Home Properties of New York, Inc.

850 Clinton Square
Rochester, New York 14604
U.S.A.
Telephone: (716) 546-4900
Toll Free: (866) 808-2787
Fax: (716) 546-5433
Web site: http://www.homeproperties.com

Public Company
Incorporated: 1967 as Home Leasing Corp.
Employees: 2,100
Sales: $319.05 million (2000)
Stock Exchanges: New York
Ticker Symbol: HME
NAIC: 52593 Real Estate Investment Trusts; 531311 Residential Property Managers; 531312 Nonresidential Property Managers

Home Properties of New York, Inc. is a real estate investment trust (REIT) that owns, manages, acquires, rehabilitates, and develops apartment complexes (which the company describes as “communities” ) in the northeastern, mid-Atlantic, and midwestern United States. Through a limited partnership and two management companies, it owns and operates many apartment complexes and also manages complexes and units for other owners. Home Properties also fee-manages office and retail properties. Home Properties targets older renters who are less likely to move for its apartments and, in so doing, enjoys a turnover rate far below the average for the industry.

Privately Owned Developer and Manager: 1967–93

Twin brothers Nelson and Norman Leenhouts developed an early work ethic after their father died, serving as teenage soda jerks in the ice cream bar of their mother’s dairy. Interviewed by Frank Bilovksy for the Rochester Democrat and Chronicle in 1998, Nelson recalled, “My mom would tell us when someone came in and asked how you were doing or how was your day, always come back with a smile and try to do something to uplift that customer.” After graduating from the University of Rochester, they founded a company named Home Leasing Corp. They began by purchasing houses to rent out and later switched to apartments. Even during recessions, Home Leasing increased its income from apartments each year. The company developed the Piano Works Mall in East Rochester, the White Spruce office complex in Brighton, and the Blue Heron Hills community in Gananda. It also secured a number of management contracts. By 1994 half of the 12-person management team were family members, consisting of Norman’s two daughters and the husband of one of the daughters, plus the husband of Nelson’s daughter, as well as the Leenhoutses themselves.

When the Leenhouts brothers decided to become the first real estate investment trust in upstate New York, they decided to specialize in apartments. Such trusts, usually publicly traded, are exempt from federal corporate taxes if 75 percent of their income comes from real property and 95 percent of the taxable income is distributed to shareholders. They also can use operating partnership units instead of cash to make acquisitions, and these units can be converted to stock after a year without payment of capital gains tax until sold. Home Properties of New York was established in 1993 as a corporation conducting its business through Home Properties of New York, L.P., a limited partnership in which the company held a 90 percent partnership interest at the time. The company completed its initial public offering of 5.4 million shares in 1994 at $19 a share, netting $95.56 million.

Predecessor Home Leasing had revenues of $21.42 million and net income of $1.8 million in 1993. Its holdings at that time included 11 apartment complexes and a mobile home park in the Rochester area, six commercial properties in Rochester, including the Clinton Square office building downtown, the Piano Works Mall in East Rochester, and an apartment complex and shopping center in Columbus, Ohio. Its portfolio was valued at about $140 million. The new company acquired four upstate New York apartment complexes in Baldwinsville, Buffalo, Greece, and Penfield. These acquisitions maintained Home Leasing’s focus on renting to middle-income persons 55 or older.

The real estate investment trust did not include Home Leasing’s commercial properties or several multifamily residential properties that it was running under management contracts. These came under a subsidiary.

Expanding West and South: 1994–99

Home Properties’ revenues rose modestly in 1994, a little faster in 1995, and significantly higher in 1996, when they reached $45.7 million. Its pace of acquisitions, financed by money from the stock offering and a $45 million credit line, was also modest at first, with about $23 million spent in 1994 for three complexes, about $21 million in 1995 for three more, and about $52 million in 1996. Effective on the first day of 1996, the company acquired Rochester-based Conifer Realty, Inc. and Conifer Development, Inc. for $13.4 million. The transaction gave Home Properties two more apartment complexes, with 260 units. It also gave the firm management contracts for 4,867 Conifer apartment units and a general partner interest in 3,777 units. The acquisitions increased Home Properties’ business to ownership or management of 10,957 apartment units and 1.8 million square feet of commercial space.

