
the Company by its vendors. This was included in the first quarter results and
allocated $312,000 to expense for property repairs, $136,000 (before minority
interest) to loss on disposition of property, and $413,000 capitalized to real
estate assets for improvements.

The Company determined that the amount of liability which it failed to record
with respect to sales and use tax did not have a material impact on its results
of operations or reported earnings for the prior periods in which the items
subject to tax were purchased and that the expense recorded in the first and
second quarters of 2004 were one-time adjustments. The Company does not believe
that the additional sales and use tax it will record and pay will have a
material impact on its results of operations in future periods. As a result of
the sales tax audit, the Company initiated procedures to ensure that sales and
use tax on expenditures were properly collected by its vendors or accrued and
paid by the Company.

Personnel expense was up 7.6% in 2004 versus 2003. Payroll tax expense was up
6.7%, mostly fueled by significant increases in workers compensation and health
insurance costs. The balance represents a 4.8% increase in wages.

Site level incentive compensation was up $504,000, or 50.2%. This represents an
increased focus on creating a higher level of property management compensation
coming from incentive based performance measures.

Advertising costs were down 8.4% as a result of a comparison to higher than
normal levels in 2003. Advertising costs were up substantially in 2003
consistent with increased efforts to attract traffic and increase occupancy. The
advertising level in 2004 reflected a more normalized run rate.

Property insurance costs were up 16.3% over 2003. The insurance expense for 2003
reflects the impact of a legal settlement which reduced the expense by $500,000.
Without the benefit of this settlement, insurance costs would have been up 6.8%.
The Company renewed the property and general liability insurance policy for the
year beginning November, 2004 at significantly reduced rates.

Real estate taxes were up 6.1% in 2004, reflecting increased assessments and
rates as tax authorities struggle to raise revenues in many regions of the
country.

Snow removal costs were down 40.3%. The first quarter of 2003 produced
significant snowfalls compared to historical norms. Most of the $704,000
decrease in snow removal costs occurred during the first quarter, due to this
comparison, and below normal snowfall in 2004.

The operating expense ratio (the ratio of operating and maintenance expense
compared to rental and property other income) for the 2004 Core Properties was
44.5% and 43.4% for 2004 and 2003, respectively. This 1.1% increase resulted
from the 4.1% increase in total revenue achieved through ongoing efforts to
upgrade and reposition properties for maximum potential being offset by the 6.6%
increase in operating and maintenance expense. In general, the Company's
operating expense ratio is higher than that experienced in other parts of the
country due to relatively high real estate taxes in its markets and the
Company's practice, typical in its markets, of including heating expenses in
base rent.

G&A increased in 2004 by $1,371,000 or 6% from $22,607,000 in 2003 to
$23,978,000 in 2004. Of this increase, $3,800,000 is attributable to an accrued
liability recorded in the fourth quarter of 2004 relating to the March 2005
settlement of a lawsuit and the payment of certain related legal fees, as
described below. The year-over-year increase would have been greater except for
a $5,000,000 expense incurred in 2003 for the restricted stock granted to the
Leenhoutses as part of their retirement as Co-CEO's. After taking into account
the settlement expense and the restricted stock grant, all other items of G&A
increased $2,571,000 year over year. Of this net variance, $1,591,000 is
directly attributed to increased external costs incurred specifically to comply
with Section 404 of Sarbanes-Oxley. Including all other accounting, auditing and
tax compliance cost increases explains an additional $368,000 of the variance
increase. All other items of G&A accounted for the $612,000 balance of the
increase. The total direct external costs incurred during 2004 for Section 404
compliance totaled approximately $1,800,000.

The $3,800,000 accrued for settlement costs ($3,500,000) and the legal fees
($300,000) relates to a legal action, commenced in 2000, against the Company,
the Operating Partnership and Home Leasing Corporation. Home Leasing is owned by
Nelson B. Leenhouts and Norman Leenhouts, who are the Co-Chairs of the Board of
Directors and Senior Advisors to the Company. The Company was originally formed
to expand and continue Home Leasing's business. The essence of the complaint was
that the entity in which the plaintiffs were investors was wrongfully excluded
from the Company's initial public offering. In their original complaint,
plaintiffs sought damages in the amount of $3,000,000. In the subsequent
discovery process, plaintiffs increased damages sought to $10,000,000. Payment
in settlement and of legal fees was made on behalf of Home Leasing as well as
the Company and the Operating Partnership in recognition of the fact that the
matters alleged in the action against Home Leasing related directly and solely
to the promotion and creation of the Company.

Interest expense increased in 2004 by $7,152,000 as a result of the increased
borrowings in connection with acquisition of the 2004 Acquisition Communities,
and a full year of interest expense for the 2003 Acquisition Communities. In
addition, amortization from deferred charges relating to the financing of
properties totaled $1,766,000 and $1,483,000, and was included in interest
expense for 2004 and 2003, respectively.

Included in interest expense are prepayment penalties which decreased in 2004 by
$1,305,000 as compared to 2003. During 2004, the Company incurred a total of
$305,000 in prepayment penalties in connection with the refinancing of certain
mortgages and the sale of one of the 2004 disposed properties. In 2003,
$1,610,000 was recorded in loss from early extinguishment of debt in connection
with the sale of two of the 2003 Disposed Communities.

Depreciation and amortization expense increased $13,379,000 due to the
additional depreciation expense on the 2004 Acquisition Communities and a full
year of depreciation expense for the 2003 Acquisition Communities, as well the
incremental depreciation on the capital expenditures for additions and
improvements to the Core Properties in 2004 and 2003 of $91,151,000 and
$101,398,000, respectively, net of the Disposition Communities.

In the fourth quarter of 2002, the Company announced its intention to sell
virtually all of the assets associated with its general partner interests in the
affordable properties in order to focus solely on the direct ownership and
management of market rate apartment communities. The assets included principally
loans, advances and management contracts. During 2004, the Company recorded
impairment charges of $1,116,000 (all in the first quarter). Of this total,
$171,000 represents advances made during the first quarter of 2004 to certain of
the affordable property limited partnerships which the Company believes will not
be repaid upon the sale of the loans. The remaining $945,000 pertains to an
additional net impairment charge taken on the 38 properties included in the
Company's planned disposition of its affordable portfolio to reduce the
investment in the partnership based upon the revisions to the sale contract in
the first quarter. In connection with FIN 46R, the Company was required to
consolidate the majority of the affordable limited partnerships results of
operations beginning April 1, 2004.

