UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-9496
BNP RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
- -------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
301 S. College Street, Suite 3850, Charlotte, NC 28202-6024
(Address of principal executive offices) (Zip Code)
704/944-0100
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
- -
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of July 29, 2005 (the latest practicable date).
Common Stock, $.01 par value 9,244,812
- ---------------------------- -----------------------
(Class) (Number of shares)
Exhibit index: page 40
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information (Unaudited)
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
3 Quantitative and Qualitative Disclosures 36
About Market Risk
4 Controls and Procedures 36
PART II - Other Information
4 Submission of Matters to a Vote of Security Holders 36
5 Other Information 37
6 Exhibits 37
Signatures 39
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets - Unaudited
(all amounts in thousands except share amounts)
June 30 December 31
2005 2004
------------------ ------------------
Assets
Real estate investments at cost:
Apartment properties $527,641 $389,119
Restaurant properties 37,405 37,405
------------------ ------------------
565,047 426,525
Less accumulated depreciation (80,120) (66,454)
------------------ ------------------
484,927 360,071
Cash and cash equivalents 2,533 517
Prepaid expenses and other assets 8,209 4,516
Intangible assets, net 1,251 1,115
Deferred financing costs, net 2,329 1,545
------------------ ------------------
Total assets $499,250 $367,764
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $410,480 $286,425
Accounts payable and accrued expenses 3,700 897
Accrued interest on notes payable 1,721 1,264
Consideration due for acquisitions 1,000 -
Deferred revenue and security deposits 2,089 1,787
------------------ ------------------
Total liabilities 418,989 290,373
Minority interest in consolidated limited partnerships 274 -
Minority interest in operating partnership 19,637 14,394
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
909,090 at June 30, 2005, and December 31, 2004 10,000 10,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
9,244,812 at June 30, 2005,
8,652,740 at December 31, 2004 92 87
Additional paid-in capital 112,012 103,221
Dividend distributions in excess of net income (61,754) (50,311)
------------------ ------------------
Total shareholders' equity 60,350 62,996
------------------ ------------------
Total liabilities and shareholders' equity $499,250 $367,764
================== ==================
See accompanying notes
3
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations - Unaudited
(all amounts in thousands except per share amounts)
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
------------- ------------- --------------- ---------------
Revenues
Apartment rental income $ 17,508 $ 10,579 $ 31,600 $ 20,632
Restaurant rental income 957 957 1,915 1,915
Management fee income 11 208 127 405
Interest and other income 26 113 251 136
------------- ------------- --------------- ---------------
18,502 11,858 33,892 23,089
Expenses
Apartment operations 6,853 4,388 12,296 8,250
Apartment administration 738 614 1,412 1,040
Corporate administration 637 561 1,522 1,227
Interest and prepayment penalties 5,728 3,330 10,818 6,570
Depreciation 4,157 2,690 7,678 5,230
Amortization of deferred loan costs 117 68 224 156
Write-off of unamortized loan costs
at debt refinance 63 - 223 -
Deficit distributions to minority partners 800 - 7,621 -
------------- ------------- --------------- ---------------
19,093 11,650 41,794 22,472
------------- ------------- --------------- ---------------
(Loss) income before minority interests (591) 208 (7,902) 616
Loss (income) attributed to
minority interests -
- Consolidated limited partnerships 14 - 76 -
- Operating partnership 171 9 1,463 (27)
------------- ------------- --------------- ---------------
Net (loss) income (406) 217 (6,363) 590
Less cumulative preferred dividend (250) (250) (500) (500)
------------- ------------- --------------- ---------------
(Loss) income attributed to
common shareholders $ (656) $ (33) $ (6,863) $ 90
============= ============= =============== ===============
Weighted average
common shares outstanding 9,239 7,119 9,111 6,763
Earnings per common share - basic:
Net (loss) income $ (0.04) $ 0.03 $ (0.70) $ 0.09
(Loss) income attributed to
common shareholders (0.06) (0.01) (0.75) 0.01
Earnings per common share - diluted:
Net (loss) income (0.04) 0.02 (0.70) 0.07
(Loss) income attributed to
common shareholders (0.06) (0.01) (0.75) 0.01
Dividends declared per common share 0.25 0.25 0.50 0.50
See accompanying notes
4
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity - Unaudited
(all amounts in thousands)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance December 31, 2004 909 $ 10,000 8,653 $ 87 $ 103,221 $ (50,311) $ 62,996
Common stock issued - - 580 6 8,596 - 8,602
Dividends paid - preferred - - - - - (250) (250)
Dividends paid - common - - - - - (2,272) (2,272)
Net loss - - - - - (5,957) (5,957)
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2005 909 10,000 9,233 92 111,817 (58,790) 63,120
Common stock issued - - 12 - 194 - 194
Dividends paid - preferred - - - - - (250) (250)
Dividends paid - common - - - - - (2,308) (2,308)
Net loss - - - - - (406) (406)
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance June 30, 2005 909 $ 10,000 9,245 $ 92 $ 112,012 $ (61,754) $ 60,350
========= ============ =========== ========== ============= =============== ============
See accompanying notes
5
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited
(all amounts in thousands)
Six months ended
June 30
2005 2004
----------------- ----------------
Operating activities:
Apartment rental receipts, net $ 31,356 $ 20,523
Restaurant rental receipts 1,915 1,915
Management fee receipts 127 427
Interest and other income receipts 269 135
Operating and administrative expense payments (15,812) (10,636)
Interest payments (10,806) (6,641)
----------------- ----------------
Net cash provided by operating activities 7,048 5,723
Investing activities:
Acquisitions of apartment properties (35,658) (19,513)
Acquisition of Boddie Investment Company, net of cash included in
accounts of consolidated limited partnerships 193 -
Additions to apartment properties, net (4,097) (1,543)
Net release (funding) of lender reserves (2) 35
----------------- ----------------
Net cash used in investing activities (39,564) (21,021)
Financing activities:
Net proceeds from issuance of common stock 1,082 13,401
Distributions to minority partners in consolidated limited partnerships (7,621) -
Distributions to operating partnership minority unitholders (916) (921)
Dividends paid to preferred shareholder (500) (500)
Dividends paid to common shareholders (4,580) (3,251)
Proceeds from notes payable 94,938 59,156
Principal payments on notes payable (46,908) (47,590)
Payment of deferred financing costs (962) (565)
----------------- ----------------
Net cash provided by financing activities 34,532 19,730
----------------- ----------------
Net increase in cash and cash equivalents 2,016 4,432
Cash and cash equivalents at beginning of period 517 564
----------------- ----------------
Cash and cash equivalents at end of period $ 2,533 $ 4,996
================= ================
(continued)
6
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited - continued
(all amounts in thousands)
Six months ended
June 30
2005 2004
----------------- ----------------
Reconciliation of net (loss) income to
net cash provided by operating activities:
Net (loss) income $ (6,363) $ 590
Amortization of intangible for in-place leases at acquisitions 74 -
Equity in income of unconsolidated limited partnership - -
Amortization of deferred interest defeasance (77) (105)
Depreciation and amortization of deferred loan costs 7,902 5,385
Write off of unamortized loan costs at debt refinancing 223 -
Deficit distributions to minority partners in
consolidated limited partnerships 7,621 -
Minority interest in consolidated limited partnerships (76) -
Minority interest in operating partnership (1,463) 27
Changes in operating assets and liabilities:
Prepaid expenses and other assets (2,931) (1,796)
Accounts payable and accrued expenses 2,396 1,746
Deferred revenue, prepaid rent and security deposits (259) (124)
----------------- ----------------
Net cash provided by operating activities $ 7,048 $ 5,723
================= ================
See accompanying notes
7
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - June 30, 2005
(Unaudited)
Note 1. Interim financial statements
We prepared the accompanying condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. These interim financial statements do not include
all information and notes required by generally accepted accounting principles
for complete financial statements. However, except as disclosed herein, there
has been no material change in the information disclosed in the notes to the
consolidated financial statements included in the Annual Report on Form 10-K of
BNP Residential Properties, Inc. for the year ended December 31, 2004. You
should read these financial statements in conjunction with our 2004 Annual
Report on Form 10-K. When we use the terms "company," "we," "us," or "our," we
mean BNP Residential Properties, Inc. and all entities included in our
consolidated financial statements. We believe that we have included all
adjustments (including normal recurring accruals) necessary for a fair
presentation. Operating results for the three and six months ending June 30,
2005, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
We have reclassified certain amounts in our prior period consolidated financial
statements and notes to conform to the current period presentation.
Note 2. Basis of presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "operating partnership"). The company is the general partner
and owns a majority interest in the operating partnership.
Effective January 26, 2005, in connection with an acquisition on that date, the
consolidated financial statements also include the accounts of real estate
limited partnerships (the "limited partnerships") that the operating partnership
controls which are not considered variable interest entities ("VIEs"), as well
as all VIEs for which the operating partnership is the primary beneficiary. The
assets of consolidated limited partnerships controlled by the operating
partnership generally are not available to pay creditors of the company or the
operating partnership.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
Accounting for VIEs
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46, "Consolidation of Variable Interest Entities," ("FIN 46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provided a new
framework for identifying VIEs and determining when a company should include the
assets, liabilities, noncontrolling interests and results of activities of a VIE
in its consolidated financial statements.
8
In general, a VIE is an entity or other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has equity owners that, as a group, are unable to make significant
decisions about its activities, or (3) has equity owners that, as a group, do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46, as modified, requires a VIE to be consolidated if a party with an
ownership, contractual or other financial interest in the VIE (a "variable
interest holder") is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the "primary
beneficiary." Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest.
