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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER:  1-13136

HOME PROPERTIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

850 Clinton Square, Rochester, New York 14604

(Address of principal executive offices)(Zip Code)

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

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

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

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes    þ       No    ¨

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

Yes    ¨       No    þ

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    þ       No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    þ       No    ¨

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

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes    ¨       No    þ

As of June 30, 2013, the aggregate market value of the 51,663,567 shares of common stock held by non-affiliates was $3,377,247,375 based on the last reported closing sale price of $65.37 per share on the New York Stock Exchange on June 28, 2013.

As of February 13, 2014, there were 57,053,009 shares of common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

HOME PROPERTIES, INC.

TABLE OF CONTENTS

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PART I

Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Our actual results could differ materially from those set forth in each forward-looking statement.  Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” on page 58 of this Form 10-K.

Item 1.   Business

The Company

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

The Company conducts its business through Home Properties, L.P. (the “Operating Partnership”), a New York limited partnership, and a management company, Home Properties Resident Services, Inc. (“HPRS”), which is a Maryland corporation.  At December 31, 2013, the Company held 84.8% (83.2% at December 31, 2012) of the limited partnership units in the Operating Partnership (“UPREIT Units”).

Home Properties, through its affiliates described above, as of December 31, 2013, owned and operated 120 communities with 42,170 apartment units (the “Communities” or the “Properties”).

The Properties are concentrated primarily in suburbs of major metropolitan areas along the East Coast of the United States, as follows:

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

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The Company (continued)

The Company’s long-term business strategies include:

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

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

·      limited development of new apartment communities on entitled land, on land adjacent to existing owned communities, and, where there are opportunities to increase the density of units at existing properties;

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

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

Structure

The Company was formed in November 1993 as a Maryland corporation and is the general partner of the Operating Partnership.  On December 31, 2013, it held an 84.8% partnership interest in the Operating Partnership comprised of: a 1.0% interest as sole general partner; and an 83.8% limited partner interest through its wholly owned subsidiary, Home Properties I, LLC, which owns 100% of Home Properties Trust, the actual limited partner of the Operating Partnership.  The holders of the remaining 15.2% of the UPREIT Units are certain individuals and entities who received UPREIT Units as consideration for their interests in entities owning apartment communities purchased by the Operating Partnership, including certain officers of the Company.

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

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

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

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

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Operating Strategies

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

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

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

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

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

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

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

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

·      focusing on expense control while also improving the level of service to residents.

The Company has a strategy of acquiring and repositioning mature C to B- apartment communities.  Since its 1994 IPO, the Company has acquired and redeveloped 221 communities, containing nearly 62,000 units.  The rehabilitation and revitalization process targets a minimum 10% cash-on-cash return on repositioning investments.  It is expected that capital expenditures in 2014 on repositioning investments will be in line with 2013 levels as residents continue to have a preference for an upgraded apartment at a higher monthly rent in a recovering economic environment.  Extensive experience and expertise in redevelopment has helped the Company build significant internal design and construction management skills.   The complete repositioning of a community can take place over a five to seven year period.  The comprehensive process typically begins with improvements in landscaping, signage and common areas.  Exterior improvements increase curb appeal and marketability of the property.  Deferred maintenance is corrected, which can include new HVAC systems, roofs, balconies and windows.  At many properties, community centers and swimming pools are added or upgraded.  Apartment interiors are renovated when residents move out, with the most significant investments made in upgrading kitchens and baths.  Complete remodeling of dated kitchens and bathrooms typically includes new appliances, flooring, counters, cabinets, lighting, tile, fixtures, sinks, bathtubs and toilets.  It may include the removal of kitchen walls to create an open concept living space.  When feasible, in-unit washers and dryers are added. Repositioning efforts upgrade properties that were C to B- level when acquired to the B to B+ level, which, over time, significantly increases the property’s rental income, net operating income and market value.