The equity in earnings (losses) of unconsolidated affiliates of ($538,000) is
primarily the result of the general partner recording a greater share of the
underlying investment's losses due to the loans and advances to certain of the
affordable property limited partnerships where the limited partner has no
capital account. This is pursuant to the accounting requirements of EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method Losses." In connection
with FIN 46R, the Company was required to consolidate the majority of the
affordable limited partnerships results of operations beginning April 1, 2004.

Minority interest decreased $276,000 as a direct result of the decrease in
income from operations over the prior year.

Included in discontinued operations for the year-ended December 31, 2004, are
the Disposition Communities, Held for Sale Communities and the results of
operations of the sold affordable limited partnerships that in connection with
FIN 46R were required to be consolidated beginning April 1, 2004. As all
significant contingencies surrounding the sale of the affordable properties had
been resolved, the Company had considered these assets held for sale and
reported them in discontinued operations. (See further detail supplied under
"Variable Interest Entities" section below).

Included in the $11,417,000 net gain on disposition of property reported for the
year 2004 is the sale of five apartment communities where the Company has
recorded a combined gain on sale, net of minority interest, of approximately
$18,082,000. In addition, the Company recorded a $6,665,000 loss, net of
minority interest of $3,103,000, during the year related to the disposal of the
affordable partnerships. Included in the gross $9,800,000 loss reported is a
$5,000,000 loss from a property being disposed through a default with the
lender. In December, 2004, the Company recorded an obligation to repurchase the
limited partner's interests in two VIEs in satisfaction of any tax credit
guarantees or other obligations to that partner for $5.7 million, resulting in a
loss of $5.0 million included in "gain on disposition of property" as part of
"Discontinued operations." The transfer of the partnership interests was
effective in January, 2005. An additional impairment in the Company's investment
of $4,000,000 was recorded relating to the closing of 26 affordable properties
and the eight properties under contract for sale with the same buyer. Finally, a
reduction of $800,000 to fair market value of the Company's investment has been
recorded for the property the Company will continue to hold for sale.

In connection with the adoption of FIN 46R, the Company recorded a $321,000
cumulative effect charge, net of minority interest, of a change in accounting
principle in the first quarter of 2004. This charge was the result of negative
capital accounts of minority interest partners that were absorbed by the
Company.

Net income increased $5,224,000 primarily due to the increase in income from
discontinued operations of $6,720,000 in 2004 compared to 2003.

Liquidity and Capital Resources

The Company's principal liquidity demands are expected to be distributions to
the preferred and common stockholders and Operating Partnership Unitholders,
capital improvements and repairs and maintenance for the properties, acquisition
of additional properties, stock repurchases and debt repayments. The Company may
also acquire equity ownership in other public or private companies that own and
manage portfolios of apartment communities. Management anticipates the
acquisition of properties of approximately $150 million in 2006, although there
can be no assurance that such acquisitions will actually occur.

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

To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and the
line of credit, it intends to satisfy such requirements through property debt
financing, proceeds from the sale of properties, the issuance of UPREIT Units,
proceeds from sales of its common stock through the Dividend Reinvestment Plan,
or issuing additional common shares, shares of the Company's preferred stock, or
other securities. As of December 31, 2005, the Company owned 25 properties, with
5,271 apartment units, which were unencumbered by debt.

A source of liquidity in 2006 is expected to be from the sale of properties.
During 2005, the Company sold four communities for a total sales price of $142.6
million. The Company sold five communities during 2004 for a total sales price
of $92.5 million. The Company was able to sell these properties at an average
capitalization rate of 5.7% and reinvest in the acquisition of properties with
more growth potential at an expected first year cap rate of 6.3%. Management has
included in its operating plan that the Company will strategically dispose of
assets totaling approximately $250 million in 2006, although there can be no
assurance that such dispositions will actually occur.

In May 1998, the Company's Form S-3 Registration Statement was declared
effective relating to the issuance of up to $400 million of common stock,
preferred stock or other securities. As of December 31, 2005, the Company
continued to have available securities under the registration statement in the
aggregate amount of $144,392,000.

In May and June 2000, the Company completed the sale of $60 million of Series C
Preferred Stock in a private transaction with affiliates of Prudential Real
Estate Investors ("Prudential"), Teachers Insurance and Annuity Association of
America ("Teachers"), affiliates of AEW Capital Management and Pacific Life
Insurance Company. The Series C Preferred Stock carried an annual dividend rate
equal to the greater of 8.75% or the actual dividend paid on the Company's
common shares into which the preferred shares could be converted. The stock had
a conversion price of $30.25 per share and a five-year, non-call provision. As
part of the Series C Preferred Stock transaction, the Company also issued
240,000 warrants to purchase common shares at a price of $30.25 per share,
expiring in five years. On January 9, 2003, holders of 100,000 shares of Series
C Preferred Shares elected to convert those shares for 330,579 shares of common
stock. On May 8, 2003, 200,000 shares of Series C Preferred Shares were
converted into 661,157 shares of common stock. On August 26, 2003, 200,000
shares of Series C Preferred Shares were converted into 661,157 of common stock.
On November 5, 2003, holders of the remaining 100,000 shares of Series C
Preferred Shares elected to convert those shares for 330,579 shares of common
stock. On September 9, 2003, 17,780 warrants were exercised, resulting in the
issuance of 17,780 shares of common stock. During the fourth quarter of 2003,
the remaining 222,220 common stock warrants were exercised, resulting in the
issuance of 222,220 shares of common stock. Neither the conversions nor the
warrant exercise had an effect on the reported results of operations.

In June 2000, the Company completed the sale of $25 million of Series D
Preferred Stock in a private transaction with The Equitable Life Assurance
Society of the United States. The Series D Preferred Stock carries an annual
dividend rate equal to the greater of 8.775% or the actual dividend paid on the
Company's common shares into which the preferred shares can be converted. The
stock has a conversion price of $30 per share and a five-year, non-call
provision. On May 26, 2005, all 250,000 shares of the Series D Preferred Stock
were converted into 833,333 shares of common stock. The conversion of preferred
shares to common shares did not have an effect on the reported results of
operations.