Accounting for general partner interests in limited partnerships
As managing general partner in three real estate limited partnerships, we have
the ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective partnership
agreements. However, under the guidance of the AICPA's Statement of Position
78-9 ("SOP 78-9"), we do not "control" the respective limited partnerships if
the limited partners have significant rights, such as the right to replace the
general partner and the right to approve the sale or refinancing of the assets
of the respective partnership in accordance with the partnership agreement. In
acting as the general partner in these limited partnerships, we are committed to
providing additional levels of funding to meet partnership operating deficits as
may be needed.
If we, as general partner, control a partnership that is not a VIE, generally
accepted accounting principles require that we consolidate the partnership in
our financial statements. Upon consolidation, we initially record our prorata
interest in the partnership's assets and liabilities at the lower of our cost or
fair value, and subsequently account for the partnership based on our prorata
interest; the non-controlling interests are reflected in our financial
statements at their historical costs.
Acquisition of interests in limited partnerships
Effective January 26, 2005, we acquired Boddie Investment Company ("BIC") in
exchange for shares of our common stock valued at $8.2 million. As a result of
this acquisition, in addition to other significant assets, we acquired certain
economic interests in the following limited partnerships:
o Marina Shores Associates One, Limited Partnership - 50% interest as general
partner
o The Villages of Chapel Hill Limited Partnership - 1% interest as
general partner
o The Villages of Chapel Hill - Phase 5 Limited Partnership - 1%
interest as general partner
Prior to this acquisition, we managed, on a fee basis, the properties owned by
these limited partnerships. Following our acquisition of BIC, the operating
partnership acts as the managing general partner of these limited partnerships
and will continue to manage the properties. These limited partnerships are
primarily funded with financing from third party lenders, which is secured by
first deed of trust loans on the rental properties of the partnerships. The
creditors of the limited partnerships generally do not have recourse to the
operating partnership.
9
We determined that the Marina Shores Associates One, Limited Partnership
("Marina Shores Partnership") is not a VIE. However, under the terms of the
partnership agreement for the Marina Shores Partnership, the general partner
controls the activities of the partnership; we have therefore included the
accounts of this partnership in our consolidated financial statements effective
January 26, 2005. The initial inclusion of the Marina Shores Partnership in our
consolidated financial statements resulted in an increase in real estate
investments of $26.3 million, an increase in net operating assets of $1.0
million and an increase in deed of trust notes payable of approximately $21.4
million. Our initial net investment in this limited partnership was $5.9
million.
We determined that The Villages of Chapel Hill Limited Partnership ("Villages
Partnership") is a VIE, because the limited partnership does not have sufficient
equity to carry out its principal activities without additional subordinated
financial support from the general partner. We also determined that we are the
primary beneficiary of the Villages Partnership. We have therefore included the
accounts of this partnership in our consolidated financial statements effective
January 26, 2005. The initial inclusion of the Villages Partnership in our
consolidated financial statements resulted in an increase in real estate
investments of $14.2 million, an increase in net operating assets of $0.1
million and an increase in deed of trust notes payable of approximately $12.1
million. In addition, we hold approximately $2.0 million in notes and other
receivables from The Villages Partnership which has been eliminated in
consolidation.
We determined that The Villages of Chapel Hill - Phase 5 Limited Partnership
("Villages - Phase 5 Partnership") is not a VIE. Following guidance in SOP 78-9,
under the terms of the partnership agreement for the Villages - Phase 5
Partnership, the limited partners have certain voting rights that preclude
control by the general partner. We have therefore accounted for our investment
in this partnership by applying the equity method. Our initial investment in the
Villages - Phase 5 Partnership was approximately $7,000, and we include this
investment in "other assets" on our balance sheet.
In late June 2005, the FASB ratified its Emerging Issues Task Force consensus in
Issue No. 04-5, "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights" ("Issue 04-5"). This guidance states that the
general partner in a limited partnership is presumed to control that limited
partnership, with very limited exceptions. We have not yet made a final
determination as to how the provisions of Issue 04-5 impact our accounting
treatment for our interest in the Villages - Phase 5 Partnership. If applicable,
we may be required to consolidate the accounts of the Villages - Phase 5
Partnership beginning no later than January 1, 2006; however, we do not expect
that such a change in accounting treatment would have a material effect on our
financial statements.
We reflect the unaffiliated partners' interests in the Marina Shores Partnership
and the Villages Partnership as minority interest in consolidated limited
partnerships. Minority interest in consolidated limited partnerships represents
the minority partners' share of the underlying net assets of these consolidated
limited partnerships. When these consolidated limited partnerships make cash
distributions to partners in excess of the carrying amounts of the minority
interests, we record a charge equal to the amount of such excess distributions
as deficit distributions to minority partners. During the first quarter of 2005
we recorded charges for deficit distributions to the minority partner in the
Marina Shores Partnership totaling $6.8 million. During the second quarter of
2005 we recorded additional charges for deficit distributions to the minority
partner totaling $0.8 million. There is no economic effect or cost to the
company or the operating partnership for these distributions.
10
We allocate proportional income and losses of the consolidated limited
partnerships to minority partners to the extent of the carrying amount of the
minority interest. We record a charge when losses attributable to the limited
partners of a consolidated limited partnership exceed the carrying amount of the
minority interest, even though there is no economic effect or cost to the
operating partnership. In our initial consolidation of the Marina Shores
Partnership, we reset the noncontrolling limited partner's capital account to
$-0-. During the first quarter of 2005, we recorded charges for consolidated
limited partnership losses, resulting primarily from depreciation and costs
related to refinance of the Marina Shores Partnership's first deed of trust
loan, of approximately $621,000 that were not allocated to the minority partner
in Marina Shores Partnership because the losses exceeded the carrying amount of
the minority interest. During the second quarter of 2005, we reduced these
charges by $203,000 for income that would otherwise have been allocated to the
limited partner.
Stock-based compensation
The company has one employee Stock Option and Incentive Plan in place. As
allowed by FAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," and FAS 123 "Accounting for Stock-Based Compensation," we account
for this plan using the intrinsic value method under the recognition and
measurement principles of APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. All outstanding options were fully vested prior to the end of
2004. If we had applied the fair value recognition provisions of FAS 123 to this
significant estimate for stock-based employee compensation, the effect would
have been to reduce net income as reported by less than $200 for the six months
ended June 30, 2004, with no impact on net income as reported for the six months
ended June 30, 2005, and no impact on basic and diluted earnings per share
amounts as reported.
In December 2004 the Financial Accounting Standards Board issued FAS 123
(revised 2004), "Share Based Payment," ("FAS 123(R)") which is a revision of FAS
123. FAS 123(R) supersedes APB Opinion 25, and amends FAS 95, "Statement of Cash
Flows." Generally, the approach in FAS 123(R) is similar to the approach
described in FAS 123. However, FAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. Pro forma disclosure is no
longer an alternative. FAS 123(R) must be adopted no later than January 1, 2006,
and we expect to adopt FAS 123(R) as of that date.
Note 3. Apartment property acquisitions
During the first quarter of 2005, we completed the acquisition of a portfolio of
four apartment properties from entities associated with Grover F. Shugart, Jr.
and/or Brian D. Shugart, which we call the "Shugart Parties." The four
properties contain an aggregate of 1,086 apartment units. The aggregate purchase
price for the properties totaled $52.1 million (including approximately $0.3
million in net operating assets acquired), paid by the assumption or refinancing
of $42.8 million of debt on the properties and issuance of $9.3 million in
operating partnership units with an imputed value of $13.50 per unit. Under the
terms of the exchange agreements, we issued 689,000 operating partnership units
at closing, and will issue an additional 74,000 deferred units in March 2006.
The preliminary allocation of the purchase price includes the following
significant components:
11
Value of
Apt. Operating
Property Units Contract Price Debt Assumed Partnership Units
- ------------------------------------- --------- ------------------- -------------------- -------------------
(000's) (000's) (000's)
Canterbury Apartments 630 $ 25,750 $ 22,992 $ 3,070
Laurel Springs Apartments 240 14,610 11,320 3,329
Laurel Springs II Apartments 96 7,090 5,850 1,209
Salem Ridge Apartments 120 4,360 2,610 1,706
We will operate Laurel Springs and Laurel Springs II Apartments as one
community.
During the second quarter of 2005, we completed two additional apartment
property acquisitions in separate cash transactions. Both properties are located
in the Charleston, South Carolina area.
Apt.
Property Units Contract Price
- ------------------------------------- --------- -------------------
(000's)
Waverly Place Apartments 240 $13,100
Paces Watch Apartments 232 $20,450
In addition, during the second quarter of 2005, we acquired approximately 40
acres of undeveloped land adjacent to our Canterbury Apartments property for a
contract price of $2.7 million, paid by $0.6 million in cash and the assumption
of $2.1 million in debt which bears interest at the lender's prime rate and
matures in September 2005.
Note 4. Financing transactions
Shortly after we acquired BIC (see Note 2 above) in January 2005, we completed
the refinancing of debt related to the Marina Shores Partnership. The Marina
Shores Partnership issued a $33.9 million fixed-rate note payable, secured by a
deed of trust and assignment of rents of Marina Shores Apartments. This loan
provides for interest at 5.075% (5.145% effective rate), payable in monthly
installments of principal and interest of $184,000 through January 2015, with a
balloon payment of $28.2 million in February 2015. The Marina Shores Partnership
first applied proceeds of this loan to retire the existing $20.7 million deed of
trust loan balance along with $1.2 million interest and prepayment penalties,
then distributed $6.8 million to the minority limited partner and $3.7 million
to the operating partnership.
