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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, 2004
--------------
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 (open) (the latest practicable date).
Common Stock, $.01 par value 7,098,698
- ---------------------------- -----------------------
(Class) (Number of shares)
Exhibit index: Page 22
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
3 Quantitative and Qualitative Disclosures 19
About Market Risk
4 Controls and Procedures 19
PART II - Other Information
2 Changes in Securities and Use of Proceeds 19
6 Exhibits and Reports on Form 8-K 19
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31 December 31
2004 2003
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $300,164,836 $299,661,224
Restaurant properties 37,405,385 37,405,385
------------------ ------------------
337,570,221 337,066,609
Less accumulated depreciation (58,537,237) (56,052,569)
------------------ ------------------
279,032,984 281,014,040
Cash and cash equivalents 1,192,405 564,426
Prepaid expenses and other assets 3,958,649 3,408,127
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,115,088 1,115,088
Deferred financing costs 1,050,810 1,098,025
------------------ ------------------
Total assets $286,349,936 $287,199,706
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $216,438,372 $229,714,263
Accounts payable and accrued expenses 2,486,745 1,408,659
Deferred revenue and security deposits 1,303,755 1,343,999
Deferred credit for defeasance of interest,
net of accumulated amortization 26,240 104,960
------------------ ------------------
Total liabilities 220,255,112 232,571,881
Minority interest in Operating Partnership 15,470,003 15,894,909
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
909,090 at March 31, 2004, and December 31, 2003 10,000,000 5,000,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
7,098,698 at March 31, 2004,
5,907,133 at December 31, 2003 70,987 59,071
Additional paid-in capital 84,707,186 71,473,473
Dividend distributions in excess of net income (44,153,352) (42,799,628)
------------------ ------------------
Total shareholders' equity 50,624,821 38,732,916
------------------ ------------------
Total liabilities and shareholders' equity $286,349,936 $287,199,706
================== ==================
3
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31
2004 2003
----------------- ----------------
Revenues
Apartment rental income $10,053,060 $ 8,886,284
Restaurant rental income 957,447 999,326
Management fee income 197,541 227,360
Interest and other income 23,140 129,810
----------------- ----------------
11,231,188 10,242,780
Expenses
Apartment operations 3,862,127 3,473,897
Apartment administration 426,376 327,060
Corporate administration 666,171 687,065
Depreciation 2,539,588 2,333,318
Amortization of deferred
loan costs 88,005 72,971
Interest 3,240,494 3,196,056
----------------- ----------------
10,822,761 10,090,367
----------------- ----------------
Income before
minority interest 408,427 152,413
Minority interest in
Operating Partnership 35,368 6,623
----------------- ----------------
Net income 373,059 145,790
Cumulative preferred dividend 250,000 125,000
----------------- ----------------
Income available to
common shareholders $ 123,059 $ 20,790
================= ================
Per share amounts:
Basic earnings per share -
Net income $0.06 $0.02
================= ================
Income available to
common shareholders $0.02 $0.00
================= ================
Diluted earnings per share -
Net income $0.05 $0.02
================= ================
Income available to
common shareholders $0.02 $0.00
================= ================
Dividends declared $0.25 $0.25
================= ================
Weighted average common
shares outstanding 6,405,944 5,839,474
================= ================
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, 2003 909,090 $10,000,000 5,907,133 $59,071 $71,473,473 $(42,799,628) $38,732,916
Common stock issued - - 1,191,565 11,916 13,233,713 - 13,245,629
Dividends paid - preferred - - - - - (250,000) (250,000)
Dividends paid - common - - - - - (1,476,783) (1,476,783)
Net income - - - - - 373,059 373,059