In December 2000, the Company completed the sale of $30 million of Series E
Preferred Stock in a private transaction, again with affiliates of Prudential
and Teachers. The Series E Preferred Stock carried an annual dividend rate equal
to the greater of 8.55% or the actual dividend paid on the Company's common
shares into which the preferred shares could be converted. The stock had a
conversion price of $31.60 per share and a five-year, non-call provision. In
addition, as part of the Series E Preferred Stock transaction, the Company
issued warrants to purchase 285,000 common shares at a price of $31.60 per
share, expiring in five years. On August 20, 2002, 63,200 of the Series E
Convertible Preferred Shares were converted into 200,000 shares of common stock.
On May 6, 2003, 36,800 shares of Series E Preferred Shares were converted into
116,456 shares of common stock. On August 26, 2003 the remaining 200,000 shares
of Series E Preferred Shares were converted into 632,911 of common stock. On
September 9, 2003, 17,100 warrants were exercised, resulting in the issuance of
17,100 shares of common stock. During the fourth quarter of 2003, the remaining
267,900 common stock warrants were exercised, resulting in the issuance of
267,900 shares of common stock. Neither the conversions nor the warrant exercise
had an effect on the reported results of operations.

In March 2002, the Company issued 2,400,000 shares of its 9.00% Series F
Cumulative Redeemable Preferred Stock ("Series F Preferred Shares"), with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million. The net proceeds were used to fund the repurchase of
the Company's Series B Preferred Stock, property acquisitions, and property
upgrades. The Series F Preferred Shares are redeemable by the Company at anytime
on or after March 25, 2007 at a redemption price of $25.00 per share, plus any
accumulated, accrued and unpaid dividends. Each Series F Preferred share will
receive an annual dividend equal to 9.00% of the liquidation preference per
share (equivalent to a fixed annual amount of $2.25 per share).

In 2000, the Company obtained an investment grade rating from Fitch, Inc. The
Company was assigned an initial corporate credit rating of "BBB" (Triple-B),
with a rating of "BBB-" (Triple-B Minus) for Series C through E Convertible
Preferred Stock and Series F Preferred Stock. This rating remains in effect as
of December 31, 2005.

The issuance of UPREIT Units for property acquisitions continues to be a minor
source of capital for the Company. During 2005, the Company issued $55,600,000
of UPREIT Units as consideration for three acquired properties. During 2004, the
Company issued $12,100,000 worth of UPREIT Units as consideration for two of the
four properties acquired in the New Jersey region. No units were issued in
connection with the two acquisitions during 2003.

In 1997, the Company's Board of Directors approved a stock repurchase program
under which the Company may repurchase shares of its outstanding common stock
and UPREIT Units. The shares/units may be repurchased through open market or
privately negotiated transactions at the discretion of Company management. The
Board's action did not establish a target price or a specific timetable for
repurchase. At December 31, 2003, there was approval remaining to purchase
3,135,800 shares. During 2004, the Company repurchased 1,135,800 shares at a
cost of $47,426,000. During 2005, the Company repurchased 2,779,805 shares at a
cost of $111,738,000. In addition, in January, 2006, the Company repurchased
107,800 shares at a cost of $4,468,000. On each of February 16, 2005 and
November 4, 2005, the Board of Directors approved a 2,000,000 share increase in
the stock repurchase program, resulting in a remaining authorization level of
approximately 3,112,000 shares at February 21, 2006. During 2006, the Company
will monitor stock prices, the published net asset value, and acquisition
alternatives to determine the current best use of capital between the two major
uses of capital - stock buyback and acquisitions.

The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the
stockholders of the Company an opportunity to automatically invest their cash
dividends in common stock. In addition, eligible participants may make monthly
payments or other voluntary cash investments in shares of common stock. The
maximum monthly investment without prior Company approval is currently $1,000.
In the fourth quarter of 2004, the Company began meeting share demand in the
program through share repurchase by the transfer agent in the open market on the
Company's behalf instead of new share issuance. This removes essentially 100% of
the dilution caused by issuing new shares at a price less than the net asset
value in an economic and efficient manner. During 2004, $17,560,000 (net of
$5,978,000 share repurchase) of common stock was issued under this plan, with no
additional issuance (net of share repurchases) of common stock in 2005.

Management monitors the relationship between the Company's stock price and its
estimated net asset value. During times when the difference between these two
values is small, resulting in little "dilution" of net asset value by common
stock issuances, the Company has the flexibility to satisfy the demand for DRIP
shares with stock repurchased in the open market or to issue waivers to DRIP
participants to provide for investments in excess of the $1,000 maximum monthly
investment. No such waivers were granted during 2004 or 2005.

During 2005, the Company extended its revolving line of credit with M&T Bank for
a period of three years, increasing the line from $115,000,000 to $140,000,000.
As of December 31, 2005, the Company had $82,000,000 outstanding on the line of
credit. Borrowings under the line of credit bear interest at .75% over the
one-month LIBOR rate. Accordingly, increases in interest rates will increase the
Company's interest expense and as a result will affect the Company's results of
operations and financial condition. The one-month Libor was 4.38% at
December 31, 2005. The Company renegotiated certain terms of the line of credit
effective, including a forty basis point drop in the interest rate and easing of
certain covenant restrictions. The line of credit expires on September 1, 2008.

The Credit Agreement relating to this line of credit provides for the Company to
maintain certain financial ratios and measurements. One of these covenants was
that the Company may not pay any distribution if a distribution, when added to
other distributions paid during the three immediately preceding fiscal quarters,
exceeds the greater of: (i) 90% of funds from operations and 110% of cash
available for distribution; and (ii) the amount required to maintain the
Company's status as a REIT. Historically, there were certain quarters where the
Company did not meet this specific covenant and appropriate waivers were granted
by the participating banks. The new credit agreement, effective September 1,
2005, has removed this covenant completely. The line of credit has not been used
for long-term financing but adds a certain amount of flexibility, especially in
meeting the Company's acquisition goals. Many times it is easier to temporarily
finance an acquisition in a short-term nature through the line of credit, with
long term secured financing or other sources of capital replenishing the line of
credit availability.

On November 23, 2004, the Company signed a supplemental demand note with M&T
Bank. The note had a maximum principal amount of $42 million. Borrowings on the
note bear interest at 1.25% over the one-month LIBOR rate. The demand note was
entered into to fund the Company's stock repurchase program. The Company had no
outstanding balance on the note as of December 31, 2004. In connection with the
increased borrowing capacity of the line of credit as described above, this
supplemental note was terminated during the third quarter of 2005.

On November 23, 2005, the Company executed a Standard Libor Grid Note with M&T
Bank. The note has a maximum principal amount of $40 million with an interest
rate at .95% over the one-month LIBOR. Proceeds from this demand note were
utilized to fund the Company's stock repurchase program. The Company had no
outstanding balance on the note as of December 31, 2005.