In conjunction with our acquisition of the four apartment properties from the
Shugart Parties in March 2005, we assumed the following long-term debt:
o $21.5 million balance, fixed-rate note payable, secured by a mortgage
and assignment of rents of Canterbury Apartments. This loan provides
for interest at 5.4% (5.48% effective rate), payable in monthly
installments of principal and interest of $124,000 through July 2013,
with a balloon payment of $18.4 million at maturity in August 2013.
o $1.5 million variable rate unsecured note related to Canterbury
Apartments, which we immediately retired.
12
o $11.3 million balance, fixed-rate note payable, secured by a deed of
trust and assignment of rents of Laurel Springs Apartments. This loan
provides for interest at 4.91% (4.98% effective rate), payable in
monthly installments of principal and interest of $62,000 through June
2013, with a balloon payment of $9.6 million at maturity in July 2013.
o $5.9 million variable rate note payable, secured by a deed of trust and
assignment of rents of Laurel Springs II Apartments. This loan provides
for interest at 30-day LIBOR plus 1.9%, payable monthly. Beginning in
June 2005, principal payments of $7,000 will be due monthly in addition
to interest, with a balloon payment of $5.8 million at maturity in June
2006. At our option, we may extend the loan maturity to June 2008.
o $2.6 million fixed-rate note payable, secured by a deed of trust and
assignment of rents of Salem Ridge Apartments. This loan provides for
interest at 6.76%, payable in monthly installments of $15,000 through
September 2008, with principal due in full at that date.
In conjunction with our acquisitions during the second quarter of 2005, we
issued the following debt:
o $10.2 million fixed-rate note payable, secured by a mortgage and
assignment of rents of Waverly Place Apartments. This loan provides for
interest at 5.31% (5.38% effective rate), with interest only monthly
payments of $46,000 through May 2008. Beginning June 2008, scheduled
monthly installments of principal and interest will be $56,000, with a
balloon payment of $9.1 million at maturity in June 2015.
o $14.9 million fixed-rate note payable, secured by a mortgage and
assignment of rents of Paces Watch Apartments This loan provides for
interest at 5.31% (5.38% effective rate), with interest only monthly
payments of $67,000 through June 2008. Beginning July 2008, scheduled
monthly installments of principal and interest will be $83,000, with a
balloon payment of $13.3 million at maturity in June 2015.
Also, during the second quarter of 2005, we issued the following debt in
refinancing transactions for two of our apartment properties:
o $15.5 million fixed-rate note payable, secured by a deed of trust and
assignment of rents of Chason Ridge Apartments. This loan provides for
interest at 5.21% (5.28% effective rate), with interest only monthly
payments of $68,000 through June 2008. Beginning July 2008, scheduled
monthly installments of principal and interest will be $85,000, with a
balloon payment of $13.9 million at maturity in June 2015.
We applied proceeds of this loan to retire an $11.5 million
variable-rate note payable. In conjunction with this retirement, we
wrote off $63,000 of unamortized loan costs.
o $7.1 million fixed-rate note payable, secured by a deed of trust and
assignment of rents of Harris Hill Apartments. This loan provides for
interest at 5.21% (5.28% effective rate), with interest only monthly
payments of $31,000 through June 2008. Beginning July 2008, scheduled
monthly installments of principal and interest will be $39,000, with a
balloon payment of $6.4 million at maturity in June 2015.
We applied proceeds of this loan to retire an 8.55% fixed-rate note
payable with a
13
balance of $5.5 million.
In conjunction with the various acquisition and financing transactions described
above, we made net draws on our line of credit secured by Latitudes Apartments
totaling $5.0 million. In June 2005, we modified our line of credit secured by
our 40 restaurant properties to extend the maturity date to January 2008.
Note 5. Shareholders' equity
In January 2005, we issued 508,578 shares of our common stock, valued at $8.2
million, in conjunction with the BIC acquisition (see Note 2 above). As part of
the acquisition, BIC surrendered, and we cancelled, 72,399 shares of our common
stock, valued at $1.2 million.
In February 2005, we issued 12,748 shares of our common stock through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of $0.2 million. In
May 2005, we issued 12,311 shares through this Plan for proceeds of $0.2
million.
In March 2005, we issued 57,500 shares of our common stock upon exercise of
options by two employees for proceeds of $0.7 million.
Also in March 2005, we redeemed operating partnership units from a minority
unitholder by issuing 73,333 shares of our common stock on a one-for-one basis.
We calculated basic and diluted earnings per common share using the following
amounts (in thousands):
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ----------------
(000's) (000's) (000's) (000's)
Numerators:
Numerator for basic
earnings per share -
Net (loss) income $ (406) $ 217 $ (6,363) $ 590
Cumulative preferred dividend (250) (250) (500) (500)
--------------- --------------- --------------- ----------------
(Loss) income attributed to common
shareholders $ (656) $ (33) $ (6,863) $ 90
=============== =============== =============== ================
Numerator for diluted
earnings per share -
Net (loss) income $ (406) $ 217 $ (6,363) $ 590
Loss (income) attributed to minority
interest in operating partnership (1)
- (9) - 27
Cumulative preferred dividend (250) (250) (500) (500)
--------------- --------------- --------------- ----------------
(Loss) income attributed to common
shareholders $ (656) $ (42) $ (6,863) $ 116
=============== =============== =============== ================
14
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ----------------
(000's) (000's) (000's) (000's)
Denominators:
Denominator for basic earnings per share -
weighted average common shares
outstanding 9,239 7,119 9,111 6,763
Effect of dilutive securities:
Convertible
operating partnership units (1) - 1,850 - 1,846
Stock options (2) - 24 - 19
--------------- --------------- --------------- ----------------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 9,239 8,994 9,111 8,628
=============== =============== =============== ================
(1) Inclusion of operating partnership units would serve to reduce the net loss
per share in calculation of 2005 amounts and have been excluded from the
calculation.
(2) We excluded options to purchase 60,000 shares of common stock at $12.25,
120,000 shares of common stock at $13.125, 60,000 shares of common stock at
$11.25, and 30,000 shares of common stock at $9.25 from the calculation of
diluted earnings per share for the three and six months ended June 30,
2005, because inclusion of these options would serve to reduce the net loss
per share. We excluded options to purchase 120,000 shares of common stock
at $13.125 from the calculation of diluted earnings per share for the three
and six months ended June 30, 2004; the exercise price of these options was
greater than the average market price of the common shares for those
periods, and the effect would be anti-dilutive.
Note 6. Subsequent events
The Board of Directors declared a regular quarterly dividend of $0.25 per common
share on July 21, 2005, payable on August 15, 2005, to shareholders of record as
of August 1, 2005. The Board of Directors also authorized the payment of
dividends totaling $250,000 to the Series B Preferred shareholder.
Effective August 1, 2005, the company and four members of senior management
agreed to the terms upon which the company will enter into new employment
agreements with each of the four officers. These terms provide for cash
compensation and other benefits if we terminate them without cause or if a
change in control of the company occurs. The Board of Directors also granted
restricted stock awards for a total of 200,000 shares of common stock as of
August 1, 2005, to the four officers. The shares vest annually at the rate of
10% per year, and carry all rights of ownership, including the receipt of
dividends. The full terms of the restricted stock grants will be included in the
employment agreements.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report contains forward-looking statements within the
meaning of federal securities law. You can identify such statements by the use
of forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information.
Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that we will achieve our plans, intentions or expectations.
When you consider such forward-looking statements, you should keep in mind the
following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:
o Our markets could suffer unexpected increases in the development of
apartment, other rental or competitive housing alternatives;
o our markets could suffer unexpected declines in economic growth or an
increase in unemployment rates;
o general economic conditions could cause the financial condition of a
large number of our tenants to deteriorate;
o we may not be able to lease or re-lease apartments quickly or on as
favorable terms as under existing leases;
o we could incur unexpected costs in performing our third-party apartment
property management activities;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates could cause our debt service
costs to exceed expectations;
o we may not be able to meet our long-term liquidity requirements on
favorable terms; and
o we could lose the services of key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to disclose the
results of any revision to these forward-looking statements we may make to
reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
You should read the discussion in conjunction with the financial
statements and notes thereto included in this Quarterly Report and our Annual
Report on Form 10-K.
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust with operations in North Carolina,
South Carolina and Virginia. Our primary activity is the ownership and operation
of apartment communities. As of June 30, 2005, we owned and managed 33 apartment
communities containing 8,384 units, including three communities containing 713
units for which we are the general partner of the entities that own the
properties. In addition to our apartment communities, we own 40 properties that
we lease on a triple-net basis to a restaurant operator.
16
We are structured as an UpREIT, or umbrella partnership real estate
investment trust. The company is the sole general partner and owns a controlling
interest in BNP Residential Properties Limited Partnership, through which we
conduct all of our operations. We refer to this partnership as the operating
partnership. We refer to the limited partners of the operating partnership as
minority unitholders or as the minority interest in the operating partnership.
Our executive offices are located at 301 South College Street, Suite
3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100.
Results of Operations
Summary
With good growth and comparisons, we were pleased with the results for
the second quarter of 2005. Our focus during the second quarter was on
increasing same-unit apartment revenue, which we were able to do with modest
success. We entered the quarter with high occupancy at our apartment properties
and knew that any increase in revenue would have to come as a result of
increases in rental rates, not occupancy. During the quarter, continued strength
in single-family home sales, fueled in large part by low home mortgage rates,
made it difficult to increase rents as fast as we would have liked. Despite
this, however, we were able to increase same-unit apartment rental income by
2.4%, all as the result of increases in rental rates.
