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 March 31, 2003
--------------
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 No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of May 5, 2003 (the latest practicable date).
Common Stock, $.01 par value 5,848,652
- ---------------------------- -----------------------
(Class) (Number of shares)
Exhibit indes: page 24
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
3 Quantitative and Qualitative Disclosures 20
About Market Risk
4 Controls and Procedures 20
PART II - Other Information
6 Exhibits and Reports on Form 8-K 20
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31 December 31
2003 2002
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $282,065,826 $275,712,863
Restaurant properties 38,335,989 39,158,921
------------------ ------------------
320,401,815 314,871,784
Less accumulated depreciation (51,525,579) (49,448,825)
------------------ ------------------
268,876,236 265,422,959
Cash and cash equivalents 413,784 884,316
Other current assets 3,986,590 3,024,683
Notes receivable, net of reserve 100,000 100,000
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,115,088 1,115,088
Deferred financing costs 1,195,607 1,175,684
------------------ ------------------
Total assets $275,687,305 $271,722,730
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $216,719,555 $211,584,935
Accounts payable and accrued expenses 1,876,298 1,272,451
Deferred revenue and security deposits 1,297,463 1,313,239
Deferred credit for defeasance of interest,
net of accumulated amortization 291,712 333,376
------------------ ------------------
Total liabilities 220,185,028 214,504,001
Minority interest in Operating Partnership 17,491,876 17,947,493
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
454,545 at March 31, 2003, and December 31, 2002 5,000,000 5,000,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
5,848,652 at March 31, 2003,
5,831,077 at December 31, 2002 58,487 58,311
Additional paid-in capital 70,901,667 70,724,671
Dividend distributions in excess of net income (37,949,753) (36,511,746)
------------------ ------------------
Total shareholders' equity 38,010,401 39,271,236
------------------ ------------------
Total liabilities and shareholders' equity $275,687,305 $271,722,730
================== ==================
3
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31
2003 2002
----------------- ----------------
(Restated)
Revenues
Apartment rental income $ 8,886,284 $7,489,296
Restaurant rental income 999,326 1,005,319
Management fee income 227,360 294,188
Interest and other income 129,810 37,199
----------------- ----------------
10,242,780 8,826,002
Expenses
Apartment operations 3,473,897 2,692,276
Apartment administration 327,060 325,434
Corporate administration 687,065 593,394
Depreciation 2,333,318 1,946,534
Amortization of deferred
loan costs 72,971 47,925
Interest 3,196,056 2,504,997
Write-off of unamortized loan
costs at debt refinance - 95,032
----------------- ----------------
10,090,367 8,205,592
----------------- ----------------
Income before
minority interest 152,413 620,410
Minority interest in
Operating Partnership 6,623 127,835
----------------- ----------------
Net income 145,790 492,575
Cumulative preferred dividend 125,000 61,644
----------------- ----------------
Income available to
common shareholders $ 20,790 $ 430,931
================= ================
Per share amounts:
Basic earnings per share -
Net income $0.02 $0.09
Income available to
common shareholders 0.00 0.08
Diluted earnings per share -
Net income 0.02 0.08
Income available to
common shareholders 0.00 0.07
Dividends declared 0.25 0.31
Weighted average common
shares outstanding 5,839,474 5,754,918
4
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity
(Unaudited)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance December 31, 2002 454,545 $5,000,000 5,831,077 $58,311 $70,724,671 $(36,511,746) $39,271,236
Common stock issued - - 17,575 176 176,996 - 177,172
Dividends paid - preferred - - - - - (126,027) (126,027)
Dividends paid - common - - - - - (1,457,770) (1,457,770)
Net income - - - - - 145,790 145,790
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2003 454,545 $5,000,000 5,848,652 $58,487 $70,901,667 $(37,949,753) $38,010,401
========= ============ =========== ========== ============= =============== ============
5
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31
2003 2002
----------------- ----------------
(Restated)
Operating activities:
Net income $ 145,790 $ 492,575
Adjustments to reconcile net income to
net cash provided by operations:
Minority interest in Operating Partnership 6,623 127,835
Depreciation and amortization of loan costs 2,406,289 1,994,459
Write-off of unamortized loan costs
at debt refinance - 95,032