As of December 31, 2005, the weighted average rate of interest on the Company's
mortgage debt was 5.9% and the weighted average maturity of such indebtedness
was approximately seven years. Mortgage debt of $1.8 billion was outstanding
with 91% at fixed rates of interest with staggered maturities. This limits the
exposure to changes in interest rates, minimizing the effect of interest rate
fluctuations on the Company's results of operations and cash flows.

The Company's net cash provided by operating activities decreased from
$161,691,000 for the year ended December 31, 2004, to $132,947,000 for the year
ended December 31, 2005. The decrease was principally due to changes in accounts
payable and accrued liabilities. The decrease in liabilities over the prior year
were primarily related to paying $5,700,000 to repurchase limited partner
interests, $3,800,000 for a legal settlement, bonus accrual of $1,500,000 and
increased insurance reserves of $2,000,000 over the prior year. The remainder of
the difference is attributable to an increase in trade payables offset by a
decrease in other assets.

Net cash used in investing activities increased from $165,466,000 in 2004 to
$179,696,000 in 2005. The increase was principally due to the higher level of
properties purchased in 2005, which increased to $283,363,000 in 2005 from
$247,500,000 in 2004. Other changes included an increase of $50,045,000 in
proceeds from sale of property, offset by a decrease in property additions of
$3,783,000.

The Company's net cash provided by financing activities increased from
$5,747,000 in 2004 to $44,215,000 in 2005. Debt proceeds, used to fund property
acquisitions and additions, increased from $94,038,000 in 2004 to $250,813,000
in 2005. Net borrowings on the Company's line of credit decreased from a net
borrowing of $58,000,000 in 2004 to a net borrowing of $24,000,000 in 2005.

On February 7, 2006, the Board of Directors approved a dividend on the Company's
common shares of $.64 per share for the period from October 1, 2005 to December
31, 2005. This is the equivalent of an annual distribution of $2.56 per share.
In addition, the Company declared a dividend of $0.5625 per share on its Series
F Cumulative Redeemable Preferred Stock for the quarter ended February 28, 2006.
The dividends were paid on February 28, 2006 to shareholders of record on
February 17, 2006.

Critical Accounting Policies

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

Revenue Recognition

The Operating Partnership leases its residential properties under leases with
terms generally one year or less. Rental income is recognized on a straight-line
basis over the related lease term. As a result, deferred rents receivable are
created when rental income is recognized during the concession period of certain
negotiated leases and amortized over the remaining term of the lease. In
accordance with SFAS 141, the Company recognizes rental revenue of acquired
in-place "above and below" market leases at their fair value over the weighted
average remaining lease term. Property other income, which consists primarily of
income from operation of laundry facilities, utility recovery, administrative
fees, garage and carport rentals and miscellaneous charges to residents, is
recognized when earned (when the services are provided, or when the resident
incurs the charge).

Property management fees are recognized when earned based on a contractual
percentage of net monthly cash collected on rental income.

Real Estate

Real estate is recorded at cost. Costs related to the acquisition, development,
construction and improvement of properties are capitalized. Recurring capital
replacements typically include carpeting and tile, appliances, HVAC equipment,
new roofs, site improvements and various exterior building improvements.
Non-recurring upgrades include, among other items, community centers, new
appliances, new windows, kitchens and bathrooms. Interest costs are capitalized
until construction is substantially complete. There was $1,096,000, $763,000,
and $920,000 of interest capitalized in 2005, 2004 and 2003, respectively.
Salaries and related costs capitalized for the years ended December 31, 2005,
2004 and 2003 were $2,135,000, $3,391,000 and $6,008,000, respectively. When
retired or otherwise disposed of, the related asset cost and accumulated
depreciation are cleared from the respective accounts and the net difference,
less any amount realized from disposition, is reflected in income. Ordinary
repairs and maintenance that do not extend the life of the asset are expensed as
incurred.

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

The Company accounts for its acquisitions of investments in real estate in
accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires
the fair value of the real estate acquired to be allocated to the acquired
tangible assets, consisting of land, building, and personal property and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, value of in-place leases and value of
resident relationships, based in each case on their fair values. The Company
considers acquisitions of operating real estate assets to be businesses as that
term is contemplated in Emerging Issues Task Force Issue No. 98-3, Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business.

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

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

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

The total amount of other intangible assets acquired is further allocated to
in-place leases, which includes other resident relationship intangible values
based on management's evaluation of the specific characteristics of the
residential leases and the Company's resident retention history.

The value of in-place leases and resident relationships are amortized as a
leasing cost expense over the initial term of the respective leases and any
expected renewal period.

The acquisitions of minority interests for shares of the Company's Common Stock
are recorded under the purchase method with assets acquired reflected at the
fair market value of the Company's Common Stock on the date of acquisition. The
acquisition amounts are allocated to the underlying assets based on their
estimated fair values.

Discontinued Operations

In the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets ("SFAS 144"), the standard addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It also retains
the basic provisions for presenting discontinued operations in the income
statement but broadened the scope to include a component of an entity rather
than a segment of a business. Pursuant to the definition of a component of an
entity in SFAS 144, assuming no significant continuing involvement by the former
owner after the sale, the sale of an apartment community is now considered a
discontinued operation. In addition, apartment communities classified as held
for sale are also considered a discontinued operation. The Company generally
considers assets to be held for sale when all significant contingencies
surrounding the closing have been resolved, which often corresponds with the
actual closing date.

Included in discontinued operations for the three years ended December 31, 2005
are the operating results, net of minority interest, of sixteen apartment
community dispositions (four sold in 2005, five sold in 2004 and seven sold in
2003). In addition, discontinued operations for all periods presented includes
the operating results, net of minority interest of twenty two VIEs sold during
2004 and four VIEs sold during 2005 and nineteen apartment communities held for
sale as of December 31, 2005. For purposes of the discontinued operations
presentation, the Company only includes interest expense associated with
specific mortgage indebtedness of the properties that are considered
discontinued operations. Subsequent to the classification of assets held for
sale, no further depreciation expense is recorded. The depreciation suspended
for the nineteen apartment communities held for sale amounted to $1,457,000.

On April 5, 2006, the Company disposed of two properties acquired during 2004.
The results of these two properties are reflected in discontinued operations for
the years ended December 31, 2005 and 2004 and classified as held for sale as of
December 31, 2005.

