maintenance for the properties, acquisition of additional properties within the investment restrictions placed on it by BMVF, debt repayment and investment in the affiliated Berkshire Multifamily Value Fund. (See footnote 11 in Item 1 herein for additional information).
The Company intends to meet its short-term liquidity requirements through net cash flows provided by operating activities, cash distributions from its investments, including the Company’s investments in the Mortgage Funds and Multifamily Ventures, and advances from the revolving credit facility. 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 of 1986, as amended, applicable to REITs.
The Company intends to meet its long-term liquidity requirements through distributions of principal from its investments in the Multifamily Ventures, property debt financing and refinancing, and, to a lesser degree, advances from the revolving credit facility. The Company may seek to expand its purchasing power through the use of joint venture relationships with other companies. Management has not concluded that the sale of any additional properties in the Company’s portfolio, as of September 30, 2005, would be beneficial strategically or otherwise, although we cannot be certain that no such dispositions will actually occur as was the case with the Windward Lakes property on June 22, 2005.
The Company has obtained mortgage financing on the Berkshires at Westchase, Berkshires on Brompton, Lake Ridge and Laurel Woods properties and is currently pursuing financing on the Riverbirch, Century, Dorseys Forge, Hannibal Grove, and Bear Creek properties. The Company currently anticipates closing on all the committed financings as well as the pending financings in the fourth quarter of 2005, which will provide the Company with additional liquidity.
On June 30, 2005, the Company closed on a new credit facility in the form of a $20,000,000 revolving credit agreement. The financing was obtained from an affiliate of the Board, was based on arms-length negotiations and was approved by the Audit Committee of the Board, which is comprised solely of directors who are independent under applicable rules and regulations of the SEC and AMEX. Concurrently with the closing, the Company borrowed $16,000,000. The proceeds from the borrowing were used to fund the July 1, 2005 acquisition of Lake Ridge Apartments as well as ongoing rehabilitation projects at certain of the Company’s existing properties. The Company repaid the advance from the credit facility outstanding as of June 30, 2005 in the third quarter. The Company currently expects that repayment of future advances from the credit facility, if any, will be funded by proceeds from conventional mortgages on newly acquired properties and potential re-financing of existing properties, including those properties undergoing substantial rehabilitation projects where resulting increases in value, if any, would allow refinancing of the properties at increased levels from the existing mortgages currently outstanding on the rehabilitated properties.
The Company’s mortgage debt on its Seasons of Laurel property is due in 2009, which includes the additional $20,378,000 of mortgage debt obtained in fiscal year 2003 that is coterminous with the first mortgage. Total long term obligations due in 2009 are $70,453,143, which the Company plans to pay through the refinancing of the respective property, although we cannot be certain that such financing will be available.
The Company incurred $5,830,402 and $2,123,307 in recurring capital expenditures during the nine months ended September 30, 2005 and 2004, respectively. Recurring capital expenditures typically include items such as appliances, carpeting, flooring, HVAC equipment, kitchen and bath cabinets, site improvements and various exterior building improvements.
The Company incurred $8,921,879 and $5,381,829 in renovation related capital expenditures during the nine months ended September 30, 2005 and 2004, respectively. Renovation related capital expenditures generally include capital expenditures of a significant non-recurring nature, including construction management fees payable to an affiliate of the Company, where the Company expects to see a financial return on the expenditure or where the Company believes the expenditure preserves the status of a property within its sub-market.
In April 2003, the Company began a significant renovation project at its Seasons of Laurel property. The renovation involved substantial upgrades to the kitchens and bathrooms in all of the property’s 1,088 apartment units and was originally expected to cost approximately $8,100,000, or $7,444 per apartment unit. In 2004, the original contractor sent notification to the Company of its desire to renegotiate the contract. As a result of that notification, the Company sought new bids from several contractors and ultimately dismissed the original contractor and awarded the contract to a new company based on the new bids. The current cost estimate is now approximately $8,450,000, an
increase of approximately 5% over the original cost estimate. As of September 30, 2005, the project is approximately 73% complete, approximately $5,663,000 of costs has been incurred to date and the project continues to be on track to meet the adjusted cost estimate. During 2004, the Company also completed construction on the new fitness center at Seasons of Laurel. The Company currently anticipates spending, and has budgeted, approximately $3,000,000 for continued renovations to the Seasons of Laurel property in 2005 and 2006 in accordance with the renovation project currently in process. The Company currently anticipates completion of the project to occur by June 30, 2006.
In January 2004, the Company authorized the renovation of 252 apartment units at its Hannibal Grove property to provide for in-unit washer and dryer hookups. The total cost of the project was estimated to be approximately $1,455,000, or $5,775 per apartment unit. As of September 30, 2005, the project is approximately 59% complete, approximately $611,000 has been spent to date and the project is tracking to meet original cost estimates. The Company believes the renovations are necessary to maintain the property’s competitiveness in its sub-market and that the property will also achieve significant growth in rental rates as a result of the renovations.
In addition to the washer and dryer program, the Company has renovated 44, or 18%, of the apartment units at its Hannibal Grove property at a total cost of approximately $836,000. These units were renovated as part of test programs to determine if the market would be willing to pay premiums for renovated apartment units. Management has evaluated the results of the initial test program, including the potential to achieve specific rent premium levels and has decided to conduct additional tests in an attempt to achieve higher returns. The Company is waiting for the results of the additional testing before moving forward with the full property renovation project.