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Acquisition, Development and Sale Strategies

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

During 2013, the Company acquired two communities with a total of 457 units for an aggregate consideration of $56 million, or an average of approximately $122,000 per apartment unit.  The weighted average expected first year capitalization rate for the acquired communities was 6.5%.  Capitalization rate (“cap rate”) is defined as the rate of interest used to convert the first year expected net operating income (“NOI”) less a 2.7% management fee into a single present value.  NOI is defined by the Company as rental income and property other income less operating and maintenance expenses.  The acquisitions were in suburban Boston and Philadelphia.

The Company believes that it will have the opportunity to make acquisitions during 2014 and has projected $150 million to $250 million in purchases for the year.

The Company has the ability to develop new market-rate communities.  It plans to engage in development activity only in markets in which it is currently doing business in order to add net asset value and supplement future earnings and growth.  It expects to develop new apartment communities on entitled land and on land adjacent to existing Properties, as well as to increase the density of units at some communities currently owned.  The Company plans to continue construction of one project started in late 2011 and another started in the second quarter of 2012.  The Company plans to spend approximately $60 million on development in 2014.  There are no additional construction starts planned for 2014.

The Company closed on the sale of four communities in 2013 with a total of 1,013 units for approximately $192 million, resulting in a weighted average unlevered internal rate of return (“IRR”) of 11.3% over the ownership period of these four communities.  The Company closed on the sale of six communities in 2012 with a total of 1,596 units for approximately $160 million, resulting in a weighted average IRR of 14.1% over the ownership period of these six communities. IRR is defined as the discount rate at which the present value of the future cash flows of the investment is equal to the cost of the investment.  The Company has specifically identified additional communities for sale in 2014 and will continue to evaluate the sale of its communities.  The Company expects to dispose of between $160 million and $260 million of properties for the year.   Typically, a property will be targeted for sale if management is of the opinion that it has reached its potential or if it is located in a slower growth market or is less efficient to operate.  After many years of being a net acquirer, and for 2013 a net seller, the Company is looking to create a better balance, with an equal range targeted of acquisitions and dispositions.  Property sale proceeds add another significant source of capital, reducing reliance on debt and equity sources.

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Financing and Capital Strategies

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

·      maintaining a ratio of debt-to-total value (total debt of the Company as a percentage of the value (using the Company’s value as calculated under the terms of the line of credit facility)) of approximately 38.5% or less;

·      utilizing primarily fixed rate debt;

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

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

On December 31, 2013, the Company’s debt was approximately $2.5 billion and the debt-to-total market capitalization ratio was 40.5% based on the year-end closing price of the Company’s common stock of $53.62.  The weighted average interest rate on the Company’s mortgage debt as of December 31, 2013 was 5.11% and the weighted average maturity was approximately four and a half years.  Debt maturities are staggered, with an average 12.4% of loans maturing each of the next eight years.  The debt maturity range is from a high of 24.5% in 2018 (includes line facility bank term loan) to a low of 2.8% in 2014.  As of December 31, 2013, the Company had a $450 million unsecured line of credit facility with M&T Bank and U.S. Bank National Association (acting as joint lead banks) and nine other participating commercial banks with $193 million outstanding on the line of credit.

To further strengthen the Company’s balance sheet and increase its financial flexibility, during 2013 the Company pursued certain capital market initiatives as follows:

·      The Company publicly offered 4.4 million shares of its common stock at a price of $63.00 per share, for net proceeds of approximately $268 million.

·      The Company received a published investment grade credit rating of Baa2 from Moody’s Investor Services to complement its existing BBB rating from Fitch Ratings.

·      The Company renegotiated and extended the unsecured line of credit facility and extended the $250 million unsecured term loan.

-       In August 2013, the $275 million line of credit facility was increased to $450 million and now matures August 18, 2017, and may be extended at the Company’s option for an additional one-year period.  Borrowings under the line of credit bear interest at a variable rate based on LIBOR, plus a spread from 1.00% to 2.00% based on the Company’s leverage ratio.  As of December 31, 2013, based on the Company’s leverage ratio, the LIBOR margin was 1.00%, and the one-month LIBOR was 0.19%; resulting in an effective rate of 1.19% for the Company.