Amortization of defeasance credit (41,664) (41,664)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (840,691) (803,842)
Accounts payable and accrued expenses 584,433 431,390
Deferred revenue and security deposits (41,215) (214,806)
----------------- ----------------
Net cash provided by operating activities 2,219,565 2,080,979
Investing activities:
Acquisition of apartment property (5,697,761) -
Additions to apartment properties, net (752,958) (544,315)
Sale of restaurant property 587,761 -
----------------- ----------------
Net cash used in investing activities (5,862,958) (544,315)
Financing activities:
Costs of issuance of preferred stock - (5,313)
Issuance of common stock 177,172 188,589
Distributions to Operating Partnership minority unitholders (462,240) (528,827)
Dividends paid to preferred shareholder (126,027) (2,740)
Dividends paid to common shareholders (1,457,770) (1,780,911)
Proceeds from notes payable 6,666,945 13,870,000
Principal payments on notes payable (1,532,325) (14,056,811)
Payment of deferred financing costs (92,894) (89,693)
----------------- ----------------
Net cash provided by (used in) financing activities 3,172,861 (2,405,706)
----------------- ----------------
Net decrease in cash and cash equivalents (470,532) (869,042)
Cash and cash equivalents at beginning of period 884,316 1,417,616
----------------- ----------------
Cash and cash equivalents at end of period $ 413,784 $ 548,574
================= ================
6
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - March 31, 2003
(Unaudited)
Note 1. Interim financial statements
Our independent accountants have not audited the accompanying financial
statements of BNP Residential Properties, Inc., except for the balance sheet at
December 31, 2002. We derived the amounts in the balance sheet at December 31,
2002, from the financial statements included in our 2002 Annual Report on Form
10-K. We believe that we have included all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for the periods presented.
We have condensed or omitted certain notes and other information from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
You should read these financial statements in conjunction with our 2002 Annual
Report on Form 10-K.
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. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Stock-Based Compensation
The company has one employee Stock Option and Incentive Plan in place. We
account for this plan using the intrinsic value method, under the recognition
and measurement principles of APB Opinion No. 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. If we had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation, the effect would have been to reduce net income as
reported by approximately $240 in 2003 and $1,250 in 2002, with no impact on
basic and diluted earnings per share amounts as reported.
Reclassifications
We adopted Statement of Financial Accounting Standards No. 145, "Rescission of
FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections," effective January 1, 2003. Statement 145 generally
requires gains and losses on extinguishments of debt to be classified as income
or loss from continuing operations, rather than as extraordinary items as
previously required under Statement 4. We have reclassified the extraordinary
item for loss on early extinguishment of debt in the first quarter of 2002 to
conform to Statement 145. While adoption of Statement 145 has no impact on net
income, it reduces income before extraordinary items and eliminates
extraordinary items as previously reported. We have adjusted the 2002
comparative amounts in our consolidated financial statements to conform to the
2003 presentation as follows:
7
2002 as 2002 as
Currently Previously
Presented Adjustments Reported
----------------- ----------------- -----------------
Three months ended March 31, 2002
Revenues $8,826,002 $ - $8,826,002
Expenses 8,205,592 95,032 8,110,560
----------------- ----------------- -----------------
Income before minority interest and
extraordinary item 620,410 (95,032) 715,442
Minority interest in Operating Partnership 127,835 (21,735) 149,570
----------------- ----------------- -----------------
Income before extraordinary item 492,575 (73,297) 565,872
Extraordinary item - loss on early
extinguishment of debt - (73,297) 73,297
----------------- ----------------- -----------------
Net income $ 492,575 $ - $ 492,575
================= ================= =================
Note 3. Apartment property acquisition
Effective March 13, 2003, we acquired The Place Apartments for a contract price
of $5.6 million, paid in cash. Through March 31, 2003, we have incurred and
capitalized other direct costs of this acquisition totaling approximately
$20,000.
We funded this acquisition by the placement of a $4.56 million first deed of
trust loan and draws on our existing line of credit.