In May 2005, the Company authorized the interior renovation of 216 apartment units as well as significant renovation to the exterior siding and decks of its Yorktowne property. The interior renovation includes the replacement and upgrade of the kitchens, bathrooms and doors of each unit. The total cost of the project is currently estimated at approximately $4,750,000. As of September 30, 2005, the interior renovation project has been started and is approximately 42% complete, approximately $1,033,000 has been spent to date and the project is substantially on track to meet original cost estimates. The Company believes the renovations will yield significant growth in rental rates and must be undertaking in order to maintain its competitiveness in its sub-market.
Also in May 2005, the Company authorized the renovation of its Berkshires on Brompton property. The renovations at the 362 unit property will include significant rehabilitation to the interior and exterior common areas as well as interior unit renovations. The total cost of the project is currently estimated at approximately $5,100,000, of which approximately $1,400,000, or $3,724 per unit, is slated for interior unit renovation. The Company will test the interior rehabilitation plan on 100 units, at a cost of approximately $6,300 per unit or $630,000, to determine that the financial returns estimated in the plan are reasonable. Pending successful financial returns from the 100 unit test, the Company may decide to move forward with the renovation of the remaining 312 units.
Other properties undergoing limited scope renovation projects include the Trellis at Lee’s Mill and the Countryplace I & II properties where a window replacement program is ongoing, the Century property where a HVAC unit replacement project is under way and Dorsey’s Forge where a in-unit washer and dryer hookup test is being conducted. The projects, which have a preliminary total estimated aggregate cost of approximately $1,841,000, have had approximately 90% of the individual units completed.
For the balance of 2005, the Company currently anticipates spending approximately $12,500,000 for continued work on the projects detailed above as well as other smaller scale projects at other properties. The Company is in the process of developing capital budgets for 2006 and currently anticipates spending approximately $12,400,000 for ongoing rehabilitation and development of properties currently owned, subject to approval of 2006 budgets by the Board. As of September 30, 2005, the Company has not committed to any significant new rehabilitation projects.
Acquisitions
On February 15, 2005, the Operating Partnership, through its newly formed and wholly owned subsidiary, BIR Westchester West, L.L.C., consummated the acquisition of 100% of the outstanding limited and general partner interests of BRI Westchester Limited Partnership, the fee simple owner of Westchester West Apartments, a 345 unit multifamily apartment community located in Silver Spring, Maryland, from BRH Westchester, L.L.C. and BRI OP Limited Partnership (collectively, the “Seller”). The Seller is an affiliate of the Company. The purchase price, which was agreed upon through arms-length negotiations, was $39,250,000, subject to normal operating pro rations. The acquisition was approved by the Audit Committee of the Board, which is comprised solely of directors who are independent under applicable rules and regulations of the SEC and AMEX. The purchase price and related closing costs were funded in part through a $29,500,000 first mortgage and available cash. The first mortgage has a fixed
27
interest rate of 5.03% for a term of ten years.
On March 1, 2005, the Operating Partnership, through a newly formed and wholly owned subsidiary, BIR Brompton Limited Partnership, consummated the acquisition of 100% of the fee simple interest of Waters on Brompton, a 362 unit multifamily apartment community located in Houston, Texas, from an unaffiliated third party. The Company will operate the property under the name Berkshires on Brompton. The acquisition was consummated pursuant to a winning bid placed on the property at foreclosure auction. The successful bid was $14,400,000 and was immediately paid from available cash. On July 22, 2005, the Company closed on financing that is collateralized by the property.
On March 30, 2005, the Operating Partnership, through a newly formed and wholly owned subsidiary, BIR Westchase Limited Partnership, consummated the acquisition of Antilles Apartment Homes, a 324 unit multifamily apartment community located in Houston, Texas, from Trivest Westpark L.P (“Trivest”), the fee simple owner of the property. The Company will operate the property under the name The Berkshires at Westchase Apartments. Trivest is not an affiliate of the Company. The purchase price was $9,900,000, and was subject to normal operating pro rations. The purchase price was immediately paid from available cash. On July 22, 2005, the Company closed on financing that is collateralized by the property.
On May 31, 2005, the Operating Partnership, through a newly formed and wholly owned subsidiary, BIR-Charlotte I, LLC, consummated the acquisition of 100% of the fee simple interest of Riverbirch Apartments, a 210 unit multifamily apartment community located in Charlotte, North Carolina, from an unaffiliated third party. The acquisition was consummated pursuant to a bid placed at the May 16, 2005 foreclosure auction of the property. The bid of $8,200,000 was declared the winning bid on May 26, 2005, after a mandatory 10 day waiting period during which the seller was required to accept incrementally higher bids (5%) from other interested parties, as required by North Carolina law. A deposit on the purchase price was paid at the time the bid was accepted, and the balance of the acquisition cost was paid on May 31, 2005 at the closing on the property. Both payments were made from available cash.
On July 1, 2005, the Operating Partnership, through a newly formed and wholly owned subsidiary, BIR Lakeridge, L.L.C., consummated the acquisition of 100% of the fee simple interest of Lake Ridge Apartments, a 282 unit multifamily apartment community located in Hampton, Virginia, from an unaffiliated third party. The purchase price of $34,344,000 was paid in part from an escrow account administered by a qualified intermediary institution in connection with the prior sale of a qualified property structured to comply with the requirements of a Section 1031 tax deferred exchange under the Internal Revenue Code of 1986, as amended, and the balance was paid from borrowings under the revolving credit facility available from an affiliate of the Company. The purchase price was subject to normal operating pro rations and adjustments as provided for in the purchase and sale agreement.