-       In August 2013, the Company extended the term on a $250 million unsecured term loan, which was set to mature on December 8, 2016, through August 18, 2018.

·      The Company increased the value of unencumbered properties in relationship to the total property portfolio from 37.5% to 47.8%.  This higher level adds flexibility, allowing the Company to place additional unsecured financing or increase secured borrowing on unencumbered assets.

·      The Government Sponsored Enterprises (“GSEs”) Fannie Mae and Freddie Mac are still active lending to apartment owners.  However, no secured debt was added during 2012 or 2013, except for one small loan assumed in conjunction with a property acquisition.   The Company paid off approximately $317 million of mortgage debt in 2013 with a weighted average interest rate of 4.45%.

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Financing and Capital Strategies (continued)

The capital market initiatives described above allowed the Company to achieve stronger key debt and credit metrics at December 31, 2013 versus December 31, 2012 as follows:

·      total debt to value was reduced to 38.5% from 45.2%; (1)

·      total secured debt to value was reduced to 28.4% from 35.0%; (1)

·      net debt to EBITDA (net income before interest expense, income taxes, depreciation and amortization) was reduced to 6.1 times from 7.2 times;

·      interest coverage ratio was increased to 3.5 times from 3.0 times;

·      fixed charge coverage ratio increased to 3.3 times from 2.9 times; and

·      the value of the unencumbered asset pool was increased to $3.0 billion from $2.3 billion; or to 47.8% from 37.5% of total value, respectively. (1)

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

For 2014, the Company plans to continue to increase the level of the value of unencumbered properties to over 50% of the portfolio, maintaining the debt-to-total value ratio at a level equal to or slightly less than the level at December 31, 2013 and utilizing more unsecured debt with little reliance on secured debt.

Management expects to continue to fund a portion of its continued growth by taking advantage of its UPREIT structure and using UPREIT Units as currency in acquisition transactions.  It is difficult to predict the level of demand from sellers for this type of transaction.  In periods when the Company’s stock price is trading at a discount to estimated net asset value (“NAV”) per share, it is unlikely that management would engage in UPREIT transactions.

The Company’s strategy is to opportunistically repurchase shares at a discount to its estimated NAV, thereby continuing to build value for long-term shareholders.  The last year where the Company repurchased any shares under this program was 2008.  At December 31, 2013, there was approval remaining to purchase 2.3 million shares.  Management does not anticipate making additional share repurchases in 2014.

Competition

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

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

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

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

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

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

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Market Environment

The markets in which Home Properties operates could be characterized long term as stable, with moderate levels of job growth.  After a recessionary period, starting in 2010 and expected to continue through 2014, many regions of the United States have been experiencing varying degrees of economic recovery resulting in improving job growth for both the country as a whole and the Company’s markets.

In 2012, the Company’s markets job growth was slightly behind the U.S. average with 1.1% job growth versus 1.4%, respectively.  In 2013, the Company’s markets job growth continued to lag the U.S. average with a 1.2% growth rate versus 1.6%.  However, the unemployment rate for the Company’s markets of 5.8% continues to compare favorably to the country average of 6.5%.  The Company’s Northern VA/DC market continues to experience the lowest unemployment rate of 4.6% at December 31, 2013.  This market represents 29.5% of the Company’s total apartment unit count.

New construction in the Company’s markets is low relative to the existing multifamily housing stock and compared to other regions of the country.  In 2013, Home Properties’ markets represented 27.7% of the total estimated existing U.S. multifamily housing stock, but only 21.0% of the country’s estimated new supply of multifamily housing units.