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2004 909,090 $10,000,000 7,098,698 $70,987 $84,707,186 $(44,153,352) $50,624,821
========= ============ =========== ========== ============= =============== ============
5
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31
2004 2003
----------------- ----------------
Operating activities:
Net income $ 373,059 $ 145,790
Adjustments to reconcile net income to
net cash provided by operations:
Minority interest in Operating Partnership 35,368 6,623
Depreciation and amortization of loan costs 2,627,593 2,406,289
Amortization of defeasance credit (78,720) (41,664)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (542,514) (840,691)
Accounts payable and accrued expenses 1,078,086 584,433
Deferred revenue and security deposits (48,252) (41,215)
----------------- ----------------
Net cash provided by operating activities 3,444,620 2,219,565
Investing activities:
Acquisition of apartment property - (5,697,761)
Additions to apartment properties, net (558,532) (752,958)
Sale of restaurant property - 587,761
----------------- ----------------
Net cash used in investing activities (558,532) (5,862,958)
Financing activities:
Net proceeds from issuance of common stock 13,245,629 177,172
Distributions to Operating Partnership minority unitholders (460,274) (462,240)
Dividends paid to preferred shareholder (250,000) (126,027)
Dividends paid to common shareholders (1,476,783) (1,457,770)
Proceeds from notes payable 40,790 6,666,945
Principal payments on notes payable (13,316,681) (1,532,325)
Payment of deferred financing costs (40,790) (92,894)
----------------- ----------------
Net cash (used in) provided by financing activities (2,258,109) 3,172,861
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 627,979 (470,532)
Cash and cash equivalents at beginning of period 564,426 884,316
----------------- ----------------
Cash and cash equivalents at end of period $ 1,192,405 $ 413,784
================= ================
6
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - March 31, 2004
(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, 2003. We derived the amounts in the balance sheet at December 31,
2003, from the financial statements included in our 2003 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 2003 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 less than $100 for the three months ended March 31, 2004 and 2003,
respectively, with no impact on basic and diluted earnings per share amounts as
reported.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" ("VIEs"). The
primary objective of FIN 46 is to provide guidance on the identification of
entities for which control is achieved through means other than voting rights
and to determine when and which business enterprise should consolidate the VIEs.
This new model applies when the equity investors, if any, do not have a
controlling financial interest, or when the equity investment at risk is
insufficient to finance the entity's activities without additional financial
support. FIN 46 also requires additional disclosures. FIN 46 was effective
immediately for interests acquired subsequent to January 31, 2003, and is
effective March 31, 2004, for interests in VIEs created before February 1, 2003.
We assessed our variable interests and determined that these interests were not
VIEs as defined in FIN 46. As a result, the provisions of FIN 46 have no impact
on our financial condition or results of operations.
7
Note 3. Shareholders' Equity
On February 23, 2004, we issued 1,175,519 shares of common stock at a price of
$11.75 per share, to a number of institutional investors and mutual funds
pursuant to a private placement, for a total purchase price of approximately
$13,812,000. Through March 31, 2004, we incurred costs associated with this
placement totaling approximately $765,000. We expect to use the net proceeds to
fund future acquisitions, repay bank debt, and for general corporate purposes.
We immediately applied $13.0 million of the net proceeds to reduce our revolving
line of credit secured by Latitudes Apartments.
In addition, in February 2004, we issued 16,046 shares of our common stock
through our Dividend Reinvestment and Stock Purchase Plan ("DRIP") for proceeds
of approximately $195,000.