On August 3, 2005, the operating partnership of the Company, Berkshire Income Realty – OP, L.P., entered into a purchase and sale agreement (“the Agreement”) to purchase 100% of the fee simple interest of Savannah at Citrus Park Apartments, a 264 unit multifamily apartment community located in Tampa, Florida, from SCP Apartments, L.L.C. and Madison-Clinton-Tampa, L.L.C. (collectively, the “Seller”). The Seller is an unaffiliated third party. The purchase price is $27,520,000, and is subject to normal operating prorations, apportionments and adjustments as provided for in the Agreement. Additionally, the cash portion of the purchase price shall be reduced by the $15,720,000 principal balance of the existing first mortgage loan (the “Existing Loan”) to be assumed by the Company, subject to the obtaining of all necessary approvals from the lender under the Existing Loan. The remaining balance of the purchase price will be paid from available cash.
On August 12, 2005, the Company entered into a subscription agreement to invest in the Berkshire Multifamily Value Fund, L.P. (“BVF” or the “Fund”), an affiliate of the Advisor. Under the terms of the agreement and the related limited partnership agreement, the Company, together with affiliates, will invest up to $25,000,000, or 10%, of the total capital of BVF. The Fund’s investment strategy is to acquire middle-market properties where there is an opportunity to add value through repositioning or rehabilitation. Under the terms of the BVF partnership agreement, the Company’s ability to acquire additional properties is restricted to the two following conditions: (1) the Company can invest up to $8,000,000 per year in new properties from available cash or cash generated from the refinancing of existing properties, for a period of up to thirty-nine months; and (2) the Company is authorized to sell existing properties and reinvest those proceeds through transactions structured to comply with Section 1031 tax deferred exchanges under the Internal Revenue Code of 1986, as amended, (“1031 Exchanges”) without limit. Further, the agreement permits the Company to acquire without restriction, on or prior to December 31, 2005, a limited number of specific investment opportunities identified by Management. Management has evaluated these restrictions and believes that they will not materially impact the Company. Management believes, as of the date of the subscription agreement, the Company has invested substantially all of its available capital and, due to the Company’s ability to
28
do 1031 Exchanges with existing properties, will not be significantly restricted in its ability to appropriately manage its investments. As of September 30, 2005, BVF has not made a capital call, as provided for in the agreement, and as a result the Company has not yet made an investment in BVF.
Declaration of Dividends and Distributions
On March 25, 2003, the Board declared a dividend at an annual rate of 9% on the stated liquidation preference of $25 per share of the outstanding shares of the 9% Cumulative Redeemable Preferred Stock, which is payable quarterly in arrears, on February 15, May 15, August 15, and November 15 of each year to shareholders of record in the amount of $0.5625 per share per quarter.
On May 10, 2005, the Board authorized the general partner of the Operating Partnership to distribute a quarterly distribution of $250,000 from its operating cash flows to common general and common limited partners, payable on May 15, 2005. On the same day, the Board also declared a common dividend of $0.004656 per share on the Company’s Class B common stock payable concurrently with the Operating Partnership distributions.
On August 9, 2005, the Board authorized the general partner of the Operating Partnership to distribute a quarterly distribution of $250,000 from its operating cash flows to common general and common limited partners, payable on August 15, 2005. On the same day, the Board also declared a common dividend of $0.004249 per share on the Company’s Class B common stock payable concurrently with the Operating Partnership distributions.
On November 9, 2005, the Board authorized the general partner of the Operating Partnership to distribute a special distribution of $6,000,000 from its operating cash flows to common general and common limited partners, payable on November 15, 2005. On the same day, the Board also declared a common dividend of $0.101977 per share on the Company’s Class B common stock payable concurrently with the Operating Partnership distribution.
Also on November 9, 2005, the Board authorized the general partner of the Operating Partnership to distribute quarterly distributions of $1,000,000 from its operating cash flows to common general and common limited partners, payable on February 15, 2006 and May 15, 2006. On the same day, the Board also declared a common dividend of $0.0016996 per share on the Company’s Class B common stock payable concurrently with the Operating Partnership distributions.
Results of Operations and Financial Condition
During the nine months ended September 30, 2005, the Company’s portfolio increased from 17 to 23 properties (the “Total Property Portfolio”). As a result of significant changes in the Total Portfolio over time, the consolidated financial statements show considerable changes in revenue and expenses from period to period. The Company does not believe that its period-to-period financial data are comparable. Therefore, the comparison of operating results for the three and nine months ended September 30, 2005 and 2004 reflects changes attributable to the properties that were owned by the Company throughout each period presented (the “Same Property Portfolio”).
Net Operating Income (“NOI”) falls within the definition of “non-GAAP financial measure” as stated in Item 10(e) of Regulation S-K promulgated by the SEC and, as a result, the Company may be required to include in this report a statement disclosing the reasons why management believes that presentation of this measure provides useful information to investors. The Company believes NOI is a measure of operating results that is useful to investors to analyze the performance of a real estate company because it provides a direct measure of the operating results of the Company’s multifamily apartment communities. The Company also believes it is a useful measure to facilitate the comparison of operating performance among competitors.
29
Comparison of the three months ended September 30, 2005 to the three months ended September 30, 2004.