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

An analysis of multifamily supply compared to multifamily demand can indicate whether a particular market is tightening, softening or in equilibrium.  The fourth to last column in the “Multifamily Supply and Demand” table on page 11 reflects current estimated net new multifamily supply as a percentage of new multifamily demand for the Company’s markets and the United States.  For both the Company’s markets and the country as a whole, net new supply is low compared to expected new demand.  For the country, net new supply represents 75.4% of net new demand, creating an environment where both pricing and/or occupancy will remain stable with room for some improvement.  The relationship in the Company’s markets is much better, where net new supply after obsolescence is expected to meet only 43.0% of the expected increasing demand for rental housing.

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Market Demographics

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

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

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

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

(5)             Based on The Nielsen Company 2013 estimates calculated from the 2010 U.S. Census figures.

(6)             2013 Multifamily Housing Stock is from The Nielsen Company estimates of five or more units based on the 2010 U.S. Census.

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

Data collected is data available as of February 5, 2014 and in some cases may be preliminary.

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

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

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

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Multifamily Supply and Demand

(1)-(6) see footnotes prior page

(7)             Estimated 2013 New Supply of Multifamily =  Multifamily permits (2013 figures U.S. Census Bureau, Mfg. & Constr. Div., 5+ permits only) adjusted by the average % of permits resulting in a construction start (estimated at 95%).

(8)             Estimated 2013 Multifamily Obsolescence = Estimated 2013 Multifamily Housing Stock multiplied by the estimated % of obsolescence (0.5%).

(9)             Estimated 2013 Net New Multifamily Supply = Estimated 2013 New Supply of Multifamily - Estimated 2013 Multifamily Obsolescence.

(10)        Estimated 2013 New Multifamily Household Demand = 2013 job growth (Nonfarm, not seasonally adjusted payroll employment figures) (12/31/2012-12/31/2013) multiplied by the expected % of new household formations resulting from new jobs (66.7%) and the % of multifamily households in each market (based on Nielsen estimates).

(11)        Expected Excess Demand = Estimated 2013 New Multifamily Household Demand - Estimated 2013 Net New Multifamily Supply.

(12)        Expected Excess Revenue Growth = Expected Excess Demand divided by 2013 Multifamily Housing Stock.  This percentage is expected to reflect the relative impact that changes in the supply and demand for multifamily housing units will have on occupancy rates and/or rental rates in each market, beyond the impact caused by broader economic factors, such as inflation and interest rates.

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Environmental Matters

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

Available Information

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

Company Website

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

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

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

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Item 1A.  Risk Factors

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

Our business is subject to uncertainties and risks.  Please carefully consider the risk factors described below, which apply to Home Properties, the Operating Partnership, and HPRS, in addition to other risks set forth in this Form 10-K.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or prospects.  The risk factors we describe contain or refer to certain forward-looking statements.  You should review the explanation of the limitations of forward-looking statements contained in the section entitled “Forward-Looking Statements” on page 58 of this Form 10-K.

Real Estate Investment Risks

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

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

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

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

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

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

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

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

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Real Estate Investment Risks (continued)

Possible difficulty of selling apartment communities could limit our flexibility.

We have identified certain of our communities that we intend to sell in 2014. We may encounter difficulty in finding buyers in a timely manner and who are willing to pay acceptable prices for these communities. If we are unable to sell apartment communities or if we can only sell them at prices lower than are expected, then we may have to take on additional leverage in order to provide adequate capital to execute our strategy.

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

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

Repositioning and development risks could affect our profitability.

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

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

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

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

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

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

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

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

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

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

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

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Real Estate Investment Risks (continued)

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

The Company carries comprehensive liability, fire, extended and rental loss insurance for each of our properties.  There are however certain types of extraordinary losses, such as losses for certain natural catastrophes and relating to environmental contamination, for which the Company may not have insurance coverage.  If an uninsured loss occurred, we could incur significant expense.  As a result of a catastrophic uninsured event impacting an entire property, we could lose our investment in and cash flow from, the affected property, and could be required to repay any indebtedness secured by that property and related taxes and other charges.