Note 4. Shareholders' Equity
In February 2003, we issued 17,575 shares of our common stock through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of approximately
$177,000.
We calculated basic and diluted earnings per common share using the following
amounts:
Three months ended
March 31
2003 2002
----------------- -----------------
(Restated)
Numerators:
Numerator for basic
earnings per share -
Net income $ 145,790 $ 492,575
Cumulative preferred dividend (125,000) (61,644)
----------------- -----------------
Income available to
common shareholders $ 20,790 $ 430,931
================= =================
Numerator for diluted
earnings per share -
Net income (1) $ 152,413 $ 620,410
Cumulative preferred dividend (125,000) (61,644)
----------------- -----------------
Income available to
common shareholders (1) $ 27,413 $ 558,766
================= =================
8
Three months ended
March 31
2003 2002
----------------- -----------------
(Restated)
Denominators:
Denominator for basic
earnings per share -
weighted average shares
outstanding 5,839,474 5,754,918
Effect of dilutive securities:
Convertible Operating
Partnership units 1,844,264 1,703,981
Stock options (2) 3,441 9,115
----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 7,687,179 7,468,014
================= =================
(1) Assumes conversion of Operating Partnership units to common shares;
minority interest in Operating Partnership income has been eliminated.
(2) We excluded options to purchase 140,000 shares of common stock at $12.50,
110,000 shares at $12.25, and 120,000 shares at $13.125 from the
calculation of diluted earnings per share for the three months ended March
31, 2003 and 2002. We also excluded additional options to purchase 60,000
shares of common stock at $11.25 from the calculation of diluted earnings
per share for the three months ended March 31, 2003. 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 5. Subsequent event
On April 21, 2003, the Board of Directors declared a regular quarterly cash
dividend of $0.25 per share to be paid on May 15, 2003, to common shareholders
of record on May 1, 2003. The Board of Directors also authorized the payment of
dividends totaling $125,000 to the Series B Preferred shareholder in accordance
with the investment agreement for those shares.
9
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 revenues from our third-party apartment property management activities could
decline, or we could incur unexpected costs in performing these activities;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates could increase our debt service
costs;
o we may not be able to meet our long-term liquidity requirements on favorable
terms; and
o we could lose key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to publicly release
the results of any revision to these forward-looking statements that may be made
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. We currently own 19 apartment communities containing
4,571 units and provide third-party management services for 9 communities
containing a total of 2,349 units. In addition to our apartment communities, we
own 41 properties that we lease on a triple-net basis to a restaurant operator.
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
10
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.
Our executive offices are located at 301 South College Street, Suite
3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100.
Results of Operations
Revenues
Total revenues in the first quarter of 2003 were $10.2 million, an
increase of 16.1% compared to the first quarter of 2002. Apartment related
income (apartment rental income plus income from apartment management and
investment activities) accounted for approximately 90.2% of total revenues in
the first quarter of 2003, compared to 88.6% in the first quarter of 2002.
Apartment rental income totaled $8.9 million in the first quarter of
2003, an increase of 18.7% compared to the first quarter of 2002. This increase
is primarily attributable to the acquisition of three apartment communities in
2002 and one in the first quarter of 2003, which contributed approximately $1.6
million to apartment rental income in the first quarter of 2003. For the first
quarter, average economic occupancy for all apartments was 90.9% in 2003,
compared to 92.3% in the first quarter of 2002. Average monthly revenue per
occupied unit for all apartments was $732 in the first quarter of 2003, compared
to $735 in the first quarter of 2002.