We continue to be optimistic about the outlook for our properties, our
markets and the company. We believe we will continue to see a slow strengthening
in demand for the type of apartment property we operate and that we are well
positioned to take advantage of this trend.
In January 2005, we acquired the general partner interest in three
limited partnerships. The activities of two of these limited partnerships (and
the apartment properties owned by those partnerships) are included in our
consolidated financial statements as of January 26, 2005. We describe this
acquisition in more detail under the heading "Capital Resources" as well as in
the notes to our financial statements included in this Current Report on Form
10-Q.
Effective March 31, 2005, we acquired a portfolio of four apartment
properties which we had previously managed under third-party contracts. (We will
operate these as three apartment communities.) We subsequently acquired one
apartment property effective April 21, 2005, and another property effective May
12, 2005. The activities of these owned properties have been included in our
consolidated financial statements as of their respective acquisition dates.
Results of operations for the second quarter and first six months of
2005, compared to the same periods in 2004, reflect significant growth in our
company and increased complexity in our financial reporting. We provide the
following supplemental consolidating information, in response to requests from
members of the investment community, for use in comparing our operating results
for 2005 and 2004:
17
2005 2004
----------------------------------------------------- -------------
Consolidated Owned (Owned
Consolidated Elim LPs (1) Properties Properties)
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Operating Results - 3 months ended June 30:
Revenues:
Apartment rental income $ 17,508 $ - $ 1,830 $ 15,678 $ 10,579
Restaurant rental income 957 - - 957 957
Management fee income 11 (92) - 103 208
Interest and other income 26 (44) 11 59 113
------------- ----------- ------------- ------------- -------------
18,502 (136) 1,841 16,798 11,858
Expenses:
Apartment operations 6,853 (92) 745 6,200 4,388
Administration expenses 1,375 - - 1,375 1,175
Interest and
prepayment penalties 5,728 (44) 637 5,135 3,330
Depreciation 4,157 - 197 3,960 2,690
Amortization of
deferred loan costs 117 - 17 100 68
Write-off of unamortized loan costs
at debt refinance 63 - - 63 -
Deficit distributions to minority
partners of consolidated limited
partnerships(2) 800 - 800 - -
------------- ----------- ------------- ------------- -------------
19,093 (136) 2,396 16,833 11,650
------------- ----------- ------------- ------------- -------------
(Loss) income before
minority interest (591) $ - $ (555) $ (35) 208
=========== ============= =============
Loss (income) attributed to
minority interests -
- Consolidated limited partnerships
14 -
- Operating partnership 171 9
------------- -------------
Net (loss) income (406) 217
Cumulative preferred dividend (250) (250)
------------- -------------
(Loss) income attributed to common
shareholders $ (656) $ (33)
============= =============
(Loss) income before minority
interest $ (591) $ - $ (555) $ (35) $ 208
Cumulative preferred dividend (250) - - (250) (250)
Depreciation and amortization of
real estate assets 4,231 - 197 4,034 2,690
Deficit distributions to minority
partners of consolidated limited
partnerships(2) 800 - 800 - -
------------- ----------- ------------- ------------- -------------
4,190 - 442 3,748 2,648
Minority interest in FFO of
consolidated limited partnerships
(200) - (200) - -
------------- ----------- ------------- ------------- -------------
Funds from operations(3) $ 3,990 $ - $ 242 $ 3,748 $ 2,648
============= =========== ============= ============= =============
18
2005 2004
----------------------------------------------------- -------------
Consolidated Owned (Owned
Consolidated Elim LPs (1) Properties Properties)
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Operating Results - 6 months ended June 30:
Revenues:
Apartment rental income $ 31,600 $ - $ 3,013 $ 28,586 $ 20,632
Restaurant rental income 1,915 - - 1,915 1,915
Management fee income 127 (151) - 277 405
Interest and other income 251 (56) 5 302 136
------------- ----------- ------------- ------------- -------------
33,892 (207) 3,018 31,081 23,089
Expenses:
Apartment operations 12,296 (151) 1,217 11,230 8,250
Administration expenses 2,934 - - 2,934 2,267
Interest and
prepayment penalties 10,818 (56) 1,548 9,326 6,570
Depreciation 7,678 - 543 7,135 5,230
Amortization of
deferred loan costs 224 - 29 196 156
Write-off of unamortized loan costs
at debt refinance 223 - 160 63 -
Deficit distributions to minority
partners of consolidated limited
partnerships(2) 7,621 - 7,621 - -
------------- ----------- ------------- ------------- -------------
41,794 (207) 11,119 30,882 22,472
------------- ----------- ------------- ------------- -------------
(Loss) income before
minority interest (7,902) $ - $(8,100) $ 199 616
=========== ============= =============
Loss (income) attributed to
minority interests -
- Consolidated limited partnerships
76 -
- Operating partnership 1,463 (27)
------------- -------------
Net (loss) income (6,363) 590
Cumulative preferred dividend (500) (500)
------------- -------------
(Loss) income attributed to common
shareholders $ (6,863) $ 90
============= =============
(Loss) income before
minority interest $ (7,902) $ - $(8,100) $ 199 $ 616
Cumulative preferred dividend (500) - - (500) (500)
Depreciation and amortization of
real estate assets 7,752 - 543 7,209 5,230
Deficit distributions to minority
partners of consolidated limited
partnerships(2) 7,621 - 7,621 - -
------------- ----------- ------------- ------------- -------------
6,971 - 64 6,907 5,346
Minority interest in FFO of
consolidated limited partnerships
338 - 338 - -
------------- ----------- ------------- ------------- -------------
Funds from operations(3) $ 7,310 $ - $ 402 $ 6,907 $ 5,346
============= =========== ============= ============= =============
19
2005 2004
----------------------------------------------------- -------------
Consolidated Owned (Owned
Consolidated Elim LPs (1) Properties Properties)
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Balance Sheet at June 30, 2005, compared to December 31, 2004:
Real estate investments $484,927 $ $40,004 $444,923 $360,071
-
Cash and cash equivalents 2,533 - 696 1,837 517
Prepaid expenses and
other assets 8,209 (3,949) 1,141 11,018 4,516
Intangible assets, net 1,251 - - 1,251 1,115
Deferred financing costs, net 2,329 - 599 1,730 1,545
------------- ----------- ------------- ------------- -------------
$499,250 $(3,949) $42,439 $460,760 $367,764
============= =========== ============= ============= =============
Deed of trust and
other notes payable $410,480 $(1,914) $47,625 $364,769 $286,425
Accounts payable and
accrued expenses 3,700 (73) 280 3,493 897
Accrued interest 1,721 - 190 1,531 1,264
Consideration due for acquisitions
1,000 - - 1,000 -
Deferred revenue and
security deposits 2,089 - 133 1,956 1,787
------------- ----------- ------------- ------------- -------------
418,989 (1,987) 48,228 372,748 290,373
Minority interests -
- - Consolidated limited partnerships
274 - 274 - -
- - Operating partnership 19,637 - - 19,637 14,394
Shareholders' equity 60,350 (1,962) (6,062) 68,375 62,996
------------- ----------- ------------- ------------- -------------
$499,250 $(3,949) $42,439 $460,760 $367,764
============= =========== ============= ============= =============
(1) Effective January 26, 2005, we include the accounts of the Marina Shores
Partnership and the Villages Partnership in our consolidated financial
statements.
(2) In accordance with generally accepted accounting principles ("GAAP"),
deficit distributions to minority partners are charges recognized in our
statement of operations when cash is distributed to a non-controlling
partner in a consolidated limited partnership in excess of the positive
balance in such partner's capital account (which is classified as minority
interest in our consolidated balance sheet). We are required to record
these charges for GAAP purposes even though there is no economic effect or
cost to the company or the operating partnership.
(3) See discussion of funds from operations under the caption "Funds from
Operations" below in this Item 2.
Revenues
Total revenues in the second quarter of 2005 were $18.5 million,
compared to $11.9 million in the second quarter of 2004. Total revenues in the
first six months of 2005 were $33.9 million, compared to $23.1 million in the
first six months of 2004. These increases are primarily attributable to
increases in apartment rental income.
Apartment rental income totaled $17.5 million in the second quarter
of 2005, an increase of $6.9 million, or 65.5%, compared to the second quarter
of 2004. Apartment rental income in the first six months of 2005 totaled $31.6
million, an increase of $11.0 million, or 53.2%, compared to the first six
months of 2004. These increases are attributable to:
20
o Apartment acquisitions in 2004 and 2005 - these ten communities
contributed $5.3 million in second quarter 2005 and $7.9 million in
the first six months of 2005, compared to $0.4 million in the second
quarter and first six months of 2004 (contributed by one community
acquired in May 2004).
o Apartment communities that we consolidate effective January 2005 -
these two communities contributed $1.8 million in second quarter 2005
and $3.0 million in the first six months of 2005.
On a "same-units" basis (the 20 apartment communities that we owned as
of January 1, 2004), apartment rental income increased by 2.4% in the second
quarter and by 2.2% in the first six months of 2005 compared to 2004. These
increases are consistent with increases in average revenue per occupied unit,
while average economic occupancy for these units varied only slightly from
comparable periods in 2004.