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

At December 31, 2013, approximately 29.5%, 24.8%, 17.0% and 12.2% (on an apartment unit basis) of the Company’s Properties are located in the Washington, D.C., Baltimore, Long Island/New Jersey and Philadelphia markets, respectively.  The Company’s current strategy is to reduce its concentration in the Washington, D.C. market to approximately 28%.  However, geographic concentration could present risks if local property market performance falls below expectations as a result of deteriorating economic conditions or other factors.  This could have a negative impact on the Company’s financial condition and results of operations, which could adversely affect our ability to make expected distributions.

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

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

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

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

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

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

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

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Real Estate Investment Risks (continued)

We may incur increased costs resulting from the climate change regulations and the occurrence of climate change could adversely affect our financial results.

Various treaties, laws and regulations result in increased capital expenditures to improve the energy efficiency of our properties and may have been adopted relating to climate change.   The Company believes these laws being enacted or proposed may cause energy and waste removal costs at our properties to increase.  We do not expect the direct impact of these increases to be material to our results of operations.  Increased costs relating to energy either would be the responsibility of our residents directly or in large part may be passed through by us to our residents through the utility recovery programs.  We may be able to pass increased waste removal costs on to our residents in the form of increased rental rates.  If this is not possible, it is still not expected that these additional costs would affect the Company’s financial performance in any material way.  To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for properties located in these areas or affected by these conditions.  Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.

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

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

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

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

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

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Real Estate Investment Risks (continued)

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

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

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

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

Financing Risks

We are subject to general risks related to debt.

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

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

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

As of December 31, 2013, we had approximately $1.8 billion of mortgage debt, a significant portion of which is subject to balloon payments.  We do not expect to have cash flows from operations to make all of these balloon payments.  The mortgage debt matures as follows:

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Financing Risks (continued)

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

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

Disruptions in the financial markets could adversely affect our ability to obtain debt financing and impact our acquisitions and dispositions.

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected.  We primarily use external financing to fund acquisitions, our re-positioning program and development and to refinance indebtedness as it matures.  If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our planned activity and/or take other actions to fund our business activities and repayment of debt such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income.  To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flows could be adversely affected.  Uncertainty in the credit markets also could negatively impact our ability to make acquisitions and make it more difficult or not possible for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.

Potential continued disruptions in the financial markets could also have other unknown adverse effects on us or the economy generally and may cause the price of our securities to fluctuate significantly and/or to decline.

Failure to maintain our current credit ratings could adversely affect our cost of funds, liquidity and access to capital markets.

There are two rating agencies that have assigned an issuer credit rating to the Company.  These ratings are based on a number of factors, which include their assessment of our financial strength, liquidity, capital structure, and sustainability of cash flow and earnings, among other factors.  If market conditions change, we may not be able to maintain our current ratings, which could adversely affect our cost of funds, liquidity and access to capital markets.

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

Fannie Mae and Freddie Mac (the “GSEs”) are a major source of financing for secured multifamily real estate.  We have used the GSEs for a portion of our financing needs.  There is significant uncertainty surrounding the future of the GSEs.  A final decision by the government to eliminate the GSEs or to change their mandate may adversely affect interest rates and capital availability and the value of multifamily communities.

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

As of December 31, 2013, the Company had an unsecured line of credit agreement of $450 million with an initial maturity date of August 18, 2017, and a one-year extension, at the Company’s option.  The Company had $193 million outstanding under the credit facility on December 31, 2013.  We believe that the lenders under our line of credit will fulfill their obligations thereunder, but if economic conditions deteriorate, there can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely affected.

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

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Financing Risks (continued)

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

In addition to the line of credit, as of December 31, 2013, the Company had $450 million of unsecured debt outstanding.  These loans require the Company to maintain some of the same covenants, ratios and measurements as under the line of credit.  A default in any of these requirements could result in a default of these unsecured loans and a requirement that the loan be repaid early.  This could adversely affect our liquidity and result in increased borrowing costs.