The table below reflects selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of the 7 properties acquired or placed in service on or prior to January 1, 2004 and owned through September 30, 2005. The Total Property Portfolio includes the effect of the additional multifamily apartment communities acquired after January 1, 2004.
| | Same Property Portfolio | | Total Property Portfolio |
| | Three months ended September 30, | | Three months ended September 30, |
| | | | | | | | Increase / | | | % | | | | | | | | Increase / | | | % |
| | 2005 | | 2004 | | (Decrease) | | | Change | | 2005 | | 2004 | | Decrease | | | Change |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 8,286,136 | | $ | 8,108,370 | | $ | 177,766 | | | 2.19% | | $ | 16,092,704 | | $ | 8,522,654 | | $ | 7,570,050 | | | 88.82% |
Interest | | | 4,439 | | | 3,734 | | | 705 | | | 18.88% | | | 149,696 | | | 153,877 | | | (4,181) | | | (2.72)% |
Utility reimbursement | | | 100,242 | | | 115,248 | | | (15,006) | | | (13.02)% | | | 198,567 | | | 120,821 | | | 77,746 | | | 64.35% |
Other | | | 301,201 | | | 393,345 | | | (92,144) | | | (23.43)% | | | 588,845 | | | 406,074 | | | 182,771 | | | 45.01% |
Total revenue | | | 8,692,018 | | | 8,620,697 | | | 71,321 | | | 0.83% | | | 17,029,812 | | | 9,203,426 | | | 7,826,386 | | | 85.04% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating | | | 2,051,021 | | | 2,101,036 | | | (50,015) | | | (2.38)% | | | 4,152,523 | | | 2,343,965 | | | 1,808,558 | | | 77.16% |
Maintenance | | | 732,260 | | | 662,883 | | | 69,377 | | | 10.47% | | | 1,342,494 | | | 702,220 | | | 640,274 | | | 91.18% |
Real estate taxes | | | 955,680 | | | 910,995 | | | 44,685 | | | 4.91% | | | 1,883,867 | | | 984,426 | | | 899,441 | | | 91.37% |
General and administrative | | | 148,972 | | | 121,128 | | | 27,844 | | | 22.99% | | | 995,412 | | | 340,500 | | | 654,912 | | | 192.34% |
Management fees | | | 368,505 | | | 330,239 | | | 38,266 | | | 11.59% | | | 1,090,617 | | | 618,402 | | | 472,215 | | | 76.36% |
Total operating expenses | | | 4,256,438 | | | 4,126,281 | | | 130,157 | | | 3.15% | | | 9,464,913 | | | 4,989,513 | | | 4,475,400 | | | 89.70% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Operating Income | | | 4,435,580 | | | 4,494,416 | | | (58,836) | | | (1.31)% | | | 7,564,899 | | | 4,213,913 | | | 3,350,986 | | | 79.52% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 2,690,742 | | | 2,425,583 | | | 265,159 | | | 10.93% | | | 5,682,905 | | | 2,573,097 | | | 3,109,808 | | | 120.86% |
Interest | | | 2,576,954 | | | 2,442,261 | | | 134,693 | | | 5.52% | | | 4,548,982 | | | 2,458,933 | | | 2,090,049 | | | 85.00% |
Loss on sale of securities | | | 0 | | | 0 | | | 0 | | | 0% | | | 0 | | | 0 | | | 0 | | | 0% |
Loss on extinguishment of debt | | | 0 | | | 0 | | | 0 | | | 0% | | | 80,017 | | | 0 | | | 80,017 | | | 100.00% |
Amortization of acquired in-place leases and tenant relationships | | | 0 | | | 689,100 | | | (689,100) | | | (100)% | | | 755,326 | | | 361,251 | | | 394,075 | | | 109.09% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-operating expenses | | | 5,267,696 | | | 5,556,944 | | | (289,248) | | | (5.21)% | | | 11,067,230 | | | 5,393,281 | | | 5,673,949 | | | 105.20% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before minority interest in properties, equity in loss of Multifamily Venture, equity in income of Mortgage Funds, minority common interest in Operating Partnership, income from discontinued operations and gain on transfer of assets to Multifamily Venture | | $ | (832,116) | | $ | (1,062,528) | | $ | 230,412 | | | 21.69% | | $ | (3,502,331) | | $ | (1,179,368) | | $ | (2,322,963) | | | (196.97%) |
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Comparison of the three months ended September 30, 2005 to the three months ended September 30, 2004. (Same Property Portfolio).
Revenue
Rental revenue of the Same Property Portfolio increased slightly in the three-month period ended September 30, 2005 as compared to the same period of 2004. The increase continues to be due mainly to the ongoing property rehabilitation efforts at certain properties within the Same Property Portfolio. The success of these projects persist in enhancing rental revenues as management continues to update apartment units at select properties with new kitchen and bathrooms and/or in-unit laundry equipment and is able to bring the rehabilitated units back to the market at notable rental premiums over pre-rehabilitation levels. Also contributing to the positive results is the effects of general rent increases across the Same Property Portfolio as well as stable occupancy levels in the Mid-Atlantic market. The positive trends are being partially offset by sub-markets that continue to experience softness in rental revenues related to less than anticipated occupancy levels in the Southwest market. Specifically, occupancy in the Company’s Texas market continues to trail budgeted expectations, though they are currently experiencing an improvement. Although the trend of occupancy appears to have turned the corner, revenues still suffer as rent concessions continue to prevail in the Houston and Dallas sub-markets. The improved occupancy levels remain below expectations due mainly to the continued popularity of single family home purchases which have, and to a lesser degree continue to, benefit from low interest rates and the over supply of apartment units in the sub-market. Management anticipates that rising interest rates will begin to dilute the popularity of home purchases and stabilize occupancy rates, which we believe is reflective of the positive occupancy trends in the three-month period ended September 30, 2005.
While interest income is consistent with the three-month period of 2004, decreases in utility reimbursement and other miscellaneous revenue is primarily attributable to a one time event revenue event in the three month period ended September 30, 2004 that was not repeated in 2005, as well as normal operating fluctuations for the comparative reporting periods for the remainder of the revenue items. Miscellaneous revenues consist primarily of the various fees charged to tenants and potential tenants, including late fees, parking fees, pet fees, laundry fees, application fees and other similar items.