We calculated basic and diluted earnings per common share using the following
amounts:
Three months ended
March 31
2004 2003
----------------- -----------------
Numerators:
Numerator for basic
earnings per share -
Net income $ 373,059 $ 145,790
Cumulative preferred dividend (250,000) (125,000)
----------------- -----------------
Income available to
common shareholders $ 123,059 $ 20,790
================= =================
Numerator for diluted
earnings per share -
Net income (1) $ 408,427 $ 152,413
Cumulative preferred dividend (250,000) (125,000)
----------------- -----------------
Income available to
common shareholders (1) $ 158,427 $ 27,413
================= =================
Denominators:
Denominator for basic
earnings per share -
weighted average shares
outstanding 6,405,944 5,839,474
Effect of dilutive securities:
Convertible Operating
Partnership units 1,841,098 1,844,264
Stock options (2) 15,389 3,441
----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 8,262,431 7,687,179
================= =================
8
(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
and 120,000 shares at $13.125 from the calculation of diluted earnings per
share for the three months ended March 31, 2004. We also excluded
additional options to purchase 110,000 shares of common stock at $12.25 and
60,000 shares 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 4. Subsequent event
On April 21, 2004, the Board of Directors declared a regular quarterly cash
dividend of $0.25 per share to be paid on May 17, 2004, to common shareholders
of record on May 3, 2004. The Board of Directors also authorized the payment of
dividends totaling $250,000 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 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 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 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 20 apartment communities containing
4,859 units and provide third-party management services for eight communities
containing a total of 2,061 units. In addition to our apartment communities, we
own 40 properties that we lease on a triple-net basis to a restaurant operator.
10
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.
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 2004 were $11.2 million, an
increase of 9.6% compared to the first quarter of 2003. Apartment related income
(apartment rental income plus income from apartment management and investment
activities) accounted for approximately 91.5% of total revenue in the first
quarter of 2004, compared to 90.2% in the first quarter of 2003.
Apartment rental income totaled $10.1 million in the first quarter of
2004, an increase of 13.1% compared to apartment rental income of $8.9 million
in the first quarter of 2003. This increase is attributable to acquisitions of
two apartment communities in 2003 (The Place and The Harrington contributed
approximately $812,000 to rental income in the first quarter of 2004) as well as
increased rental income at existing apartments.
For the first quarter, average economic occupancy for all apartments
was 94.9% in 2004, compared to 90.9% in the first quarter of 2003. Average
monthly revenue per occupied unit for all apartments was $727 in the first
quarter of 2004, compared to $732 in the first quarter of 2003.
On a "same-units" basis (the 18 apartment communities that we owned
throughout the first three months of 2004 and 2003), apartment rental income
increased by 4.5% in the first quarter of 2004 compared to the first quarter of
2003. This increase was primarily the result of occupancy improvements. On a
same-units basis, average economic occupancy was 95.1% for the first quarter of
2004, compared to 90.9% for the first quarter of 2003; average monthly revenue
per occupied unit was $731 in the first quarter of 2004, compared to $732 in the
first quarter of 2003.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the first quarter of 2004 follow:
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Abbington Place 360 93.4% $755
Allerton Place 228 93.1% 770
Barrington Place 348 95.4% 756
Brookford Place 108 97.9% 672
Chason Ridge 252 97.6% 788
The Harrington (1) 288 90.3% 736
Harris Hill 184 94.9% 654
11
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Latitudes 448 96.2% 899
Madison Hall 128 93.6% 601
Marina Shores Waterfront 290 92.9% 747
Oakbrook 162 97.9% 690
Oak Hollow 461 95.0% 604
Paces Commons 336 96.2% 632
Paces Village 198 94.1% 681
Pepperstone 108 98.0% 660
Savannah Place 172 93.0% 700
Summerlyn Place 140 94.9% 831
The Place (1) 144 97.8% 564
Waterford Place 240 94.1% 872
Woods Edge 264 96.3% 699
All apartments
- 2004 94.9% 727
- 2003 90.9% 732
Same units (1) 4,427
- 2004 95.1% 731
- 2003 90.9% 732
(1) We acquired The Place Apartments in March 2003, and we acquired The
Harrington Apartments in August 2003. We have excluded The Place and The
Harrington from these calculations as of March 31.
Restaurant rental income was $1.0 million in the first quarters of both
2004 and 2003. A decline in restaurant rental income of approximately $42,000
was the result of the sale of two restaurant properties during 2003. Restaurant
rental income for the first quarters of both 2004 and 2003 was the minimum rent.