On a same-units basis, apartment NOI (apartment rental income less
apartment operating expenses) for the second quarter of 2005 increased by 7.2%
compared to the second quarter of 2004. For the first six months of 2005,
same-units NOI increased by 4.8% compared to the first six months of 2004.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the second quarter and first six months of 2005 follow:
Three months ended Six months ended
June 30, 2005 June 30, 2005
----------------------- -----------------------
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ------------ ---------- ----------- -----------
Owned apartment communities:
Same-units communities:
Abbington Place 360 95.8% $ 781 94.4% $784
Allerton Place 228 94.5% 797 94.6% 795
Barrington Place 348 94.5% 767 93.4% 765
Brookford Place 108 95.4% 677 96.5% 679
Chason Ridge 252 91.9% 797 92.1% 789
The Harrington 288 90.1% 787 92.5% 770
Harris Hill 184 94.6% 639 95.7% 636
Latitudes 448 96.0% 976 96.5% 970
Madison Hall 128 97.3% 590 95.8% 596
Marina Shores Waterfront 290 94.5% 847 94.3% 821
Oakbrook 162 96.3% 723 95.2% 721
Oak Hollow 461 97.5% 611 96.4% 610
Paces Commons 336 94.9% 649 95.5% 649
Paces Village 198 98.0% 674 96.7% 672
Pepperstone 108 97.7% 686 98.0% 685
Savannah Place 172 94.5% 724 95.0% 723
Summerlyn Place 140 96.6% 828 94.5% 818
The Place 144 94.1% 561 94.5% 565
Waterford Place 240 95.6% 888 93.5% 902
Woods Edge 264 95.9% 683 95.0% 681
21
Three months ended Six months ended
June 30, 2005 June 30, 2005
----------------------- -----------------------
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ------------ ---------- ----------- -----------
Acquired in 2004:
Carriage Club 268 95.8% 751 95.1% 746
Fairington 250 95.4% 724 96.0% 720
Savannah Shores 198 96.4% 804 94.3% 799
Bridges at Southpoint 192 95.6% 699 95.8% 699
Bridges at Wind River 346 95.5% 801 93.1% 794
Acquired in 2005:
Canterbury (3/31/05) 630 97.7% 607 97.7% 607
Laurel Springs (3/31/05) 336 95.3% 689 95.3% 689
Paces Watch (5/12/05) 232 97.0% 813 97.0% 813
Salem Ridge (3/31/05) 120 97.7% 531 97.7% 531
Waverly Place (4/21/05) 240 93.6% 670 93.6% 670
All apartments
- 2005 7,671 95.5% 732 94.9% 739
- 2004 5,205 95.0% 735 95.0% 731
Same units 4,859
- 2005 95.2% 750 94.9% 747
- 2004 95.1% 732 95.0% 730
Consolidated limited partnerships:
Marina Shores(1) 392 97.2% 1,160 95.6% 1,151
Villages of Chapel Hill(1) 264 92.7% 678 94.3% 681
Unconsolidated limited partnerships:
Villages - Phase 5(2) 57 95.9% 780 97.1% 781
(1) We include the activities of these communities in our consolidated financial
statements effective January 26, 2005.
(2) We acquired a 1% interest as general partner in this partnership effective
January 26, 2005.
Restaurant rental income was $957,000 in second quarter, and $1.9
million through the first six months of both 2005 and 2004. We received the
minimum rent specified in the lease agreement in the first two quarters of both
2005 and 2004. We currently hold 40 restaurant properties under this lease, and
minimum rent is currently set at $319,000 per month, or $3.8 million per year.
Management fee income totaled $11,000 in the second quarter of 2005,
compared to $208,000 in the second quarter of 2004. Management fee income
totaled $127,000 in the first six months of 2005, compared to $405,000 in the
first six months of 2004. These decreases are attributable to the elimination of
management fees for Marina Shores and Villages of Chapel Hill with consolidation
of these properties effective January 2005 and our acquisition of four managed
22
properties effective March 31, 2005. Going forward, we expect that management
fees will be insignificant.
Expenses
Total expenses were $19.1 million in the second quarter of 2005,
compared to $11.6 million in the second quarter of 2004. Total expenses were
$41.8 million in the first six months of 2005, compared to $22.5 million in the
first six months of 2004. These increases are primarily attributable to growth
in the size of our apartment operations, along with charges for deficit
distributions to a minority partner.
We reflect the unaffiliated partners' interests in Marina Shores
Associates One Limited Partnership ("Marina Shores Partnership") and The
Villages of Chapel Hill Limited Partnership ("Villages Partnership") as minority
interest in consolidated limited partnerships. Minority interest in consolidated
limited partnerships represents the minority partners' share of the underlying
net assets of these consolidated limited partnerships. When these consolidated
limited partnerships make cash distributions to partners in excess of the
carrying amount of the minority interest, we record a charge equal to the amount
of such excess distributions, even though there is no economic effect or cost to
the operating partnership. We report this charge in our consolidated statements
of operations as deficit distributions to minority partners. We recorded charges
for deficit distributions to the minority partner in the Marina Shores
Partnership totaling $6.8 million in the first quarter and $0.8 million in the
second quarter of 2005.
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) totaled $6.9 million in the second quarter of 2005,
an increase of $2.5 million, or 56.2%, compared to the second quarter of 2004.
Apartment operations expense in the first six months of 2005 totaled $12.3
million, an increase of $4.0 million, or 49.0%, compared to the first six months
of 2004. These increases are primarily attributable to:
o Apartment acquisitions in 2004 and 2005 - apartment operations expense
for these ten communities was $2.1 million in second quarter 2005 and
$3.3 million in the first six months of 2005, compared to $0.1 million
in the second quarter and first six months of 2004 (contributed by one
community acquired in May 2004).
o Apartment communities that we consolidate effective January 2005 -
apartment operations expense for these two communities was $0.7
million in second quarter 2005 and $1.1 million in the first six
months of 2005.
On a same-units basis, apartment operations expense declined by 4.2% in the
second quarter and 1.8% in the first six months of 2005 compared to 2004, due
primarily to reductions in compensation and property insurance costs.
Operating expenses for restaurant properties are insignificant because
the triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.
Apartment administration costs (the costs associated with oversight,
accounting and support of our apartment management activities) totaled $0.7
million in the second quarter of 2005, a 20.2% increase compared to the second
quarter of 2004. Apartment administration costs totaled $1.4 million in the
first six months of 2005, a 35.7% increase compared to the first six months of
2004. These increases are primarily attributable to additional corporate support
staff.
23
Corporate administration expense totaled $0.6 million in the second
quarter of 2005, an increase of 13.5% compared to the second quarter of 2004.
Corporate administration costs totaled $1.5 million in the first six months of
2005, an increase of 24.0% compared to the first six months of 2004. These
increases are primarily attributable to a $0.2 million increase in professional
fees associated with requirements of Section 404 of the Sarbanes-Oxley Act of
2002 and late audit fee billings.
Depreciation expense totaled $4.2 million in the second quarter of
2005, an increase of $1.5 million, or 54.5%, compared to the second quarter of
2004. Depreciation expense totaled $7.7 million in the first six months of 2005,
an increase of $2.4 million, or 46.8%, compared to the first six months of 2004.
These increases are primarily attributable to acquisitions of apartment
communities ($2.0 million in the first six months of 2005), along with
depreciation expense for the two apartment communities that we consolidate
effective January 2005, which totaled $0.5 million in the first six months of
2005.
Interest expense totaled $5.7 million in the second quarter of 2005, an
increase of $2.4 million, or 72.0%, compared to the second quarter of 2004.
Interest expense (including $0.5 million in prepayment penalties paid by Marina
Shores) totaled $10.8 million in the first six months of 2005, an increase of
$4.2 million, or 64.7%, compared to the first six months of 2004. This increase
is primarily attributable to new debt issued in conjunction with acquisitions of
apartment properties during 2004 and 2005, along with the impact of
consolidating Marina Shores and Villages of Chapel Hill effective January 2005.
Overall, weighted average interest rates were 5.8% for the second quarter and
first six months of 2005, compared to 5.7% for the second quarter and first six
months of 2004, reflecting the impact of steady increases in variable interest
rates over the last twelve months.
Net Income
Consolidated earnings before non-cash charges (for depreciation,
amortization and write-off of unamortized loan costs at refinance) and before
the $0.8 charge for deficit distributions to a minority partner (which has no
economic effect or cost to the operating partnership) totaled $4.5 million, an
increase of $1.6 million, or 53.3%, compared to the second quarter of 2004.
Consolidated earnings before non-cash charges and before the $7.6 million charge
for deficit distributions to a minority partner in the first six months of 2005
totaled $7.8 million, a $1.8 million, or 30.7%, increase compared to the first
six months of 2004. These increases reflect the positive impact of new apartment
communities and improvements in apartment revenues, offset by a $0.5 million
charge for prepayment penalties paid at loan refinance by a consolidated limited
partnership during the first quarter of 2005.
On a consolidated basis, before minority interests in the consolidated
limited partnerships and the minority interest in the operating partnership, the
net loss for the second quarter of 2005 totaled $0.6 million, compared to $0.2
million in income before minority interests in the second quarter of 2004. The
net loss before minority interests in the first six months of 2005 totaled $7.9
million, compared to $0.6 million in income before minority interest in the
first six months of 2004. The 2005 losses again reflect the impact of charges
for deficit distributions to a minority partner ($0.8 million in the second
quarter and $7.6 million in the first six months), a first quarter 2005 charge
of $0.5 million for penalties paid at loan refinance by a consolidated limited
partnership, along with additional $0.2 million charges to write off unamortized
loan costs at refinance.