On a "same-units" basis (the 15 apartment communities that we owned
throughout the first three months of both years), apartment rental income
decreased by 2.5% in the first quarter of 2003 compared to the first quarter of
2002. This decrease was the result of declines in both average economic
occupancy and average revenue per occupied unit. On a same-units basis, average
economic occupancy was 90.9% for the first quarter of 2003, compared to 92.3% in
the first quarter of 2002; average monthly revenue per occupied unit was $728 in
the first quarter of 2003, compared to $735 in the first quarter of 2002.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the first quarter of 2003 follow:
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Abbington Place 360 90.0% $759
Allerton Place 228 92.1% 729
Alta Harbour (2) 290 87.5% 781
Barrington Place (2) 348 93.2% 764
Brookford Place (2) 108 94.0% 659
Chason Ridge 252 95.2% 745
Harris Hill 184 91.1% 663
Latitudes 448 95.2% 844
Madison Hall 128 98.6% 574
Oakbrook 162 87.4% 756
Oak Hollow 461 81.7% 621
11
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Paces Commons 336 91.3% 667
Paces Village 198 95.3% 644
Pepperstone 108 94.4% 659
Savannah Place 172 92.0% 705
Summerlyn Place 140 91.7% 835
The Place (1) 144
Waterford Place 240 89.3% 856
Woods Edge 264 90.4% 741
All apartments (1) 4,427
- 2003 90.9% 732
- 2002 92.3% 735
Same units 3,681
- 2003 90.9% 728
- 2002 92.3% 735
(1) We acquired The Place Apartments effective March 13, 2003. We have excluded
The Place from these calculations as of March 31.
(2) We acquired Barrington Place and Brookford Place effective May 31, 2002. We
acquired Alta Harbour effective September 18, 2002.
We remain committed to our markets and our focus on middle-market
apartment properties. However, we continue to find ourselves in a very difficult
operating environment. The lowest interest rates in decades have led to
near-record levels of single-family home purchases by individuals who
traditionally would have been apartment residents. Simultaneously, an anemic
economy has resulted in extensive job losses. When you compound these two
factors with the uncertainty caused by the threat of terrorism, war, expanding
deficits at all government levels, impending property tax increases, and
skyrocketing insurance costs, it is very difficult to form a clear vision of the
near-term future.
In this environment, we believe the best way to achieve our long-term
objectives is to focus our attention on the day-to-day operations of our
apartment communities, with the goal of maximizing short-term performance while
maintaining and enhancing the long-term potential of our apartment properties.
We will also continue to seek opportunities to add to and improve the size and
quality of our apartment portfolio.
Restaurant rental income was $1.0 million in the first quarters of both
2003 and 2002. A decline in restaurant rental income of approximately $6,000 was
the result of the sale of one restaurant property late in the first quarter of
2003. Restaurant rental income for both 2003 and 2002 was the minimum rent.
"Same-store" (those restaurant properties that operated throughout the first
three months of both 2003 and 2002) sales at our restaurant properties decreased
by 4.7% in the first quarter of 2003 compared to the first quarter of 2002.
Through March 31, 2003, we have sold six of the original 47 restaurants
to Boddie-Noell Enterprises, Inc. ("Enterprises"), the lessee, under the
non-economic clause of the agreement that
12
allows Enterprises to close up to seven restaurants and buy them back for no
less than net carrying value. Under our master lease with Enterprises,
restaurant rental income payments are the greater of a specified minimum rent or
9.875% of food sales. The minimum rent is reduced by approximately $8,000 per
month, or $96,000 per year, for each restaurant that is sold.
Management fee income totaled $227,000 in the first quarter of 2003,
compared to $294,000 in the first quarter of 2002. This decrease is attributable
to our acquisition of two previously managed apartment communities in May 2002,
as well as the termination of management contracts for several smaller
properties in the first quarter of 2003.
Interest and other income totaled $130,000 in the first quarter of
2003, compared to $37,000 in the first quarter of 2002. These comparisons
reflect the impact of non-routine income totaling $107,000 in the first quarter
of 2003 (proceeds from final resolution of litigation commenced by the company
in 1997), offset by a decline in interest income compared to the first quarter
of 2002.
Expenses
Effective January 1, 2003, in accordance with current accounting
guidance, we report the loss on extinguishment of debt as an operating expense,
rather than as an extraordinary item as previously required. We have
reclassified the write-off of unamortized loan costs at refinance in the first
quarter of 2002 to conform to the 2003 presentation in our financial statements.
This reclassification has no impact on net income; however, it reduces income
before extraordinary items and eliminates extraordinary items as previously
reported. A more detailed description of the reclassification adjustments is
included in the notes to the financial statements included in this Quarterly
Report.
Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, were $10.1 million in the
first quarter of 2003, an increase of 23.0% compared to the first quarter of
2002.
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) in the first quarter of 2003 totaled $3.5 million, a
29.0% increase compared to the first quarter of 2002. These amounts include
approximately $600,000 in apartment operations expense for properties we
acquired in 2002 and early 2003.
On a same-units basis, apartment operations expense increased 6.9% in
the first quarter of 2003 compared to the first quarter of 2002. This increase
reflects higher costs for utilities, service compensation and property insurance
in 2003.
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 administrative expense (the costs associated with oversight,
accounting and support of our apartment management activities for both owned and
third party properties) was $327,000 in the first quarter of 2003, essentially
unchanged from the first quarter of 2002.
Corporate administration expense was $687,000 in the first quarter of
2003, an increase of 15.8% compared to the first quarter of 2002. This increase
was primarily attributable to increases in compensation and directors and
officers insurance expense.
13
Depreciation expense totaled $2.3 million in the first quarter of 2003,
a 19.9% increase compared to the first quarter of 2002. This increase is
attributable to the addition of apartment communities, as well as the impact of
additions and replacements at other apartment communities.
Amortization expense (of deferred loan costs) was $73,000 in the first
quarter of 2003, compared to $48,000 in the first quarter of 2002. This is
increase is primarily attributable to the impact of loan costs associated with
financing transactions in 2002.
Interest expense totaled $3.2 million in the first quarter of 2003, a
27.6% increase compared to the first quarter of 2002. This increase reflects the
impact of approximately $55 million in new debt related to apartment
acquisitions in the second and third quarters of 2002 and the first quarter of
2003, reduced by the effect of lower interest rates on our lines of credit.
Overall, weighted average interest rates were 6.0% for the first quarter of
2003, compared to 6.2% for the first quarter of 2002.
During the first quarter of 2002, we refinanced long-term debt related
to Oakbrook Apartments. In conjunction with this transaction, we wrote off
unamortized loan costs of $95,000. As discussed above, we have reclassified the
write-off of unamortized loan costs at the date of the refinance in the first
quarter of 2002 to conform to the 2003 presentation in our financial statements.
We previously reflected this write-off, net of minority interests' share, with a
charge of $73,000 as an extraordinary item in the financial statements.
In late December 2001, we issued 227,273 shares of Series B Cumulative
Convertible Preferred Stock. In September 2002, we issued an additional 227,272
shares of this preferred stock. Because preferred shareholders have priority
over common shareholders for receipt of dividends, we deduct the amount of net
income that will be paid to preferred shareholders in calculating net income
available to common shareholders. The dividend on the Series B shares is $1.10
per share per year. The cumulative preferred dividend totaled $125,000 for the
first quarter of 2003, and approximately $62,000 for the first quarter of 2002.
Net income
Income available to common shareholders, after the cumulative preferred
dividend, was $21,000 for the first quarter of 2003, compared to $431,000 for
the first quarter of 2002. Net income (before the cumulative preferred dividend)
was $146,000 for the first quarter of 2003, compared to $493,000 for the first
quarter of 2002. These comparisons reflect the impact of decline in apartments
operating results and the impact of the cumulative preferred dividend.
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."
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 REIT
14
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 the operating performance of an
equity REIT.
We calculate funds available for distribution as FFO plus non-cash
expense for amortization and write-off of unamortized loan costs, less recurring
capital expenditures. We believe that, together with net income and cash flows,
funds available for distribution provides investors with an additional measure
to evaluate the ability of the REIT to incur and service debt, to fund
acquisitions and other capital expenditures, as well as to fund distributions to
shareholders and minority unitholders.
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. You should not consider funds from operations or
funds available for distribution:
o to be alternatives to net income as reliable measures of our operating
performance, or
o to be alternatives to cash flows as measures of liquidity.
Funds from operations and funds available for distribution do not
measure whether cash flow is sufficient to fund all of our cash needs, including
principal amortization, capital improvements and distributions to shareholders.