In 1997 Home Properties spent $266 million to purchase 7,496 apartments in four states—New Jersey, Pennsylvania, Indiana, and Michigan—by means of 11 acquisitions. Revenues rose to $69.7 million that year. A secondary stock offering of one million shares was sold to BancAmerica Robertson Stephens for $25.8 million. Home Properties’ acquisitions in 1997 included a $63 million purchase in the Philadelphia area and a $105 million acquisition of 3,108 apartment units in the Detroit metropolitan area. To hold down debt, the company sought to pay for its acquisitions in partnership units rather than cash or stock. Sellers, too, could benefit in tax-deferral strategies, and the units were redeemable in cash or stock at the option of the company.

Home Properties was seeking apartment complexes with affordable units in urban areas of the Northeast where new construction was unlikely and there were few other REITs to offer competition. The goal was to achieve operating income yield of 10 percent by purchasing and upgrading complexes at about 60 percent of new construction. Typically, the company was focusing on purchasing middle-income, brick-construction apartment complexes in relatively tight markets that needed some repair but were not badly deteriorated. Norman Leenhouts was in charge of acquisitions at this time, while Nelson was directing management. “We like to keep the predominant number of our acquisitions in major metropolitan areas,” Norman told Bilovsky. “if you go into an area where there is just one industry and it falls dead, we’re in trouble. But let’s say a major industry leaves Philadelphia. We think we can manage better and the slack would end up being taken by the people who don’t manage as well.”

Home Properties was claiming an annual turnover rate of 40 percent in its complexes, compared to the industry standard of 60 to 70 percent, and an average stay of 30 months, compared to the standard of 18 months. About 40 percent of the people living in the 14,000 units the company owned outright were age 55 or older, a group less likely than younger people to move because of job changes or changes in family size. But Home Properties also was focusing on customer satisfaction to hold tenants. To keep residents happy, it sometimes built a pool and clubhouse, arranged for church services, circulated a newsletter, or started a bridge club. Tenants also were offered the option to buy stock in the company at a discount for as little as $50 a month, through a dividend reinvestment program.

Another tenant-friendly initiative, adopted in 1995, offered to release dissatisfied tenants from their leases during the first 30 days of the contract and to let them break a lease, for reasons beyond their control, on 60 days’ notice. In addition, Home Properties guaranteed quick response to maintenance problems and promised to treat its tenants “fairly, honestly and courteously by caring and qualified people.” The seven-point pledge, featured in radio, newspaper, and direct-mail advertising, stated that tenants not fully satisfied could receive rent rebates. Writing in the Rochester Business Journal, Will Astor called it “a marked departure from the industry norm for tenant guarantees.”

Picking up the acquisition pace, Home Properties acquired properties in Indiana, Maryland, New Jersey, Virginia, and Washington, D.C., in the first three months of 1998 alone. By now fully 86 percent of its properties were in states other than New York. Acquisitions made later in the year included three apartment complexes in Baldwin, Pennsylvania, a suburb of Pittsburgh. The neighboring properties, purchased for $20 million, comprised more than 150 buildings with 1,079 units, covering at least 50 acres. Another $11 million was earmarked to upgrade the facilities, utilizing federal tax breaks intended to encourage private investment to keep rents affordable. “The tax credits are a significant motivation,” Amy Tait—one of Norman Leenhouts’s daughters—told Murray Coleman of the Pittsburgh Business Times & Journal “Without the tax credits, making these improvements probably couldn’t be justified without raising rents.” Home Properties also promised to build a $600,000 community center with computer access for senior citizens and programs for children to enhance their reading skills.

The action continued hot and heavy in 1999. At midyear, Home Properties bought seven apartment complexes from Community Realty Co. of Gaithersburg, Maryland, for $180.6 million. Two weeks later it spent $157.5 million to purchase a dozen rental complexes in the Baltimore and Wilmington, Delaware, metropolitan areas from Macks & Macks Inc. These transactions made Home Properties the 26th largest apartment owner in the United States, with 43,473 units. Company revenues rose from $149 million in 1998 to $234.46 million in 1999, while net income increased from $18.69 million to $25.13 million.

Company Perspectives:

Our mission is to provide investors with dependable financial returns that exceed those of comparable investments. While pursuing our mission, we remain committed to improving the quality of life for our residents, enhancing the broader communities in which we operate, providing employees with opportunities for growth and accomplishment, and demonstrating personal integrity and dedication at all times .