"Same-store" (those 40 restaurant properties that operated throughout the first
three months of both 2004 and 2003) sales at our restaurant properties increased
by 16.0% in the first quarter of 2004 compared to the first quarter of 2003.
Sales at these stores would have to increase by approximately 10% before we
would receive rent exceeding the minimum rent. We do not expect restaurant
rental income to exceed the minimum rent in 2004.
Management fee income totaled $198,000 in the first quarter of 2004,
compared to $227,000 in the first quarter of 2003. This decrease is attributable
to the termination of management contracts for several smaller properties in the
first quarter of 2003.
Interest and other income totaled $23,000 in the first quarter of 2004,
compared to $130,000 in the first quarter of 2003. These comparisons reflect the
impact of non-routine income totaling $107,000 in the first quarter of 2003
(proceeds from final resolution of litigation that we commenced in 1997).
12
Expenses
Total expenses, including non-cash charges for depreciation and
amortization, were $10.8 million in the first quarter of 2004, an increase of
7.3% compared to the first quarter of 2003.
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) in the first quarter of 2004 totaled $3.9 million, an
11.2% increase compared to apartment operations expense of $3.5 million in the
first quarter of 2003. The $0.4 million increase is attributable to the two
apartment communities we acquired in 2003. On a same-units basis, apartment
operations expense was generally flat for the comparable periods.
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 expense (the costs associated with oversight,
accounting and support of our apartment management activities for both owned and
third party properties) was $426,000 in the first quarter of 2004, compared to
$327,000 in the first quarter of 2003. This increase is attributable to
additional corporate support staff, software and insurance costs. Corporate
administration expense was $666,000 in the first quarter of 2004, compared to
$687,000 in the first quarter of 2003.
Depreciation expense totaled $2.5 million in the first quarter of 2004,
an 8.8% increase compared to the first quarter of 2003. This increase is
primarily attributable to the addition of two apartment communities during 2003.
Interest expense totaled $3.2 million in the first quarters of 2004,
reflecting an increase of only $44,000 over the first quarter of 2003. This
comparison reflects the effect of approximately $18 million higher debt level
early in the first quarter of 2004 compared to the first quarter of 2003,
reduced by the impact of the $13.0 million paydown of our variable rate line of
credit secured by Latitudes Apartments in February 2004 as well as the decline
in variable interest rates over the last 12 months. Overall, weighted average
interest rates were 5.7% for the first quarter of 2004, compared to 6.0% for the
first quarter of 2003. (See further discussion in "Capital Resources and
Liquidity - Capital Resources," below.)
Net income
Operating partnership earnings before non-cash charges for depreciation
and amortization totaled $3.0 million for the first quarter of 2004, an 18.7%
increase compared to $2.6 million for the first quarter of 2003. This increase
is attributable to the positive impact of adding two apartment communities in
2003, as well as improvement in apartments operating results, particularly in
apartment revenues.
Income before minority interest (Operating Partnership income, before
deductions for the minority interest in the Operating Partnership and the
cumulative preferred dividend) was $408,000 for the first quarter of 2004,
compared to $152,000 for the first quarter of 2003. Net income (after deduction
for the minority interest, but before the cumulative preferred dividend) was
$373,000 for the first quarter of 2004, compared to $146,000 for the first
quarter of 2003. These comparisons again reflect the improvement in apartments
operating results.
13
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. In September 2003, we issued 454,545 shares of cumulative
preferred stock, which doubled the number of preferred shares outstanding. The
cumulative preferred dividend totaled $250,000 for the first quarter of 2004,
compared to $125,000 for the first quarter of 2003. Income available to common
shareholders, after the cumulative preferred dividend, was $123,000 for the
first quarter of 2004, compared to $21,000 for the first quarter of 2003.
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., before minority interest).
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
calculate FAD 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 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.
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 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
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.