24
We allocate proportional income and losses of the consolidated limited
partnerships to minority partners to the extent of the carrying amount of the
minority interest. We record a charge when losses attributable to the
consolidated limited partners of a consolidated limited partnership exceed the
carrying amount of the minority interest, even though there is no economic
effect or cost to the operating partnership. During the first quarter of 2005 we
recorded charges for consolidated limited partnership losses, resulting
primarily from depreciation and costs related to refinance of the Partnership's
first deed of trust loan, of approximately $621,000 that were not allocated to
the minority partner in Marina Shores Partnership because the losses exceeded
the carrying amount of the minority interest. During the second quarter of 2005,
we reduced these charges by $203,000 for income that would otherwise have been
allocated to the limited partner.
Minority interests in the Villages Partnership and the operating
partnership absorbed $0.2 million in the second quarter of 2005, and $1.5
million in the first six months, of the consolidated losses. After allocating
those losses to minority interests, the net loss was $0.4 million in the second
quarter of 2005 and $6.4 million in the first six months of 2005.
Because the preferred shareholder has priority over common shareholders
for receipt of dividends, we deduct the amount of net income that will be paid
to the preferred shareholder in calculating net income available to common
shareholders. After deducting $250,000 for the cumulative preferred dividend in
each of the first two quarters of both 2005 and 2004, the net loss attributed to
common shareholders was $0.7 million for the second quarter and $6.9 million for
the first six months of 2005, compared to essentially break-even amounts for the
second quarter and first six months of 2004.
Funds from Operations
Funds from operations is frequently referred to as "FFO." FFO is
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
as "net income (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from sales of property, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures." Our calculation of FFO is consistent with FFO as defined by
NAREIT. Because we hold all of our assets in and conduct all of our operations
through the operating partnership, we measure FFO at the operating partnership
level (i.e., after deducting the minority interests in FFO of the consolidated
limited partnerships, but before deducting the minority interest in the
operating partnership).
Historical cost accounting for real estate assets implicitly assumes
that the value of real estate assets diminishes predictably over time. In fact,
real estate values have historically risen or fallen with market conditions. FFO
is intended to be a standard supplemental measure of operating performance that
excludes historical cost depreciation from - or "adds it back" to - GAAP net
income. We consider FFO to be useful in evaluating potential property
acquisitions and measuring operating performance.
Funds available for distribution is frequently referred to as "FAD." We
define FAD as FFO plus non-cash expense for amortization and write-off of
unamortized loan costs, plus (less) gains (losses) from sales of property, less
recurring capital expenditures. We believe that, together with net income and
cash flows from operating activities, FAD provides investors with an additional
measure to evaluate the ability of the operating partnership to incur and
service debt, to fund acquisitions and other capital expenditures, and to fund
distributions to shareholders and minority unitholders.
25
Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. Nor do FFO or FAD measure whether cash flow is
sufficient to fund all of our cash needs, including principal amortization,
capital improvements and distributions to shareholders and unitholders. You
should not consider FFO or FAD to be alternatives to net income as reliable
measures of the company's operating performance; nor should you consider FFO or
FAD to be alternatives to cash flows from operating, investing or financing
activities (as defined by generally accepted accounting principles) as measures
of liquidity. Further, FFO and FAD as disclosed by other REITs might not be
comparable to our calculation of FFO or FAD.
Funds from operations totaled $4.0 million in the second quarter of
2005, an increase of 50.7% compared to the second quarter of 2004. Funds from
operations in the first six months of 2005 totaled $7.3 million, an increase of
36.7% compared to the first six months of 2004. These comparisons reflect the
positive impact of apartment additions and the improvement in apartment
operating results.
We calculated FFO of the operating partnership as follows:
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
(Loss) income before
minority interest $ (591) $ 208 $ (7,902) $ 616
Less cumulative preferred dividend (250) (250) (500) (500)
Add amortization of
in-place lease intangibles 74 - 74 -
Add depreciation 4,157 2,690 7,678 5,230
Add deficit distributions to minority
partners of consolidated limited
partnerships(1) 800 - 7,621 -
Less minority interest in FFO of
consolidated limited partnerships (200) - 338 -
--------------- --------------- --------------- ---------------
Funds from operations $ 3,990 $ 2,648 $ 7,310 $ 5,346
=============== =============== =============== ===============
(1) In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our statement of operations when cash is distributed
to a non-controlling partner in a consolidated limited partnership in
excess of the positive balance in such partner's capital account (which is
classified as minority interest in our consolidated balance sheet). We are
required to record these charges for GAAP purposes even though there is no
economic effect or cost to the operating partnership.
Deficit distributions to minority partners may occur when the fair value of
the underlying real estate exceeds its depreciated net book value because
the underlying real estate has appreciated or maintained its value. As a
result, deficit distributions to minority partners represent, in substance,
either our recognition of depreciation previously allocated to the
non-controlling partner or a cost related to the non-controlling partner's
share of real estate appreciation. Based on NAREIT guidance that requires
that real estate depreciation and gains be excluded from FFO, we add back
deficit distributions and subtract related recoveries in our reconciliation
of net income to FFO.
26
A reconciliation of net cash provided by operating activities (as
defined by generally accepted accounting principles and reflected in our
consolidated statements of cash flows) to FAD follows:
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Net cash provided by
operating activities $ 4,371 $ 2,325 $ 7,048 $ 5,723
Less recurring capital expenditures (844) (626) (1,302) (901)
Less cumulative preferred dividend (250) (250) (500) (500)
Add (less) change in
net operating assets and liabilities 204 614 794 174
Add amortization of deferred interest
defeasance 46 26 77 105
Add (less) minority interest in
consolidated limited partnerships' share
of reconciling items (162) - 221 -
--------------- --------------- --------------- ---------------
Funds available for distribution $ 3,364 $ 2,089 $ 6,338 $ 4,600
=============== =============== =============== ===============
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Net cash provided by (used in):
Operating activities $ 4,371 $ 2,325 $ 7,048 $ 5,723
Investing activities (37,717) (20,510) (39,564) (21,021)
Financing activities 33,296 21,988 34,532 19,730
Dividends and distributions paid to:
Preferred shareholders $ 250 $ 250 $ 500 $ 500
Common shareholders 2,308 1,775 4,580 3,251
Minority partners in consolidated
limited partnerships 800 - 7,621 -
Minority unitholders in operating
partnership 450 460 916 921
Scheduled debt principal payments 577 297 1,020 614
Non-recurring capital expenditures 1,962 359 2,795 642
27
Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Weighted average shares outstanding
Preferred shares 909 909 909 909
Common shares 9,239 7,119 9,111 6,763
Weighted average operating partnership
minority units outstanding
2,408 1,850 2,141 1,846
Capital Resources and Liquidity
Capital Resources
We completed a number of significant investing and financing
transactions during the second quarter and first six months of 2005.
Acquisition of Boddie Investment Company
In January 2005, we acquired Boddie Investment Company ("BIC") through
a merger. We issued 508,578 shares of our common stock, and cancelled 72,399
shares of common stock that BIC held immediately before the merger. The value of
this transaction was $8.2 million. Direct costs (out-of-pocket cash costs)
related to this acquisition were approximately $150,000. As a result of this
acquisition, we assumed the role of general partner and acquired certain
economic interests in three limited partnerships. Prior to this acquisition, we
managed the apartment communities owned by these partnerships on a contract
basis; we will continue to manage these partnerships.
A summary of assets acquired in the BIC acquisition, along with our
preliminary allocation of costs assigned to those assets, follows (amounts in
thousands):
Investments in limited partnerships:
Marina Shores Associates One, Limited Partnership $5,940
The Villages of Chapel Hill Limited Partnership 2
The Villages of Chapel Hill - Phase 5 Limited Partnership 7
BNP common stock held by BIC (which we immediately retired) 1,166
Receivables from the Villages Partnership for general partners'
advances and accrued interest thereon 1,220
-------------
$8,335
=============
Although the amounts related to this acquisition seem relatively
insignificant at first glance, the accounting for the investments in limited
partnerships is complex, and the impact on presentation of our consolidated
financial statements is rather significant. We have included a detailed
discussion of our accounting treatment for each of the investments in limited
partnerships in Note 2 of our financial statements included in this Current
Report on Form 10-Q. A summary of that discussion for each limited partnership
follows:
28
BIC Acquisition - Marina Shores Partnership
We acquired a 50% general partner interest in the Marina Shores
Partnership. Under the terms of the partnership agreement for the Marina Shores
Partnership, the general partner controls the activities of the partnership. We
have therefore included the accounts of this partnership in our consolidated
financial statements effective January 26, 2005. In our preliminary accounting
for the BIC acquisition, the initial inclusion of the Marina Shores Partnership
in our consolidated financial statements resulted in (amounts in thousands):
Increase in real estate investments - 392 apartment units $26,254
Increase in cash and cash equivalents 252
Increase in other assets 1,251
-----------------
27,757
Increase in long-term debt 20,745
Increase in other liabilities 1,072
-----------------
21,817
-----------------
Increase in net assets $ 5,940
=================
Very shortly after our acquisition of BIC, the Marina Shores
Partnership completed a refinancing of its long-term debt. The Marina Shores
Partnership issued a $33.9 million fixed-rate note payable. This 10-year loan
provides for interest at an effective rate of 5.1%. The Marina Shores
Partnership first applied proceeds of this loan to retire the existing $20.7
million deed of trust loan balance along with $1.2 million interest and
prepayment penalties, then distributed $6.8 million to its limited partner and
$3.7 million to the operating partnership. During the second quarter of 2005,
the Marina Shores Partnership made additional distributions of $0.8 million to
its limited partner and $0.3 million to the operating partnership.