Funds from operations and funds available for distribution do not represent cash
flows from operating, investing or financing activities as defined by generally
accepted accounting principles. Further, funds from operations and funds
available for distribution as disclosed by other REITs might not be comparable
to our calculation of funds from operations or funds available for distribution.
Funds from operations of the Operating Partnership totaled $2.4 million
in the first quarter of 2003, a 5.8% decrease compared to the first quarter of
2002. This comparison reflects the impact of decline in apartment operating
results and the increased cumulative preferred dividend.
We calculated funds from operations of the Operating Partnership as
follows (all amounts in thousands):
Three months ended
March 31
2003 2002
--------------- ---------------
(Restated)
Income before minority interest $ 152 $ 620
Cumulative preferred dividend (125) (62)
Depreciation 2,333 1,947
--------------- ---------------
Funds from operations -
Operating Partnership $2,361 $2,505
=============== ===============
15
Three months ended
March 31
2003 2002
--------------- ---------------
Per share amounts - diluted*:
Net income $0.02 $0.08
Income available to
common shareholders 0.00 0.07
Funds from operations 0.31 0.34
* assumes conversion of Operating Partnership units to common shares; minority
interest in the Operating Partnership has been eliminated. Preferred stock is
antidilutive for both periods.
A reconciliation of funds from operations to funds available for
distribution follows (all amounts in thousands):
Three months ended
March 31
2003 2002
--------------- ---------------
Funds from operations -
Operating Partnership $2,361 $2,505
Amortization of loan costs 73 48
Write-off of unamortized
loan costs at refinance - 95
Recurring capital expenditures (282) (282)
--------------- ---------------
Funds available for distribution $2,152 $2,366
=============== ===============
A further reconciliation of funds from operations of the Operating
Partnership to funds from operations available to common shareholders follows
(all amounts in thousands):
Three months ended
March 31
2003 2002
--------------- ---------------
Funds from operations -
Operating Partnership $2,361 $2,505
Minority interest in
funds from operations (567) (572)
--------------- ---------------
Funds from operations available
to common shareholders $1,794 $1,933
=============== ===============
16
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended
March 31
2003 2002
--------------- ---------------
Net cash provided by (used in):
Operating activities $ 2,220 $ 2,081
Investing activities (5,863) (544)
Financing activities 3,173 (2,406)
Dividends and distributions paid to:
Preferred shareholders $ 126 $ 3
Common shareholders 1,458 1,781
Minority unitholders in
Operating Partnership 462 529
Scheduled debt principal payments $ 267 $ 42
Non-recurring capital expenditures 471 262
Weighted average shares outstanding
Preferred shares 455 227
Common shares 5,839 5,755
Weighted average Operating
Partnership minority units
outstanding 1,844 1,704
Capital Resources and Liquidity
Capital Resources
Effective March 13, 2003, we acquired The Place Apartments at a cost of
approximately $5.6 million, paid in cash. We financed this acquisition through
issuance of a first deed of trust note in the amount of $4.56 million and draws
on our line of credit secured by Latitudes Apartments. The fixed-rate deed of
trust loan provides for interest at 5.06% and monthly payments including
principal and interest of approximately $33,000, with maturity in 2013. In
conjunction with this financing, we funded repair escrows of approximately
$65,000 and paid lender fees and costs totaling approximately $61,000. Through
March 31, 2003, we have incurred and capitalized other direct costs of this
acquisition totaling approximately $20,000.
Effective February 21, 2003, we sold one restaurant property to the
lessee for its net carrying value of approximately $588,000. We applied the
proceeds from this sale to reduce our line of credit secured by the restaurant
properties.
As of March 31, 2003, total long-term debt was $216.7 million,
including $169.0 million of notes payable at fixed interest rates ranging from
5.06% to 8.55%, and $47.7 million at variable rates indexed on 30-day LIBOR
rates. The weighted average interest rate on debt outstanding was 6.0% at March
31, 2003, down from 6.1% at December 31, 2002. At our current level of
variable-rate debt, a 1% fluctuation in variable interest rates would increase
or decrease our annual interest expense by approximately $485,000.
17
During the first quarter of 2003, we issued approximately 17,600 shares
of our common stock through our Dividend Reinvestment and Stock Purchase Plan
for proceeds of approximately $177,000.