FFO and FAD do not represent cash flows from operating, investing or financing
activities as defined by generally accepted accounting principles. Further, FFO
and FAD as disclosed by other REITs might not be comparable to our calculation
of FFO or FAD.
Funds from operations totaled $2.7 million in the first quarter of
2004, a 14.3% increase compared to the first quarter of 2003. This comparison
reflects the improvement in apartments operating results, offset somewhat by the
increase in the cumulative preferred dividend, compared to 2003.
14
We calculated funds from operations as follows (all amounts in
thousands):
Three months ended
March 31
2004 2003
--------------- ---------------
Income before minority interest $ 408 $ 152
Cumulative preferred dividend (250) (125)
Depreciation 2,540 2,333
--------------- ---------------
Funds from operations $2,698 $2,361
=============== ===============
A reconciliation of FFO to FAD follows (all amounts in thousands):
Three months ended
March 31
2004 2003
--------------- ---------------
Funds from operations $2,698 $2,361
Amortization of loan costs 88 73
Recurring capital expenditures (275) (282)
--------------- ---------------
Funds available for distribution $2,511 $2,152
=============== ===============
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended
March 31
2004 2003
--------------- ---------------
Net cash provided by (used in):
Operating activities $ 3,445 $ 2,220
Investing activities (559) (5,863)
Financing activities (2,258) 3,173
Dividends and distributions paid to:
Preferred shareholders $ 250 $ 126
Common shareholders 1,477 1,458
Minority unitholders in
Operating Partnership 460 462
Scheduled debt principal payments $ 317 $ 274
Non-recurring capital expenditures 283 471
15
Three months ended
March 31
2004 2003
--------------- ---------------
Weighted average shares outstanding
Preferred shares 909 455
Common shares 6,406 5,839
Weighted average Operating
Partnership minority units
outstanding 1,841 1,844
Summary
By virtually any measure, we had a very good first quarter in 2004. As
a result of continued improvement in apartment operations, funds from
operations, funds available for distribution and earnings per share all
increased by significant amounts as compared to the first quarter of 2003.
The improvement in apartment operating results in the first quarter of
2004 was primarily the result of a 4.5% increase in same-units occupancy at our
apartment communities. With occupancy at our apartment properties averaging
approximately 95% for the first quarter, we have essentially attained our
occupancy goals. Going forward the issue will be whether we can maintain this
level of occupancy while beginning to raise rents. While we are comfortable that
we will be able to hold occupancy at current levels, we are not as certain of
our ability to meaningfully increase rents over the short term. The markets in
which we own and operate apartment properties appear to have begun to recover
from the over-building, job losses and torpid economy that have so adversely
affected apartment operations for the past couple of years, but it is too early
to say with any certainty how strong or how long this recovery will be.
In addition to the improvement in apartment operating results, sales at
our restaurant properties continued to show dramatic increases during the first
quarter of 2004, with same-store sales improving by slightly more than 16%.
While this improvement did not result in our receiving increased restaurant
rental revenue, it is certainly encouraging that our restaurant operator may
have found in the "Thickburger" an answer to stem years of declining sales.
Over the coming months, we intend to continue to improve both the size
and quality of our portfolio. To help insure that we would have sufficient funds
to take advantage of opportunities to acquire new apartment properties and to
improve our existing communities, we raised $13 million in new equity from a
number of institutional investors during the first quarter of 2004. We are
optimistic about the future of our properties, our markets and our company. We
believe we have the plan, focus and personnel to maximize the opportunities
presented to us.
Capital Resources and Liquidity
Capital Resources
On February 23, 2004, we issued 1,175,519 shares of common stock at a
price of $11.75 per share, to a number of institutional investors and mutual
funds pursuant to a private placement, for a total purchase price of
approximately $13,812,000. Through March 31, 2004, we incurred costs associated
with this placement totaling approximately $765,000. We expect to use the net
proceeds to fund future acquisitions, repay bank debt, and for general corporate
purposes. We
16
immediately applied $13.0 million of the net proceeds to reduce our revolving
line of credit secured by Latitudes Apartments.