Prior to consolidation in our financial statements, the fair value of
the real estate held by the Marina Shores Partnership significantly exceeded its
depreciated net book value because the underlying real estate had appreciated
significantly since the Marina Shores Partnership's original formation in the
late 1980s. In our initial consolidation of this partnership, we reset the
noncontrolling limited partner's capital account to $-0-. Distributions to the
limited partner subsequent to inclusion of the Marina Shores Partnership in our
consolidated financial statements are, and will generally be, reflected as
charges against income in our consolidated financial statements as "deficit
distributions to minority partners."
In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our income statement when cash is distributed to a
non-controlling partner in a consolidated limited partnership in excess of the
positive balance in such partner's capital account (which is classified as
minority interest in our consolidated balance sheet). Deficit distributions to
minority partners represent, in substance, either (a) our recognition of
depreciation previously allocated to the non-controlling partner or (b) a cost
related to the non-controlling partner's share of real estate appreciation. We
record these charges for GAAP purposes even though there is no economic effect
or cost to the company or the operating partnership.
BIC Acquisition - The Villages Partnership
We acquired a 1% general partner interest in the Villages Partnership.
We determined that, in accordance with GAAP, the Villages Partnership is a
"variable interest entity" ("VIE")
29
because it does not have sufficient equity to carry out its principal activities
without additional subordinated financial support, and that we are the "primary
beneficiary" of the Partnership. We have therefore included the accounts of this
partnership in our consolidated financial statements effective January 26, 2005.
In our preliminary accounting for the BIC acquisition, the initial inclusion of
the Villages Partnership in our consolidated financial statements resulted in
(amounts in thousands):
Increase in real estate investments - 264 apartment units $14,188
Increase in cash and cash equivalents 87
Increase in other assets 318
------------------
14,594
Increase in long-term debt - first deed of trust 12,094
Increase in subordinated long-term debt to BNP* 1,888
Increase in other liabilities 260
Minority interest in consolidated limited partnerships 350
------------------
14,592
------------------
Increase in net assets $ 2
==================
*The subordinated long-term debt to BNP is eliminated in consolidation
against related receivable balances.
BIC Acquisition - The Villages of Chapel Hill - Phase 5 Limited Partnership
We acquired a 1% general partner interest in The Villages of Chapel
Hill - Phase 5 Limited Partnership ("Villages - Phase 5 Partnership"). Under the
terms of the partnership agreement for the Villages - Phase 5 Partnership and
consistent with GAAP in place in January 2005, the limited partners have certain
voting rights that preclude control by the general partner. We have therefore
accounted for our investment in this partnership by applying the equity method.
Our initial investment in the Villages - Phase 5 Partnership was $7,000, and we
include this amount in "other assets" on our consolidated balance sheet.
In late June 2005, the FASB ratified its Emerging Issues Task Force
consensus in Issue No. 04-5, "Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners have Certain Rights" ("Issue 04-5"). This new guidance
states that the general partner in a limited partnership is presumed to control
that limited partnership, with very limited exceptions. We have not yet made a
final determination as to how the provisions of this new guidance will impact
our accounting treatment for our interest in the Villages - Phase 5 Partnership.
We may be required to consolidate the accounts of the Villages - Phase 5
Partnership beginning no later than January 1, 2006; however, we do not expect
that such a change in accounting treatment would have a material effect on our
financial statements.
Acquisition of Shugart Properties
On March 31, 2005, we completed the acquisition of a portfolio of four
apartment properties from entities that we call the "Shugart Parties." The
aggregate purchase price for the properties totaled $52.1 million, including
approximately $0.3 million in net operating assets, paid through assumption or
refinancing of $42.8 million of debt on the properties and $9.3 million paid in
operating partnership units with an imputed value of $13.50 per unit. Under the
30
terms of the exchange agreements, we issued 689,000 operating partnership units
at closing, and will issue an additional 74,000 deferred units in March 2006.
The preliminary allocation of the purchase price includes the following
significant components:
Value of
Apt. Operating
Property Units Contract Price Debt Assumed Partnership Units
- ------------------------------------- --------- ------------------- -------------------- -------------------
(000's) (000's) (000's)
Canterbury Apartments 630 $ 25,750 $ 22,992 $ 3,070
Laurel Springs Apartments 240 14,610 11,320 3,329
Laurel Springs II Apartments 96 7,090 5,850 1,209
Salem Ridge Apartments 120 4,360 2,610 1,706
We will operate Laurel Springs and Laurel Springs II Apartments as one
community. The assets and liabilities of these apartment communities are
included in our consolidated financial statements as of March 31, 2005. However,
no operating results for these communities are reflected in our consolidated
statement of operations for the first quarter of 2005.
Immediately upon completion of this acquisition, we retired a $1.5
million variable rate note related to Canterbury Apartments. The remaining
assumed debt includes three fixed-rate notes totaling $35.4 million at interest
rates ranging from 5.0% to 6.8% and a $5.9 million variable-rate note with
interest at 30-day LIBOR plus 1.9%. We have included a more detailed description
of these notes payable in Note 4 of our financial statements in this Current
Report on Form 10-Q.
Other acquisitions
During the second quarter of 2005, we completed two additional
apartment property acquisitions in separate cash transactions. Both properties
are located in the Charleston, South Carolina, area.
Apt.
Property Units Contract Price
- ------------------------------------- --------- -------------------
(000's)
Waverly Place Apartments 240 $13,100
Paces Watch Apartments 232 $20,450
In conjunction with these acquisitions, we issued two fixed-rate notes
payable totaling $25.0 million. Both notes provide for interest at 5.31% (5.38%
effective rate), interest-only payments through mid-2008, and then amortizing
payments through mid-2015. A more detailed description of these notes payable is
included in Note 4 of our financial statements in this Current Report on Form
10-Q.
In addition, during the second quarter of 2005, we acquired
approximately 40 acres of undeveloped land adjacent to our Canterbury Apartments
property for a contract price of $2.7 million, paid by $0.6 million in cash and
the assumption of $2.1 million in debt, which bears interest at the lender's
prime rate and matures in September 2005.
31
Debt refinancing transactions
During the second quarter of 2005, in conjunction with refinancing of
existing debt, we issued two fixed-rate notes payable totaling $22.6 million.
The new notes provide for interest at 5.21% (5.28% effective rate),
interest-only payments through mid-2008, and then amortizing payments through
mid-2015. We applied proceeds of these notes to retire an $11.5 million
variable-rate note payable, to retire a $5.5 million 8.55% fixed-rate note
payable, and to reduce the outstanding balance on our line of credit. A more
detailed description of these transactions is included in Note 4 of our
financial statements in this Current Report on Form 10-Q.
Other equity transactions
During the first and second quarters of 2005, we also:
o Issued 25,000 shares of our common stock through our Dividend Reinvestment and
Stock Purchase Plan for proceeds of $0.4 million;
o Issued 57,500 shares of our common stock upon exercise of options by two
employees for proceeds of $0.7 million; and
o Issued 73,000 shares of our common stock to redeem the same number of
operating partnership units from a minority unitholder.
At June 30, 2005, we had 9.2 million common shares and 0.9 million
preferred shares outstanding. In addition, there were 2.4 million operating
partnership minority common units outstanding.
Subsequent to the end of the second quarter of 2005, as of August 1,
2005, the Board of Directors granted restricted stock awards for a total of
200,000 shares of common stock to four members of the company's senior
management. The shares vest annually at the rate of 10% per year, and carry all
rights of ownership, including the receipt of dividends.
Cash Flows and Liquidity
Net cash flows from operating activities were $4.4 million in the
second quarter of 2005, compared to $2.3 million in the second quarter of 2004.
Net cash flows from operating activities were $7.0 million in the first six
months of 2005, compared to $5.7 million in the first six months of 2004. The
amounts for 2005 include a $0.5 million prepayment penalty paid by the Marina
Shores Partnership in conjunction with refinance of its long-term debt in first
quarter. The increases in comparative amounts reflect the growth in size of our
apartment operations.
Investing and financing activities, other than those described under
"Capital Resources" above, focused on capital expenditures at apartment
communities, along with payment of dividends and distributions.
We have announced that the company will pay a regular quarterly
dividend of $0.25 per share (approximately $2.4 million) on August 15, 2005, to
shareholders of record of our common stock as of August 1, 2005, as well as
$250,000 of dividends to the preferred shareholder.
We generally expect to meet our short-term liquidity requirements
through net cash provided by operations and utilization of credit facilities. We
believe that net cash provided by operations is, and will continue to be,
adequate to meet the REIT operating requirements in both the short term and the
long term. We anticipate funding our future acquisition activities primarily
32
by using short-term credit facilities as an interim measure, to be replaced by
funds from equity offerings, long-term debt or joint venture investments. We
expect to meet our long-term liquidity requirements, such as scheduled debt
maturities and repayment of short-term financing of future property
acquisitions, through long-term secured and unsecured borrowings and the
issuance of debt securities or additional equity securities. We believe we have
sufficient resources to meet our short-term liquidity requirements.
Critical Accounting Policies
We identify and discuss our significant accounting policies in the
notes to our financial statements included in our Annual Report on Form 10-K.
Our policies and practice regarding our accounting for our general partner
interests in limited partnerships and for capital expenditures and depreciation,
which may be of particular interest to readers of this Quarterly Report, are
further discussed below.
Accounting for VIEs
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation 46, "Consolidation of Variable Interest Entities,"
("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical
corrections and address certain implementation issues that had arisen. FIN 46
provided a new framework for identifying VIEs and determining when a company
should include the assets, liabilities, noncontrolling interests and results of
activities of a VIE in its consolidated financial statements.