Capital Improvements

The Company has a policy to capitalize costs related to the acquisition,
development, rehabilitation, construction, and improvement of properties.
Capital improvements are costs that increase the value and extend the useful
life of an asset. Ordinary repair and maintenance costs that do not extend the
useful life of the asset are expensed as incurred. Costs incurred on a lease
turnover due to normal wear and tear by the resident are expensed on the turn.
Recurring capital improvements typically include: appliances, carpeting and
flooring, HVAC equipment, kitchen/ bath cabinets, new roofs, site improvements
and various exterior building improvements. Non- recurring upgrades include,
among other items: community centers, new windows, and kitchen/ bath apartment
upgrades. The Company capitalizes interest and certain internal personnel costs
related to the communities under rehabilitation and construction.

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

Estimate of Fair Value of Assets Associated with General Partnership Interests

The Company uses the sale contract to determine the fair market value of assets
associated with its general partner investment, including notes, advances,
management contracts and the equity investment in the limited partnership. The
fair value used could vary from the actual sales price of the assets which could
result in further charges or gains recognized upon disposition. See Note 3 to
the Notes to Consolidated Financial Statements for further discussion.

Federal Income Taxes

The Company has elected to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31, 1994. As a result, the Company generally is not subject
to Federal or State income taxation at the corporate level to the extent it
distributes annually at least 90% of its REIT taxable income to its shareholders
and satisfies certain other requirements. For the years ended December 31, 2005,
2004 and 2003, the Company distributed in excess of 100% of its taxable income;
accordingly, no provision has been made for federal income taxes in the
accompanying consolidated financial statements. Stockholders of the Company are
taxed on dividends and must report distributions from the Company as either
ordinary income, capital gains, or as return of capital.

Included in total assets on the Consolidated Balance Sheets are deferred tax
assets of $8,496,000 and $8,737,000 as of December 31, 2005 and 2004,
respectively. The deferred tax assets were a result of the net losses associated
with the affordable property portfolio sales during 2004 and 2003. Management
does not believe it is more likely than not that these deferred assets will be
used, and accordingly has recorded a reserve against the deferred tax assets of
$8,421,000 and $8,680,000 for the years ended December 31, 2005 and 2004,
respectively. The deferred tax assets are associated with the Management
Companies who perform certain of the residential and development activities of
the Company. The Management Companies historically provided commercial
management services and provided loan advances to affordable housing entities
owned through general partnership interests. As these activities are no longer
provided, Management does not currently believe there is a source for future
material taxable earnings for the Management Companies that would give rise to
value for the deferred tax assets.

Variable Interest Entities

Effective March 31, 2004, the Company adopted FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities, "VIE"). The
Company had made the determination that all 41 of the remaining limited
partnerships at the time were Variable Interest Entities.

The Company determined that it was not the primary beneficiary in seven
partnerships syndicated under U.S. Department of Housing and Urban Development
subsidy programs, all of which have been sold as of December 31, 2005.

The Company had further determined that it was the primary beneficiary in 34 of
the VIEs and, therefore, consolidated these entities effective March 31, 2004.
Beginning with the second quarter of 2004, the Company consolidated the results
of operations of the VIEs. Effective December 31, 2005, the Company has closed
on the sale on all but one of the VIEs. The one remaining VIE is not considered
held for sale and is included in the Consolidated statement of operations for
the years ended December 31, 2005 and 2004.

The Company is currently the general partner in this one VIE with a total of 868
units syndicated using low income housing tax credits under Section 42 of the
Internal Revenue Code. As general partner, the Company manages the day-to-day
operations of this partnership for a management fee. In addition, the Company
has certain operating deficit and tax credit guarantees to its limited partner.
The Company is responsible to fund operating deficits to the extent there are
any and can receive operating incentive awards when cash flow reaches certain
levels. The effect on the consolidated balance sheets of including these VIEs as
of December 31, 2005 and 2004 includes Total assets of $21.3 and $87.8 million,
Total liabilities of $17.9 and $80.6 million, and Minority interest of $3.4 and
$7.5 million, respectively.

The Company believes the properties' operations conform to the applicable
requirements as set forth above.

Acquisitions and Dispositions

In 2005, the Company acquired a total of seven communities with a total of 2,430
units for total consideration of approximately $283,400,000, or an average of
approximately $116,900 per unit. For the same time period, the Company sold four
properties with a total of 816 units for total consideration of $142,600,000, or
an average of $174,700 per unit. The weighted average expected first year cap
rate of the 2005 Acquisition Communities was 6.0% and of the 2005 Disposed
Communities was 4.0%. The weighted average unleveraged internal rate of return
(IRR) during the Company's ownership for the properties sold was 20.0%.

In 2004, the Company acquired a total of ten communities with a total of 2,486
units for total consideration of approximately $247,500,000, or an average of
approximately $99,600 per unit. For the same time period, the Company sold five
properties with a total of 1,646 units for total consideration of $92,500,000,
or an average of $56,200 per unit. The weighted average expected first year cap
rate of the 2004 Acquisition Communities was 6.7% and of the 2004 Disposed
Communities was 8.2%. The weighted average unleveraged IRR during the Company's
ownership for the properties sold was 13.1%.

Contractual Obligations and other Commitments

The primary obligations of the Company relate to its borrowings under the line
of credit and mortgage notes payable. The Company's line of credit matures in
September 2008, and has $82,000,000 outstanding at December 31, 2005. The $1.8
billion in mortgage notes payable have varying maturities ranging from one to 37
years. The principal payments on the mortgage notes payable for the years
subsequent to December 31, 2005, are set forth in the table below as "long-term
debt."

The Company has a non-cancelable operating ground lease for one of its
properties. The lease expires May 1, 2020, with options to extend the term of
the lease for two successive terms of twenty-five years each. The lease provides
for contingent rental payments based on certain variable factors. At
December 31, 2005, future minimum rental payments required under the lease are
$70,000 per year until the lease expires.

The Company leases its corporate office space from an affiliate and the office
space for its regional offices from third parties. The corporate office space
requires an annual base rent plus a pro-rata portion of property improvements,
real estate taxes, and common area maintenance. The regional office leases
require an annual base rent plus a pro-rata portion of real estate taxes. These
leases are set forth in the table below as "Operating lease."