Operating Expenses
Overall operating expenses decreased as compared to the same three-month period of 2004. Moderate savings in payroll, related benefits and a slight savings in utilities offset an increase in property liability insurance expense. The Seasons of Laurel property contributes significantly to the Company’s utility expense, as the property does not currently pass thru utility charges to its tenants. Although the electric industry was deregulated in the market and a sharp rate increase resulted in mid 2004, the comparative results are fairly consistent as the rate was in effect in both of the comparative periods. The majority of the other properties in the Same Property Portfolio also experienced an increase in utility costs, but to a lesser degree than the Seasons of Laurel property.
Maintenance expense increased slightly in 2005 as compared to the same period a year ago and is due mainly to increases in interior painting and other normal maintenance activities. Other recurring maintenance costs were consistent with the same period of 2004. Management believes that the proactive maintenance of its multifamily apartment communities is effective in preserving, and in some cases increasing, its occupancy levels and facilitates the reduction of vacancy and rental concessions required to operate the properties at desired occupancy levels.
Real estate taxes increased for the three-month period ended September 30, 2005 from the comparable period of 2004. The increase is due mainly to the continued escalation of assessed property valuations for assets comprising the Same Property Portfolio. The Company processes include the monitoring of increases in assessed values on its properties and the contesting and seeking of arbitration on any increase in assessed value that it considers to be unreasonable. The Company continues to expect the continuation of an upward trend in real estate tax expense as local and state governments continue to rely on property taxes as an important revenue stream.
General and administrative expenses increased for the three-month period ended September 30, 2005. The slight overall increase is due mainly to miscellaneous legal expense at one of the properties, telephone expense and other normal operating expense fluctuations experienced throughout the properties of the Same Property Portfolio.
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Management fees of the Same Property Portfolio, increased slightly in the current comparable period based on increased revenues and fair market values of the Same Property Portfolio. Property management fees are assessed on the revenue stream of the managed properties.
Non Operating Expenses
Depreciation expense of the Same Property Portfolio increased for the three months ended September 30, 2005 as compared to the same period of the prior year. The increased expense is related to the additions to the basis of fixed assets in the portfolio. The additions were driven primarily by rehabilitation projects ongoing at the various properties, and, to a lesser degree, normal capital spending activities.
Interest expense for the three months ended September 30, 2005 increased over the comparable period of 2004. The increase is attributable to the refinancing of three property mortgages at incrementally higher principal levels than the related paid-off loans, which were partially offset by the reduced interest rates obtained on the new debt.
Comparison of the three months ended September 30, 2005 to the three months ended September 30, 2004. (Total Property Portfolio).
Increases in revenues, operating expenses, non-operating expenses and the related losses of the Total Property Portfolio for the three-month period ended September 30, 2005 as compared to the same three-month period of 2004 are due mainly to the increase in the number of properties owned by the Company in the comparative periods presented. As of September 30, 2004, the Total Property Portfolio consisted of 10 properties, or 4,163 units, while as of September 30, 2005, the number of properties increased to 23, or 7,083 units.
32
Comparison of the nine months ended September 30, 2005 to the nine months ended September 30, 2004.
The table below reflects selected operating information for the Same Property Portfolio and the Total Property Portfolio. The Same Property Portfolio consists of the 7 properties acquired or placed in service on or prior to January 1, 2004 and owned through September 30, 2005. The Total Property Portfolio includes the effect of the additional multifamily apartment communities acquired after January 1, 2004.
| | Same Property Portfolio | | Total Property Portfolio |
| | Nine months ended September 30, | | Nine months ended September 30, |
| | | | | | | | Increase / | | | % | | | | | | | | Increase / | | | % |
| | 2005 | | 2004 | | (Decrease) | | | Change | | 2005 | | 2004 | | Decrease | | | Change |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 24,280,137 | | $ | 23,468,446 | | $ | 811,691 | | | 3.46% | | $ | 43,805,061 | | $ | 25,056,663 | | $ | 18,748,398 | | | 74.82% |
Interest | | | 20,391 | | | 12,745 | | | 7,646 | | | 59.99% | | | 322,312 | | | 639,129 | | | (316,817) | | | (49.57)% |
Utility reimbursement | | | 360,960 | | | 349,942 | | | 11,018 | | | 3.15% | | | 610,164 | | | 366,194 | | | 243,970 | | | 66.62% |
Other | | | 915,300 | | | 919,797 | | | (4,497) | | | (0.49)% | | | 1,611,473 | | | 1,012,760 | | | 598,713 | | | 59.12% |
Total revenue | | | 25,576,788 | | | 24,750,930 | | | 825,858 | | | 3.34% | | | 46,349,010 | | | 27,074,746 | | | 19,274,264 | | | 71.19% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating | | | 6,049,007 | | | 6,024,014 | | | 24,993 | | | 0.41% | | | 11,430,617 | | | 6,747,466 | | | 4,683,151 | | | 69.41% |
Maintenance | | | 1,899,284 | | | 1,813,753 | | | 85,531 | | | 4.72% | | | 3,460,326 | | | 1,917,889 | | | 1,542,437 | | | 80.42% |
Real estate taxes | | | 2,795,450 | | | 2,694,591 | | | 100,859 | | | 3.74% | | | 5,101,785 | | | 2,960,411 | | | 2,141,374 | | | 72.33% |
General and administrative | | | 389,245 | | | 355,674 | | | 33,571 | | | 9.44% | | | 2,987,930 | | | 1,020,292 | | | 1,967,638 | | | 192.85% |
Management fees | | | 1,023,655 | | | 957,801 | | | 65,854 | | | 6.88% | | | 3,038,744 | | | 1,836,651 | | | 1,202,093 | | | 65.45% |