In general, a VIE is an entity or other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has equity owners that, as a group, are unable to make significant
decisions about its activities, or (3) has equity owners that, as a group, do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46, as modified, requires a VIE to be consolidated if a party with
an ownership, contractual or other financial interest in the VIE (a "variable
interest holder") is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the "primary
beneficiary." Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires disclosures
about VIEs that the variable interest holder is not required to consolidate but
in which it has a significant variable interest.
We determined that the Villages Partnership is a VIE, because the
limited partnership does not have sufficient equity to carry out its principal
activities without additional subordinated financial support from the general
partner. We also determined that we are the primary beneficiary of the Villages
Partnership. We have therefore included the accounts of this partnership in our
consolidated financial statements effective January 26, 2005.
33
Accounting for general partner interests in limited partnerships
As managing general partner in three real estate limited partnerships,
we have the ability to exercise significant influence over operating and
financial policies. This influence is evident in the terms of the respective
partnership agreements. However, following guidance in SOP 78-9, we do not
"control" the respective limited partnerships if the limited partners have
significant rights, such as the right to replace the general partner and the
right to approve the sale or refinancing of the assets of the respective
partnership in accordance with the partnership agreement. In acting as the
general partner in these limited partnerships, we are committed to providing
additional levels of funding to meet partnership operating deficits as may be
needed.
If we, as general partner, control a partnership that is not considered
a VIE, generally accepted accounting principles require that the partnership be
consolidated in our financial statements. Upon consolidation, we initially
record our interest in the partnership's assets and liabilities at the lower of
our cost or fair value, and subsequently account for the partnership based on
our percentage interest; the non-controlling interests are reflected in our
financial statements at their historical costs.
We determined that the Marina Shores Partnership is not a VIE. However,
under the terms of the partnership agreement for the Marina Shores Partnership,
the general partner controls the activities of partnership; we have therefore
included the accounts of this partnership in our consolidated financial
statements effective January 26, 2005.
We determined that the Villages - Phase 5 Partnership is not a VIE.
Under the terms of the partnership agreement for the Villages - Phase 5
Partnership, the limited partners have certain voting rights that preclude
control by the general partner under guidance in SOP 78-9. We have accounted for
our investment in this partnership in January 2005 by applying the equity
method. (See Note 2 to our financial statements included in this Current Report
on Form 10-Q. Under recently issued guidance in EITF Issue 04-5, we may be
required to consolidate these accounts in the near future; however, we do not
expect that such a change in accounting treatment will have a material effect on
our financial statements.)
Purchase price allocation for apartment community acquisitions
In connection with the acquisition of an apartment community, we
perform a valuation and allocation to each asset and liability in such
transaction, based on their estimated fair values at the date of acquisition.
The valuation of assets acquired includes both tangible and intangible assets.
Significant tangible asset values include real estate investments which are
subsequently depreciated over their estimated useful lives. We include
intangible asset values, consisting of at-market, in-place leases, in intangible
assets and amortize these amounts over the remaining lease terms. In general,
the average remaining life of in-place leases at acquisition date ranged from
five to nine months, and intangible assets represented approximately 0.1% to
0.3% of contract prices.
Capital expenditures and depreciation
In general, for the 15 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.
34
For apartment properties acquired in 2002 and later, we have or will
perform analyses of components of the real estate assets acquired. For these
properties, we assign estimated useful lives as follows: base building
structure, 43-60 years; land improvements, 7-20 years; short-lived building
components, 5-20 years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition. We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize recurring capital expenditures for exterior
painting, roofing, and other major maintenance projects that substantially
extend the useful life of existing assets. For financial reporting purposes, we
depreciate these additions and replacements on a straight-line basis over
estimated useful lives of 5-20 years. We retire replaced assets with a charge to
depreciation for any remaining carrying value. We capitalize all floor covering,
appliance and HVAC replacements, and depreciate them using a straight-line,
group method over estimated useful lives of 5-10 years.
Capital expenditures at our owned apartment communities during the
first six months of 2005 totaled $4.4 million, including $0.9 million for
acquisition improvements, $2.3 million for additions and betterments, and $1.2
million for recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our owned apartment communities during
the first six months of 2005 totaled $4.1 million, including $1.5 million in
compensation of service staff and $2.6 million in payments for material and
contracted services.
A summary of capital expenditures at our owned apartment communities
through June 30, 2005, in aggregate and per apartment unit, follows:
Total Per unit
--------------------- --------------------
(000's)
Recurring capital expenditures:
Floor coverings $ 544 $ 80
Appliances/HVAC 234 35
Computer/support equipment 8 1
Other 422 62
--------------------- --------------------
$ 1,208 $ 178
===================== ====================
Non-recurring capital expenditures:
Acquisition improvements at apartment properties $ 843
Casualty replacements 670
Additions and betterments at apartment properties 1,611
Computer/support equipment 45
---------------------
$ 3,169
=====================
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We completed a number of significant acquisition and financing
transactions during the first six months of 2005.
As of June 30, 2005, long-term debt, on a consolidated basis, totaled
$410.5 million, including $338.3 million of notes payable at fixed rates ranging
from 5.0% to 7.1%, and $72.2 million at variable rates indexed primarily on
30-day LIBOR rates. The weighted average interest rate on debt outstanding was
5.8% at June 30, 2005, compared to 5.9% at December 31, 2004. A 1% fluctuation
in variable interest rates would increase or decrease our annual interest
expense by approximately $0.7 million.
The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on instruments in place as of June 30, 2005 (all amounts
in thousands).
Expected maturity dates
2005 2006 2007 2008 2009 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 1,323 $ 2,884 $50,890 $42,793 $32,137 $208,254 $338,281
Average interest rate 5.3% 5.3% 6.9% 6.5% 5.2% 5.8% 6.0%
Variable rate notes $ 200 $ 6,064 $28,231 $15,979 $21,725 - $ 72,199
Average interest rate 5.0% 5.1% 5.0% 5.0% 5.0% - 5.0%
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information disclosed in our annual and periodic reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. In addition, we designed these disclosure controls and procedures to
ensure that this information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosures.
Based on our most recent evaluation, which was completed as of the end
of the second quarter of 2005, our chief executive officer and chief financial
officer believe that our disclosure controls and procedures are effective. There
have been no significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the
completion of this evaluation.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on May 19, 2005. Of the
9,232,501 shares of common stock issued, outstanding, and entitled to vote at
this meeting, 7,802,200, or 84.51%, were present in person or by proxy. The
following proposals were approved:
36
Withheld/ Broker
For Against Abstained Non-votes
-------------- --------------- -------------- --------------
Election of directors -
- -Election of directors to serve until the 2008 annual meeting:
D. Scott Wilkerson 6,287,674 -0- 1,514,526 -0-
Paul G. Chrysson 6,279,573 -0- 1,522,627 -0-
- -Election of a Series B director to serve
until the 2006 annual meeting:
Peter J. Weidhorn (elected by the holders
of Series B Cumulative Preferred Stock)
909,090 -0- -0- -0-
Amendment to the Amended and Restated 1994
Stock Option and Incentive Plan
3,733,022 1,990,173 29,096 2,049,908
Other directors, whose terms of office as directors continue after the
meeting, are as follows:
Serving until the 2006 annual meeting:
W. Michael Gilley Serving until the 2007 annual meeting:
Philip S. Payne
Stephen R. Blank
Item 5. Other Information
Re-appointment of officers
The Board of Directors re-appointed the following executive officers
effective May 19, 2005:
Philip S. Payne Chairman, Chief Financial Officer, and Assistant Secretary
D. Scott Wilkerson President and Chief Executive Officer
Pamela B. Bruno Vice President, Treasurer, Chief Accounting Officer, and
Assistant Secretary
Eric S. Rohm Vice President, Secretary, and General Counsel
Effective as of August 1, 2005, Philip S. Payne resigned as chief
financial officer of the company. Mr. Payne remains as chairman of the board of
directors, which is an executive officer position with the company, and will
continue to lead the development of corporate strategy and capital markets
activities at the Company. Also effective as of August 1, 2005, the board of
directors appointed Pamela B. Bruno as the company's chief financial officer.
Item 6. Exhibits
The Registrant agrees to furnish a copy of all agreements related to
long-term debt upon request of the Commission.
37
Exhibit No.
10.1* Amended and Restated 1994 Stock Option and Incentive Plan, as
amended May 19, 2005 (filed as Exhibit 10.1 to BNP Residential
Properties, Inc. Current Report on Form 8-K dated May 19, 2005,
and incorporated herein by reference)
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1 Section 1350 Certification by Chief Executive Officer
32.2 Section 1350 Certification by Chief Financial Officer
* Incorporated herein by reference
38
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.
BNP RESIDENTIAL PROPERTIES, INC.
(Registrant)
August 5, 2005 /s/ Philip S. Payne
---------------------------------------
Philip S. Payne
Chairman
August 5, 2005 /s/ Pamela B. Bruno
---------------------------------------
Pamela B. Bruno
Vice President, Treasurer and
Chief Financial Officer
39
INDEX TO EXHIBITS
Exhibit No.
Page
10.1* Amended and Restated 1994 Stock Option and Incentive Plan, as amended May 19, 2005 -
(filed as Exhibit 10.1 to BNP Residential Properties, Inc. Current Report on Form
8-K dated May 19, 2005, and incorporated herein by reference)
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer 41
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer 42
32.1 Section 1350 Certification by Chief Executive Officer 43
32.2 Section 1350 Certification by Chief Financial Officer 44
* Incorporated herein by reference
40