On December 1, 2004 the Company entered into a lease agreement with a third
party owner to manage the operations of one of their communities. The lease has
a term of five years, but after two years, (from the 24th month to the 36th
month) the owner may require the Company to buy the property. From the 36th
month to the end of the lease term, we have the right to require the owner to
sell the property to the Company. It is the Company's expectation that closing
on the acquisition of the property will occur no later than 36 months after the
commencement of the lease. The estimated future acquisition cost of $141 million
is included in the total purchase obligations amount for the year 2007 in the
table below.

Purchase obligations represent those costs that the Company is contractually
obligated to in the future. The significant components of this caption are costs
for capital improvements at the Company's properties, as well as costs for
normal operating and maintenance expenses at the site level that are tied to
contracts such as utilities, landscaping and grounds maintenance and
advertising. The purchase obligations include amounts tied to contracts, some of
which expire in 2006. It is the Company's intention to renew these normal
operating contracts; however, there has been no attempt to estimate the length
or future costs of these contracts.

Tabular Disclosure of Contractual Obligations:

Payments Due by Period (in thousands)
-------------------------------------
Contractual Obligations Total 2006 2007 2008 2009 2010 Thereafter
----------------------- ----- ---- ---- ---- ---- ---- ----------

Long-term debt (1) $1,842,086 $60,848 $184,684 $205,630 $66,249 $289,161 $1,035,514

Ground lease 1,050 70 70 70 70 70 700

Operating lease 7,883 2,020 1,951 1,921 1,861 130 -

Purchase obligations 159,493 15,800 142,783 653 164 93 -
---------- ------- -------- -------- ------- -------- ----------
Total (2) $2,010,512 $78,738 $329,488 $208,274 $68,344 $289,454 $1,036,214
========== ======= ======== ======== ======= ======== ==========

(1) Amounts include principal payments only. The Company will pay interest on
outstanding indebtedness based on the rates and terms summarized in note 4
to the consolidated financial statements.

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

As discussed in the section entitled "Variable Interest Entities," the Company,
through its general partnership interest in an affordable property limited
partnership, has guaranteed the Low Income Housing Tax Credits to limited
partners in this partnership totaling approximately $3 million. With respect to
the guarantee of the low income housing tax credits, the Company believes the
property's operations conform to the applicable requirements and does not
anticipate any payment on the guarantee. In addition, the Company, acting as
general partner in this partnership, is obligated to advance funds to meet
partnership operating deficits.

The fixed charge coverage ratio and the components thereof do not represent a
measure of cash generated from operating activities in accordance with generally
accepted accounting principles and are not necessarily indicative of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's performance
or of cash flow as a measure of liquidity.

The calculation of the fixed charge coverage ratio for the four most recent
quarters as filed since the issuance of the Series F Preferred Stock are
presented below (in thousands). Any subsequent changes for discontinued
operations are not reflected for purposes of the calculation per the Series F
Cumulative Redeemable Preferred Stock Article Supplementary. EBITDA is defined
in the Series F Cumulative Redeemable Preferred Stock Article Supplementary as
consolidated income before gain (loss) on disposition of property and business,
minority interest and extraordinary items, before giving effect to expenses for
interest, taxes, depreciation and amortization. Net operating income from
discontinued operations in the calculation below is defined as total revenues
from discontinued operations less operating and maintenance expenses.

Calculation Presented for Series F Covenants
--------------------------------------------
Three-months ended
------------------
Dec. 31 Sept. 30 June 30 Mar. 31
2005 2005 2005 2005
---- ---- ---- ----
EBITDA
Total revenues $114,835 $125,775 $121,636 $118,787
Net operating income from discontinued operations 5,677 1,045 (343) 142
Operating and maintenance (51,801) (54,161) (53,623) (57,511)
General and administrative (5,209) (4,894) (4,144) (5,405)
-------- -------- -------- --------
$ 63,502 $ 67,765 $ 63,526 $ 56,013
Fixed Charges
Interest expense $ 25,793 $ 27,059 $ 25,173 $ 24,943
Interest expense on discontinued operations 1,578 382 279 21
Preferred dividends 1,350 1,350 1,681 1,898
Capitalized interest 312 254 339 191
-------- -------- -------- --------
$ 29,033 $ 29,045 $ 27,472 $ 27,053

Times Coverage ratio: 2.19 2.33 2.31 2.07

Capital Improvements

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

Maintenance
Capitalized Expense Total
Capitalized Expenditure Cost per Cost per
Cost per Useful Per Unit Unit Unit
Category Unit Life(1) Per Year(2) Per Year(3) Per Year
------------------------------------------------------------------------------------------------

Appliances $1,000 18 $ 56 $ 5 $ 61
Blinds/Shades 130 6 22 6 28
Carpets/cleaning 840 5 140 97 237
Computers, equipment, misc.(4) 120 5 24 29 53
Contract repairs - - - 102 102
Exterior painting (5) 84 5 17 1 18
Flooring 250 8 31 - 31
Furnace/Air (HVAC) 765 24 32 43 75
Hot water heater 130 7 19 - 19
Interior painting - - - 138 138
Kitchen/bath cabinets 1,100 25 44 - 44
Landscaping - - - 106 106
New roof 800 24 33 - 33
Parking lot 400 15 27 - 27
Pool/ Exercise facility 100 16 6 23 29
Windows 980 36 27 - 27
Miscellaneous (6) 705 15 47 40 87
------------------------------------------------------------------------------------------------
Total $7,404 $525 $590 $1,115
------------------------------------------------------------------------------------------------

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

(2) This amount is not necessarily incurred each and every year. Some years,
per unit expenditures in any category will be higher, or lower depending on
the timing of certain longer lived capital or maintenance items.

(3) These expenses are included in the Operating and maintenance line item of
the Consolidated Statement of Operations. Maintenance labor costs are not
included in the $590 per unit maintenance estimate. All personnel costs for
site supervision, leasing agents, and maintenance staff are combined and
disclosed in the Company's same- store expense detail schedule. The annual
per unit cost of maintenance staff would add another $570 to maintenance
expenses and total cost figures provided.

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

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

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

The Company's strategy in operating apartments is to improve every property
every year regardless of age. Another part of its strategy is to purchase older
properties and rehab and reposition them to enhance internal rates of return.
This strategy results in higher costs of capital expenditures and maintenance
costs than may be reported by other apartment companies, but the Company's
experience is that the strategy results in higher revenue growth, higher net
operating income growth and a higher rate of property appreciation.