Total operating expenses | | | 12,156,641 | | | 11,845,833 | | | 310,808 | | | 2.62% | | | 26,019,402 | | | 14,482,709 | | | 11,536,693 | | | 79.66% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Operating Income | | | 13,420,147 | | | 12,905,097 | | | 515,050 | | | 3.99% | | | 20,329,608 | | | 12,592,037 | | | 7,737,571 | | | 61.45% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 7,742,933 | | | 7,106,879 | | | 636,054 | | | 8.95% | | | 14,698,314 | | | 7,658,724 | | | 7,039,590 | | | 91.92% |
Interest | | | 7,667,322 | | | 7,299,462 | | | 367,860 | | | 5.04% | | | 12,399,147 | | | 7,554,562 | | | 4,844,585 | | | 64.13% |
Loss on sale of securities | | | 0 | | | 0 | | | 0 | | | 0% | | | 0 | | | 163,630 | | | (163,630) | | | (100.00)% |
Loss on extinguishment of debt | | | 0 | | | 0 | | | 0 | | | 0% | | | 80,017 | | | 0 | | | 80,017 | | | 100.00% |
Amortization of acquired in-place leases and tenant relationships | | | 0 | | | 954,903 | | | (954,903) | | | (100)% | | | 2,834,713 | | | 1,134,188 | | | 1,700,525 | | | 149.93% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-operating expenses | | | 15,410,255 | | | 15,361,244 | | | 49,011 | | | 0.32% | | | 30,012,191 | | | 16,511,104 | | | 13,501,087 | | | 81.77% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before minority interest in properties, equity in loss of Multifamily Venture, equity in income of Mortgage Funds, minority common interest in Operating Partnership, income from discontinued operations and gain on transfer of assets to Multifamily Venture | | $ | (1,990,108) | | $ | (2,456,147) | | $ | 466,039 | | | 18.97% | | $ | (9,682,583) | | $ | (3,919,067) | | $ | (5,763,516) | | | (147.06)% |
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Comparison of the nine months ended September 30, 2005 to the nine months ended September 30, 2004. (Same Property Portfolio).
Revenue
Rental revenue of the Same Property Portfolio increased slightly in the nine-month period ended September 30, 2005 as compared to the same period of 2004. The increase continues to be due mainly to the ongoing property rehabilitation efforts at certain properties within the Same Property Portfolio. The success of these projects persist in enhancing rental revenues as management continues to update apartment units at select properties with new kitchen and bathrooms and/or in-unit laundry equipment and is able to bring the rehabilitated units back to the market at notable rental premiums over pre-rehabilitation levels. Also contributing to the positive results is the effects of general rent increases across the Same Property Portfolio as well as stable occupancy levels in the Mid-Atlantic market. The positive trends are being partially offset by sub-markets that continue to experience softness in rental revenues related to less than anticipated occupancy levels in the Southwest market. Specifically, occupancy in the Company’s Texas market continues to trail budgeted expectations, though they are currently experiencing an improvement. Although the trend of occupancy appears to have turned the corner, revenues still suffer as rent concessions continue to prevail in the Houston and Dallas sub-markets. The improved occupancy levels remain below expectations due mainly to the continued popularity of single family home purchases which have, and to a lesser degree continue to, benefit from low interest rates and the over supply of apartment units in the sub-market. Management anticipates that rising interest rates will begin to dilute the popularity of home purchases and stabilize occupancy rates, which we believe is reflective of the positive occupancy trends in the later months of the nine-month period ended September 30, 2005.
Interest income increased slightly over the same nine-month period of 2004 due mainly to modestly higher cash balances and slightly lower interest rates, while utility reimbursement and other miscellaneous revenues remained consistent with the nine-month period ended September 30, 2004. Changes in utility reimbursement and other miscellaneous revenues were due to normal operating fluctuations for the comparative reporting periods. Miscellaneous revenues consist primarily of the various fees charged to tenants and potential tenants, including late fees, parking fees, pet fees, laundry fees, application fees and other similar items.
Operating Expenses
Overall operating expenses increased as compared to the same nine-month period of 2004. Modest increases in utility costs were offset by savings in payroll and benefits and property liability insurance. The Seasons of Laurel property contributed significantly to the utility increases as electric industry was deregulated in the market and sharp rate increases resulted. The rate increases were effective in mid 2004 and the resulting cost increases have been borne by the Company as the property does not currently pass thru utilities to its tenants. A majority of the other properties in the Same Property Portfolio also experienced an increase in utility costs, but to a lesser degree than the Seasons of Laurel property.
Maintenance expenses increased in 2005 as compared to the same period a year ago and is due mainly to increases in interior painting and other normal maintenance activities. Other recurring maintenance costs were consistent with the same period of 2004. Management believes that the proactive maintenance of its multifamily apartment communities is effective in preserving, and in some cases increasing its, occupancy levels and facilitates the reduction of vacancy and rental concessions required to operate the properties at desired occupancy levels
Real estate taxes increased for the nine-month period ended September 30, 2005 from the comparable period of 2004. The increase is due mainly to the continued escalation of assessed property valuations for assets comprising the Same Property Portfolio. The Company processes include the monitoring of increases in assessed values on its properties and the contesting and seeking of arbitration on any increase in assessed value that it considers to be unreasonable. The Company continues to expect the continuation of an upward trend in real estate tax expense as local and state governments continue to rely on property taxes as an important revenue stream.
General and administrative expenses increased for the nine-month period ended September 30, 2005. The slight overall increase is due mainly to miscellaneous legal expense at one of the properties, telephone expense and other normal operating expense fluctuations experienced throughout the properties of the Same Property Portfolio.