Rising interest rates could adversely affect operations and cash flow.

As of December 31, 2013, approximately 89% of our debt was at fixed rates.  This limits our exposure to changes in interest rates.  Prolonged interest rate increases, however, could negatively affect our ability to make acquisitions, dispose of properties at favorable prices, develop properties and refinance existing borrowings at acceptable rates.

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

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

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

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

Other Risks

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

Our success depends in part on our ability to attract and retain the services of executive officers and other personnel.  Our executive officers make important capital allocation and other significant decisions or recommendations to our Board of Directors.  There is substantial competition for qualified personnel in the real estate industry, and the loss of several of our key personnel could adversely affect the Company.

Breaches of our data security could materially harm our business and reputation.

We collect and retain certain personal information provided by our residents and employees.  While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, there can be no assurance that we will be able to prevent unauthorized access to this information.  Any breach of our data security measures and loss of this information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial performance.

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Other Risks (continued)

Emerging technologies if not adopted properly and internet viruses could negatively impact productivity.

Despite a robust governance structure developed around the use of technology, adoption of emerging technologies (such as a cloud computing model) in an improper or inefficient manner might place Company data, systems and productivity at risk, as well as potentially introduce legal and regulatory compliance issues.  This could be related to new technology that is configured or deployed incorrectly or is not managed appropriately (whether by us or by a vendor).  In addition, the Company could suffer internet interruptions due to malicious software or viruses.  This could temporarily negatively affect various operations and productivity.

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

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

In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (including certain entities) at any time during the last half of its taxable year.  We have limited ownership of the issued and outstanding shares of common stock by any single stockholder to 8% of the aggregate value of our outstanding shares.

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

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

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

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

Beginning in 2009, the Company made the necessary filings with the Securities and Exchange Commission to institute the sale of its common shares from time to time in “at the market offerings” or negotiated transactions (the “ATM”).  As of December 31, 2013, approximately 2.0 million shares remain available under the current filings relating to the ATM.  If authorized by its Board of Directors, the Company, in the future could affect additional filings to register additional common shares for sale under the ATM.  Sales of substantial amounts of shares of common stock in the public market or the perception that such sales might occur could adversely affect the market price of the common stock.

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Federal Income Tax Risks

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

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

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

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

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

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

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

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

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Item 1B.  Unresolved Staff Comments

None.

Item 2.   Properties

As of December 31, 2013, the Properties consisted of 120 multifamily residential communities containing 42,170 apartment units.  In 2013, the Company acquired two communities with a total of 457 units in two transactions for total consideration of $55.8 million.  Also in 2013, the Company sold four communities in separate transactions with a total of 1,013 units for total consideration of $192.1 million.   In 2012, the Company acquired three communities with a total of 2,018 units in three transactions for total consideration of $298.2 million and sold six communities in separate transactions with a total of 1,596 units for total consideration of $159.6 million.

The Properties are generally located in established markets in suburban neighborhoods.  Average physical occupancy at the Properties was 95.0% for 2013.  “Physical occupancy” is defined as total possible rental income, net of vacancy, as a percentage of total possible rental income.  Total possible rental income is determined by valuing occupied units at contract rates and vacant units at market rents.  Average economic occupancy at the Properties was 94.0% for 2013.  “Economic occupancy” is defined as total possible rental income, net of vacancy and bad debt expense as a percentage of total possible rental income.  The Properties are typically two- and three-story garden style apartment buildings in landscaped settings and a majority are of brick or other masonry construction.  The Company believes that its strategic focus on appealing to middle income residents and the quality of the services it provides to such residents results in lower resident turnover.  Average turnover at the Properties was approximately 40% for 2013, which is significantly below the national average of approximately 52% for garden style apartments.

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

Certain of the Properties collateralize mortgage loans.  See Schedule III contained herein (pages 101 to 103).

The table on the following pages illustrates certain of the important characteristics of the Properties as of December 31, 2013.

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Property Information

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Property Information