The Company estimates that during 2005, approximately $525 per unit was spent on
recurring capital expenditures. The table below summarizes the breakdown of
capital improvements by major categories between recurring and non-recurring,
revenue generating capital improvements as follows:

For the year- ended December 31,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------ ------------------
Total Total
Non- Capital Capital
Recurring Per recurring Per Improve- Per Improve- Per
Cap Ex Unit Cap Ex Unit ments Unit ments Unit
------ ---- ------ ---- ----- ---- ----- ----
New Buildings $ - $ - $4,647 $ 111 $ 4,647 $ 111 $ 3,718 $ 93
Major building improvements 3,794 91 18,523 444 22,317 535 18,992 474
Roof replacements 1,376 33 3,731 89 5,107 122 3,866 97
Site improvements 1,376 33 7,464 179 8,840 212 9,283 232
Apartment upgrades 2,751 66 17,421 418 20,172 484 25,391 634
Appliances 2,335 56 1,933 46 4,268 102 4,155 104
Carpeting/Flooring 7,129 171 3,679 88 10,808 259 10,464 261
HVAC/Mechanicals 2,126 51 8,880 213 11,006 264 11,883 297
Miscellaneous 1,001 24 2,569 62 3,570 86 3,382 84
------- ---- ------- ------ ------- ------ ------- ------
Totals $21,888 $525 $68,847 $1,650 $90,735 $2,175 $91,134 $2,276
======= ==== ======= ====== ======= ====== ======= ======

(a) Calculated using the weighted average number of apartment units owned,
including 33,422 core units, 5,138 held for sale units, 2004 acquisition
units of 2,394 and 2005 acquisition units of 734 for the year-ended
December 31, 2005 and 33,422 core units, 5,131 held for sale units and 2004
acquisition units of 1,508 for the year-ended December 31, 2004.

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

For the year- ended December 31,
(in thousands, except per unit data)
2005 2004
------------------------------------------------------------------ ------------------
Total Total
Non- Capital Capital
Recurring Per recurring Per Improve- Per Improve- Per
Cap Ex Unit Cap Ex Unit ments Unit ments Unit
------ ---- ------ ---- ----- ---- ----- ----
Core Communities $17,549 $525 $53,932 $1,614 $71,481 $2,139 $81,379 $2,435
Held For Sale 2,697 525 2,443 475 5,140 1,000 6,341 1,236
Total Same Store 20,246 525 56,375 1,462 76,621 1,987 87,720 2,275
2005 Acquisition Communities 385 525 6,371 8,680 6,756 9,205 - -
2004 Acquisition Communities 1,257 525 6,101 2,549 7,358 3,074 3,414 2,263
Sub-total 21,888 525 68,847 1,651 90,735 2,175 91,134 2,276
2005 Disposed Communities 371 525 2,942 4,168 3,313 4,693 5,128 6,284
2004 Disposed Communities - - - - - - 2,543 4,455
Construction In Progress - - 4,089 - 4,089 - 1,515 -
Corporate office expenditures (1) - - - - 780 - 2,380 -
------- ---- ------- ------ ------- ------ -------- ------
$22,259 $525 $75,878 $1,790 $98,917 $2,315 $102,700 $2,420
======= ==== ======= ====== ======= ====== ======== ======

(1) No distinction is made between recurring and non-recurring expenditures for
corporate office.

Environmental Issues

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

During the past few years, there has been media attention given to the subject
of mold in residential communities. The Company has responded to this attention
by providing to its community management the Company's "Operation and
Maintenance Plan for the Control of Moisture". The Plan, designed to analyze and
manage all exposures to mold, has been implemented at all of the Company's
communities. There have been only limited cases of mold identified to management
due to the application and practice of the Plan. No condition is known to exist
that would give rise to a material liability for site restoration or other costs
that may be incurred with respect to mold.

Recent Accounting Pronouncements

In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company adopted this pronouncement for the year ended December 31,
2004, and it did not have a material impact on the Company's results of
operations, financial position or liquidity.

In December 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"). This interpretation addresses
consolidation by business enterprises of variable interest entities in which the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties
or in which the equity investors do not have the characteristics of a
controlling financial interest. This interpretation requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
interpretation also requires disclosures about variable interest entities that
the company is not required to consolidate but in which it has a significant
variable interest. Effective March 31, 2004, the Company adopted FIN 46R. See
the Basis of Presentation disclosure in Note 1 to the Company's consolidated
financial statements and the Company's disclosure on its Investments in and
Advances to Affiliates in Note 3 for a discussion of the impact on the Company
from the adoption of FIN 46R.

In March 2004, the FASB issued EITF 03-6, Participating Securities and the
Two-Class Method under FASB Statement 128, Earnings per Share ("EITF 03-6").
EITF 03-6 addresses a number of questions regarding the computation of earnings
per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the
company when, and if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of calculating EPS.
It clarifies what constitutes a participating security and how to apply the
two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The EITF was effective for the fiscal periods beginning after March
31, 2004. The Company adopted the provisions of this EITF effective April 1,
2004, and had no impact on the Company's results of operations, financial
position or liquidity.

In November 2004, the FASB issued EITF Issue 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share. ("EITF 04-8"). EITF 04-8
addresses a number of issues relating to issued securities with embedded market
price contingent conversion features, which includes contingently convertible
preferred stock, and the impact on the calculation of earnings per share on a
quarterly basis. The EITF is effective for periods ending after December 15,
2004. The Company adopted the provisions of this EITF for the year ended
December 31, 2004, and it and had no impact on the Company's results on
operations, financial position or liquidity.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment ("SFAS 123(R)"). The statement is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123(R) requires that entities recognize the cost
of employee services received in exchange for awards of equity instruments (i.e.
stock options) based on the grant-date fair value of those awards. The Statement
is effective for the first fiscal year beginning after June 15, 2005. On January
1, 2003, the Company adopted the provisions of SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment to SFAS No.
123 ("SFAS 148"). Effective on that date, the Company began recognizing
compensation cost related to stock option grants. Based upon the Company's
adoption of SFAS 148, the Company expects to adopt the provisions of SFAS No.
123(R) beginning January 1, 2006 using a modified prospective application. The
Company does not expect the adoption to have a material impact on the Company's
results of operations, financial position or liquidity.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- An amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 eliminates the
exception from fair value measurement for non-monetary exchanges of similar
productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with a general exception for
exchanges that lack commercial substance. SFAS 153 specifies that a non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 was
effective for the Company's interim periods beginning July 1, 2005. The adoption
of SFAS 153 did not have a material effect on our financial position or results
of operations.