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Management fees of the Same Property Portfolio increased slightly in the current comparable period based on increased revenues and fair market values of the Same Property Portfolio. Property management fees are assessed on the revenue stream of the managed properties.
Non Operating Expenses
Depreciation expense of the Same Property Portfolio increased for the nine-months ended September 30, 2005 as compared to the same period of the prior year. The increased expense is a result of continued additions to the basis of fixed assets in the portfolio. The additions were driven primarily by rehabilitation projects ongoing at the various properties, and, to a lesser degree, normal capital spending activities.
Interest expense for the nine months ended September 30, 2005 increased over the comparable period of 2004. The increase is attributable to the refinancing of three property mortgages at incrementally higher principal levels than the related paid-off loans, which were partially offset by the reduced interest rates obtained on the new debt. Also, on September 30, 2005, the Company closed on the refinancing of an additional property’s mortgage at an incrementally higher principal level than the paid-off loan. The paid-off loan was a variable interest rate loan and was replaced by a fixed interest rate loan at a reduced interest rate.
Comparison of the nine months ended September 30, 2005 to the nine months ended September 30, 2004. (Total Property Portfolio).
Increases in revenues, operating expenses, non-operating expenses and the related losses of the Total Property Portfolio for the nine-month period ended September 30, 2005 as compared to the same nine-month period of 2004 are due mainly to the increase in the number of properties owned by the Company in the comparative periods presented. As of September 30, 2004, the Total Property Portfolio consisted of 10 properties, or 4,163 units, while as of September 30, 2005, the number of properties increased to 23, or 7,083 units.
Debt to Fair Market Value of Real Estate Assets
The Company’s total debt summary and debt maturity schedule, as of September 30, 2005, is as follows:
Debt Summary |
| | | | Weighted |
| | $ | | Average Rate |
| | | | | | |
Collateralized – Fixed Rate | | $ | 339,170,319 | | | 5.11% |
Total Debt as of September 30, 2005 | | $ | 339,170,319 | | | 5.11% |
Debt Maturity Summary |
| | | | |
Year | | $ | | % of Total |
| | | | | | |
2005 | | $ | 278,956 | | | 0.08% |
2006 | | | 2,241,808 | | | 0.66% |
2007 | | | 4,620,741 | | | 1.36% |
2008 | | | 5,377,961 | | | 1.59% |
2009 | | | 71,026,747 | | | 20.94% |
Thereafter | | | 255,624,106 | | | 75.37% |
Total | | $ | 339,170,319 | | | 100.00% |
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The Company’s “Debt-to-Fair Market Value of Real Estate Assets” as of September 30, 2005 is presented in the following table. Fair market value of real estate assets is based on management’s best estimate of fair value for properties purchased in prior years or purchase price for properties acquired within the current year. The following information is presented in lieu of information regarding the Company’s “Debt-to-Total Market Capitalization Ratio”, which is a commonly used measure in our industry, because the Company’s market capitalization is not readily determinable since there was no public market for its common equity during the periods presented in this report.
The information regarding “Debt-to-Fair Value of Real Estate Assets” is presented to allow investors to calculate our loan-to-value ratios in a manner consistent with those used by management and others in our industry, including those used by our current and potential lenders. Management uses this information when making decisions about financing or refinancing properties. Management also uses fair market value information when making decisions about selling assets as well as evaluating acquisition opportunities within markets where we have assets. The most directly comparable financial measure of our property value, calculated and presented in accordance with GAAP, is net book value, shown on the balance sheet as multifamily apartment communities, net of accumulated depreciation. At September 30, 2005, the aggregate net book value of our real estate assets was $355,654,603.
Debt-to-Fair Market Value of Real Estate Assets |
as of September 30, 2005 |
| | | |
Fair Market Value – Estimated | | $ | 525,605,000 |
| | | |
Debt | | $ | 339,170,319 |
| | | |
Loan-to-Value | | | 64.53% |
The debt-to-fair market value of real estate assets does not include any outstanding borrowings under the revolving credit facility. The revolving credit facility contains covenants that require the Company to maintain certain financial ratios, including an indebtedness to value ratio. As of September 30, 2005, the Company is in compliance with the covenants of the revolving credit facility.
Funds From Operations
The Company has adopted the revised definition of Funds from Operations (“FFO”) adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). Management considers FFO to be an appropriate measure of performance of an equity REIT. We calculate FFO by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items), for gains (or losses) from sales of properties, real estate related depreciation and amortization, and adjustment for unconsolidated partnerships and ventures. Management believes that in order to facilitate a clear understanding of the historical operating results of the Company, FFO should be considered in conjunction with net income as presented in the consolidated financial statements included elsewhere herein. Management considers FFO to be a useful measure for reviewing the comparative operating and financial performance of the Company because, by excluding gains and losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies.
The Company’s calculation of FFO may not be directly comparable to FFO reported by other REITs or similar real estate companies that have not adopted the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an
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indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.