Home Properties in 2000 and 2001

Home Properties’ revenues increased to $319.05 million in 2000, and its net income to $29.28 million. At the end of the year it owned outright 39,041 units in 147 communities and another 8,325 units in 136 communities through its participation in the limited partnership as general partner. It also managed for other owners 3,546 units in 36 complexes. By this time the company had staked out a presence in Chicago, where it owned 2,018 apartments, and in Connecticut and Maine, bringing the extent of its operations to 11 states and the District of Columbia and making it the nation’s 11th largest apartment company. The company’s long-term debt was $832.8 million at the end of the year.

Home Properties was planning to sell some of its holdings in 2001, having identified about two dozen complexes with over 5,000 units in all for sale at an estimated $200 million. The majority were in the Buffalo, Rochester, and Syracuse areas. Some of these sales, it anticipated, would be matched with suitable acquisitions, using tax-deferred exchanges. Effective on the last day of 2000, the parent company sold its affordable-housing development operations to Conifer, LLC, having concluded that these government-subsidized activities required a disproportionate allocation of financial and management resources. Its property-management activities, by contrast, were seen as providing a pipeline for future acquisitions and positioning the company to build market-rate or affordable complexes when and if market factors warranted doing so.

Home Properties Management, Inc. and Conifer Realty Corp. were created in 1994 and 1995, respectively, as Home Properties of New York management companies. Formed to comply with the technical requirements of federal income tax laws, both were Maryland corporations that, effective in 2001, elected to convert to taxable REIT subsidiaries. Conifer Realty was renamed Home Properties Resident Services, Inc. Both managed, for a fee, certain of the residential, commercial, and development activities of the parent company and provided construction, development, and redevelopment services for the company. In 1997 Home Properties Trust was formed as a Maryland real estate trust and REIT subsidiary. It became a limited partner of the operating partnership, Home Properties of New York, L.P., which at the end of 2000 was 62.5 percent owned by Home Properties of New York, Inc.

Norman and Nelson Leenhouts were co-chief executive officers of the corporation, with Norman chairman of the board and Nelson president. Each owned about 2 percent of the stock in early 2001. All 18 executives and directors owned in total about 14 percent. In February 2001 Rochester banker Edward Pettinella was hired as executive vice-president and likely successor to the brothers, succeeding Amy Tait, who resigned to spend more time with her children and husband as well as to open her own real estate consulting business. (Her husband, Robert Tait, remained the firm’s vice-president of commercial property management.)

Principal Subsidiaries

Home Properties Management, Inc.; Home Properties of New York, L.P; Home Properties Resident Services, Inc.; Home Properties Trust.

Principal Competitors

Associated Estates Realty Co.; Duke-Weeks Realty Corp.; Glimcher Realty Trust; HRPT Properties Trust; Kranzoo Realty Trust.

Key Dates:

1967:

Twin brothers Norman and Nelson Leenhouts found Home Leasing Corp.

1994:

As Home Properties of New York, Inc., the firm becomes a public real estate investment trust (REIT) .

1997:

Home Properties spends $266 million to acquire properties in four additional states, New Jersey, Pennsylvania, Indiana, and Michigan.

1998:

Eighty-six percent of the company’s properties are now outside New York.

2000:

Home Properties is the nation’s 11th largest apartment owner.

Further Reading

Astor, Will, “Home Properties Gets Wall Street’s Attention,” Rochester Business Journal, October 10, 1997, p. 1.

——, “Home Properties Plans Guarantees for Tenants,” Rochester Business Journal, March 31, 1995, p. 1.

——, “Mutual-Fund Manager Sees Potential in REIT,” Rochester Business Journal, June 24, 1994, p. 1.

——, “REIT Analysts Welcome Home Properties Move,” Rochester Business Journal, September 29, 1995, p. 4.

——, “REIT Intends to Rev Up Rate of Expansion,” Rochester Business Journal, May 8, 1998, p. 1.

Bilovsky, Frank, “Location Location Location,” Rochester Democrat and Chronicle, March 9, 1998, pp. 1F, 9F.

Coleman, Murray, “Local Apartment Acquisition Utilizes Tax Credits to Pursue Renovations,” Pittsburgh Business Times & Journal, August 21, 1998, p. 26.

Haaland, Lynette, “Home Properties Hires Heir Apparent,” Rochester Business Journal, February 2, 2001, p. 1.

Halls, Bill, “New York Firm Buys 3,108 Metro Detroit Apartments,” Detroit News, October 31, 1997, p. 3B.

McQuaid, Kevin L., “N. Y. REIT Buys 12 Rental Complexes from Area Developer,” Baltimore Sun, July 17, 1999, p. 9C.

—Robert Halasz