In March 2005, the FASB issued Interpretation No. 47 Accounting for Conditional
Asset Retirement Obligations ("FIN 47"). FIN 47 requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN 47 clarifies that the term
"conditional asset retirement obligation" as used in the FASB refers to a legal
obligation to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the entity. This legal obligation is absolute, despite the
uncertainty regarding the timing and/or method of settlement. In addition, the
fair value of a liability for the conditional asset retirement obligation should
be recognized when incurred: generally upon acquisition, construction or
development and/or through normal operation of the asset. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 was effective no later than
fiscal years ending after December 15, 2005. The Company adopted FIN 47 as
required effective December 31, 2005. The initial application of FIN 47 did not
have a material effect on our financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and
establishes retrospective application as the required method for reporting a
change in accounting principle. SFAS 154 provides guidance for determining
whether a retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not believe that the adoption of SFAS 154 will have a material effect on our
financial position and results of operations.

In October 2005, the FASB issued Staff Position No. 13-1 Accounting for Rental
Costs Incurred during a Construction Period ("FSP FAS 13-1"). FSP FAS 13-1
addresses the accounting for rental costs associated with operating leases that
are incurred during the construction period. FSP FAS 13-1 makes no distinction
between the right to use a leased asset during the construction period and the
right to use that asset after the construction period. Therefore, rental costs
associated with ground or building operating leases that are incurred during a
construction period are to be recognized as rental expense, allocated over the
lease term in accordance with SFAS No. 13 and Technical Bulletin 85-3. FSP FAS
13-1 is effective for the first reporting period beginning after December 15,
2005. Retrospective application in accordance with SFAS 154 is permitted but not
required. The Company does not believe that the application of FSP FAS 13-1 will
have a material impact on our financial position or results of operations.

Economic Conditions

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

Historically, real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing intensities and at different times. Starting in 2001 and continuing
into 2004 many regions of the United States had experienced varying degrees of
economic recession and certain recessionary trends, such as a temporary
reduction in occupancy and reduced pricing power limiting the ability to
aggressively raise rents. Starting in the second half on 2004 and continuing
into 2005, we have seen a reversal of these recessionary trends. In light of
this, we will continue to review our business strategy; however, we believe that
given our property type and the geographic regions in which we are located, we
do not anticipate any changes in our strategy or material effects on financial
performance.

Contingencies

The Company is not a party to any legal proceedings which are expected to have a
material adverse effect on the Company's liquidity, financial position or
results of operations. The Company is subject to a variety of legal actions for
personal injury or property damage arising in the ordinary course of its
business, most of which are covered by liability 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.

In 2001, the Company underwent a state tax audit. The state had assessed taxes
of $469,000 for the 1998 and 1999 tax years under audit. If the state's position
was applied to all tax years through December 31, 2001, the assessment would be
$1.3 million. At the time, the Company believed the assessment and the state's
underlying position were not supportable by the law nor consistent with
previously provided interpretative guidance from the office of the State
Secretary of Revenue. After two subsequent enactments by the state legislation
during 2002 affecting the pertinent tax statute, the Company has been advised by
outside tax counsel that its filing position for 1998-2001 should prevail.
During December 2003, the state's governor signed legislation which included the
REIT tax provisions. Based upon this, Company's tax counsel expected that the
outstanding litigation should now be able to be resolved. Effective January 1,
2003, the Company reorganized the ownership of Home Properties Trust, which
should subject the Company to a much lower level of tax going forward. In
September 2004, the Company settled the 1998 year under audit for a total of
$39,000, including interest. During 2005, the Company filed a protest with the
Pennsylvania State Commonwealth Court concerning the 1999 tax year. The Company
has had settlement discussions for the years 1999-2001 with the State and, based
on these discussions, believes that the likelihood of settling all three years
is imminent. The Company has accrued $160,000 as of December 31, 2005.

During April, 2004, the Company finalized negotiations with New York State
settling a sales and use tax audit covering the period June 1, 1999 through May
31, 2002. The total cost to the Company as a result of the audit amounted to
$861,000. This was included in the first quarter 2004 results and allocated
$448,000 to expense and $413,000 capitalized to real estate assets for
improvements.

As a result of this audit, during the second quarter of 2004, the Company
examined its sales and use tax compliance in the other states in which the
Company operates. Based upon its internal analysis, the Company estimated its
liability as of June 30, 2004 in those states where it found non-compliance and
recorded at June 30, 2004 a liability of $1,712,000. This was included in the
second quarter results and allocated $761,000 to expense and $951,000
capitalized to real estate assets for improvements. The liability recorded
relates to the period beginning on the later of: (i) the date the Company first
purchased property in the applicable state; or (ii) January 1, 1997 and ending
on June 30, 2004. In addition, the Company increased the liability for sales tax
exposure by $68,000 for the six-month period ended December 31, 2004. The
Company filed Voluntary Disclosure Agreements ("VDAs") with the four states
where it had significant financial exposure. During the first six months of
2005, the Company signed VDAs with these states limiting the VDA filing period
back to January 1, 2001, and the Company had satisfied all financial obligations
under the VDAs. For the three- and six-month periods ended June 30, 2005, the
Company had recorded adjustments to the liability for both the effects of
signing the VDAs as well as for the results of the Company's additional testing
for the first six months. The net impact of these adjustments resulted in a
decrease in real estate assets of $175,000, interest expense of $115,000 and
operating expenses of $108,000 for a net decrease to the accrued liability of
$398,000. During the third quarter of 2005, the Company finalized negotiations
with New York State settling a sales tax audit covering the period June 1, 2002
through November 30, 2004. The settlement was not materially different from what
had been accrued. The result of the payments on the VDAs and this New York State
audit is that the sales tax accrual which had been $1,712,000 (as referenced
above) has been reduced to $0 at December 31, 2005.

In connection with the issuance of the Series F Preferred Stock, the Company is
required to maintain for each fiscal quarterly period a fixed charge coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Articles
Supplementary to the Company's Articles of Incorporation, of 1.75 to 1.0. The
fixed charge coverage ratio and the components thereof do not represent a
measure of cash generated from operating activities in accordance with generally
accepted accounting principles and are not necessarily indicative of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's performance
or of cash flow as a measure of liquidity. The Company has been in compliance
with the covenant since the Series F Preferred Stock was issued. If the Company
fails to be in compliance with this covenant for six or more consecutive fiscal
quarters, the holders of the Series F Preferred Stock would be entitled to elect
two directors to the board of directors of the Company.