The following table presents a reconciliation of GAAP net income (loss) to FFO for the three and nine months ended September 30, 2005 and 2004:
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
| | | | | | | | | | | | |
Net income (loss) | | $ | (1,823,776) | | $ | 29,350 | | $ | 17,069,691 | | $ | (1,898,170) |
Add: | | | | | | | | | | | | |
Depreciation of real property | | | 3,537,408 | | | 2,160,186 | | | 11,640,294 | | | 6,543,521 |
Depreciation included in results of discontinued operations | | | - | | | - | | | 389,520 | | | - |
Minority interest in Operating Partnership | | | 244,025 | | | 244,025 | | | 488,050 | | | 732,075 |
Minority interest in properties | | | - | | | 2,418 | | | - | | | 111,228 |
Amortization of acquired in-place leases and tenant relationships | | | 755,326 | | | 361,251 | | | 2,834,713 | | | 1,134,188 |
Equity in loss of Multifamily Venture | | | 23,943 | | | 58,105 | | | 67,316 | | | 160,778 |
Funds from operations of Multifamily Venture | | | 47,187 | | | 43,908 | | | 228,578 | | | 10,562 |
| | | | | | | | | | | | |
Less: | | | | | | | | | | | | |
Minority interest in properties | | | (14,964) | | | - | | | (77,900) | | | - |
Minority interest in properties share of funds from operations | | | (228,945) | | | (111,770) | | | (794,417) | | | (275,309) |
Gain on transfer of property to Multifamily Venture | | | - | | | - | | | - | | | (232,704) |
Gain on disposition of real estate assets | | | 42,732 | | | - | | | (25,215,105) | | | - |
| | | | | | | | | | | | |
Funds from Operations | | $ | 2,582,936 | | $ | 2,787,473 | | $ | 6,630,740 | | $ | 6,286,169 |
Environmental Issues
There are no recorded amounts resulting from environmental liabilities because there are no known contingencies with respect to environmental liabilities. The Company obtains environmental audits through various sources, including lender evaluations and acquisition due diligence, for each of its properties at various intervals throughout a property’s useful life. The Company has not been advised by any third party as to the existence of, nor has it identified on its own, any material liability for site restoration or other costs that may be incurred with respect to any of its properties.
Inflation and Economic Conditions
Substantially all of the leases at the Company’s properties are for a term of one year or less, which enables the Company to seek increased rents for new leases or upon renewal of existing 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. Certain properties are subject to regulations that require lease periods of two years, which management deems as having minimal effect on the overall inflation risk to the Company.
The Company believes the multifamily sector will benefit from the ongoing economic recovery and favorable current demographic trends. While the apartment sector has experienced slower growth over the past four years due to rising unemployment and a significant renter migration to single family homes, a reversal of both trends is now expected to spur an apartment recovery. The economic recovery is generating increased job growth, which typically translates into household formation and rising apartment occupancy. The Company feels, for single
4
family homebuyers over the next several years, increasing housing costs and potentially higher interest rates may make purchases increasingly expensive and out of reach. In addition, we believe the projected demographic trends strongly favor the multifamily sector, driven primarily by the initial wave of echo boomers (age 20 to 29), the fastest growing segment of the population, and an increasing number of immigrants who are typically renters by necessity.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Company’s mortgage notes and revolving credit facility are primarily fixed rate instruments; therefore, the majority of the Company’s debt is not sensitive to changes in the capital market except upon maturity. The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates, specifically debt obligations.
The table presents principal cash flows and related weighted average interest rates by expected maturity dates for the mortgage notes payable and revolving credit facility as of September 30, 2005.
| | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Thereafter | | Total |
| | | | | | | | | | | | | | |
Fixed Rate Debt | | $ 278,956 | | $ 2,241,808 | | $4,620,741 | | $5,377,961 | | $71,026,747 | | $255,624,106 | | $339,170,319 |
Average Interest Rate | | 5.38% | | 5.27% | | 5.13% | | 5.12% | | 5.52% | | 4.85% | | 5.11% |
The level of market interest rate risk remained relatively consistent from December 31, 2004 to September 30, 2005.
As of September 30, 2005, none of the Company’s outstanding debt is at variable interest rates. The Company estimates that the effect of a 1% increase or decrease in interest rates would not have an impact on interest expense as all of the outstanding mortgage debt is at fixed interest rates.
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ITEM 4. | CONTROLS AND PROCEDURES |
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report on Form 10-Q. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. | | EXHIBITS |
| | |
10.1 | | Revolving Credit Agreement dated as of June 30, 2005 among Berkshire Income Realty – OP, L.P., as |
| | the Borrower, Krupp Capital Associates, as the Lender, The Other Lenders Party Hereto and Krupp |
| | Capital Associates, as Administrative Agent. (Incorporated by reference to Exhibit No. 10.1 to the |
| | Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2005). |
| | |
10.2 | | Purchase and Sale Agreement between SCP Apartments, L.L.C., and Madison – Clinton – Tampa, L.L.C., |
| | each an Alabama limited liability company and Berkshire Income Realty – OP, L.P., a Delaware limited |
| | partnership or its nominee, dated August 3, 2005. (Incorporated by reference to Exhibit No. 10.1 to the |
| | Registrant’s Current Report on Form 8-K filed with the SEC on August 9, 2005). |
| | |
10.3 | | Agreement of Limited Partnership of Berkshire Multifamily Value Fund, L.P., dated August 12, 2005. |
| | |
10.4 | | Subscription Agreement between Berkshire Multifamily Value Fund, L.P. and Berkshire Income Realty, Inc. dated August 12, 2005. |
| | |
10.5 | | Letter Agreement between Berkshire Multifamily Value Fund, L.P. and Berkshire Income Realty, Inc. dated August 12, 2005. |
| | |
31.1 | | Certification of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350, as Adopted Pursuant to |
| | Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to |
| | Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1 | | Certification of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350, as Adopted Pursuant to |
| | Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2 | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to |
| | Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | BERKSHIRE INCOME REALTY, INC. |
|
November 14, 2005
| | |
/s/ David C. Quade
|
| | | | David C. Quade President, Chief Financial Officer and Principal Executive Officer |
|
November 14, 2005
| | |
/s/ Christopher M. Nichols
|
| | | | Christopher M. Nichols Vice President and Principal Accounting Officer |
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