Cash flows and liquidity
Net cash flows from operating activities were $2.2 million in the first
quarter of 2003, compared to $2.1 million in the first quarter of 2002.
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 on May 15, 2003, to shareholders of record of our
common stock on May 1, 2003.
In January 2003, we announced we were reducing our quarterly dividend
to $0.25 per share from the $0.31 per share per quarter that had been paid for a
number of years. While this was not pleasant, we felt that, given the current
operating environment and the uncertain near-term outlook, a reduction in
dividend was necessary. You should not view this decision as a sign that we have
changed our philosophy concerning the dividend, for we remain committed to
paying the highest dividend that is reasonably prudent. While we are not
philosophically opposed to paying dividends that temporarily exceed current cash
flow after operating expenses, this would only occur when we were confident that
we would see significant improvement in operations in a relatively short period
of time.
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 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 possible 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 - Capital expenditures and depreciation
Our significant accounting policies are identified and discussed in the
notes to our financial statements included in our Annual Report on Form 10-K.
Our policy and practice regarding capital expenditures and depreciation, which
may be of particular interest to readers of this Quarterly Report, are further
discussed below.
In general, for acquired apartment properties, 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.
For the acquisitions of Barrington Place, Brookford Place and Alta
Harbour Apartments in 2002, we performed detailed analyses of components of the
real estate assets acquired. For these properties, we assigned estimated useful
lives as follows: land improvements, 7-20 years;
18
short-lived building components, 5-20 years; base building structure, 60 years;
and fixtures, equipment and floor coverings, 5-10 years. We expect to complete a
detailed analysis of components for The Place Apartments in the near future.
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 apartment communities during the first
quarter of 2003 totaled approximately $753,000, including $205,000 for
acquisition improvements, $266,000 for additions and betterments, and $282,000
for recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during the
first quarter of 2003 totaled approximately $1.2 million, including $434,000 in
compensation of service staff and $742,000 in payments for materials and
contracted services.
A summary of capital expenditures at our apartment communities through
March 31, 2003, in aggregate and per apartment unit, follows:
Total Per unit
----------------- -----------------
(000's)
Recurring capital expenditures:
Floor coverings $161 $36
Appliances/HVAC 39 9
Exterior paint 16 4
Computer/support equipment 10 2
Other 55 13
----------------- -----------------
$282 $64
================= =================
Non-recurring capital expenditures:
Acquisition improvements $205
Additions and betterments 262
Computer/support equipment 4
-------------------
$471
===================
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information that would be
provided under Item 305 of Regulation S-K since December 31, 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity" above for a discussion of our
exposure to interest rate risks.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our annual and periodic
reports filed with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. These disclosure
controls and procedures are further designed 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 first quarter of 2003, 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 6. Exhibits and Reports on Form 8-K
a) Exhibits:
The Registrant agrees to furnish a copy of all agreements related to
long-term debt upon request of the Commission.
Exhibit No.
99.1 Section 906 Certification by Chief Executive Officer
99.2 Section 906 Certification by Chief Financial Officer
b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on March 21, 2003, to report the
acquisition of The Place Apartments as of March 13, 2003.
20
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)
May 12, 2003 /s/ Philip S. Payne
----------------------------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
(Duly authorized officer)
May 12, 2003 /s/ Pamela B. Bruno
----------------------------------------
Pamela B. Bruno
Vice President, Controller and
Chief Accounting Officer
21
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, D. Scott Wilkerson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNP Residential
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
are made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and audit committee of the
registrant's board of directors:
(a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ D. Scott Wilkerson
- --------------------------------------------
D. Scott Wilkerson
President and Chief Executive Officer
May 12, 2003
22
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Philip S. Payne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNP Residential
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
are made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and audit committee of the
registrant's board of directors:
(a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Philip S. Payne
- --------------------------------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
May 12, 2003
23
INDEX TO EXHIBITS
Exhibit No.
Page
99.1 Section 906 Certification by Chief Executive Officer 25
99.2 Section 906 Certification by Chief Financial Officer 26
24