In addition, in February 2004, we issued 16,046 shares of our common
stock through our Dividend Reinvestment and Stock Purchase Plan ("DRIP") for
proceeds of approximately $195,000.
As of March 31, 2004, total long-term debt was $216.4 million,
including $168.0 million of notes payable at fixed interest rates ranging from
5.06% to 8.55%, and $48.4 million at variable rates indexed on 30-day LIBOR
rates. The weighted average interest rate on debt outstanding was 5.9% at March
31, 2004, up from 5.8% at December 31, 2003, because of the $13.0 million
paydown of variable rate debt during the first quarter of 2004. At our current
rate of variable rate debt, a 1% fluctuation in variable interest rates would
increase or decrease our annual interest expense by approximately $490,000.
Cash Flows and Liquidity
Net cash flows from operating activities were $3.4 million in the first
quarter of 2004, compared to $2.2 million in the first quarter of 2003.
Improvements in operating results produced approximately $440,000 of the $1.2
million increase in cash flows from operating activities; the remainder of the
increase is attributable to timing of cash receipts and disbursements.
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 $1.8 million) on May 17, 2004, to
shareholders of record of our common stock as of May 3, 2003, as well as
$250,000 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 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, apartment properties acquired before 2002, we compute
depreciation using the straight-line method over composite estimated useful
lives of the related assets, generally 40
17
years for buildings, 20 years for land improvements, 10 years for fixtures and
equipment, and five years for floor coverings.
For the five apartment properties acquired in 2002 and later, we
performed analyses of components of the real estate assets acquired. For these
properties, we assigned estimated useful lives as follows: base building
structure, 45-60 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 apartment communities during the first
quarter of 2004 totaled approximately $559,000, including $78,000 for
acquisition improvements, $205,000 for additions and betterments, and $275,000
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 2004 totaled approximately $1.3 million, including $496,000 in
compensation of service staff and $801,000 in payments for materials and
contracted services.
A summary of capital expenditures at our apartment communities through
March 31, 2004, in aggregate and per apartment unit, follows:
Total Per unit
----------------- ------------------
(000's)
Recurring capital expenditures:
Floor coverings $128 $27
Appliances/HVAC 58 12
Exterior paint - -
Computer/support equipment 1 -
Other 88 18
----------------- ------------------
$275 $57
================= ==================
Non-recurring capital expenditures:
Acquisition improvements $ 78
Additions and betterments 187
Computer/support equipment 18
-----------------
$283
=================
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Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
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, 2003. 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 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 first quarter of 2004, 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 2. Changes in Securities and Use of Proceeds
In February 2004, we sold 1,175,519 shares of common stock at a price
of $11.75 per share, to a number of institutional investors and mutual funds in
a private placement that satisfied the terms and conditions of Rule 506 under
the Securities Act of 1933. We subsequently filed a registration statement for
these shares in March 2004. All purchasers were accredited investors. We did not
solicit purchasers by any form of general solicitation, and we exercised
reasonable care to assure that the purchasers were not underwriters within the
meaning of the Securities Act. We applied the net proceeds of approximately
$13.0 million to pay down our line of credit secured by Latitudes Apartments.
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.
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Exhibit No.
10.1* Purchase Agreement by and among BNP Residential Properties, Inc.
and Purchasers for 1,175,519 shares of common stock, dated as of
February 17, 2004 (filed as Exhibit 10.1 to the BNP Residential
Properties, Inc. Current Report on Form 8-K dated February 23,
2004, and incorporated by reference herein).
31.1 Section 302 Certification by Chief Executive Officer
31.2 Section 302 Certification by Chief Financial Officer
32.1 Section 906 Certification by Chief Executive Officer
32.2 Section 906 Certification by Chief Financial Officer
*Incorporated herein by reference
b) Reports on Form 8-K during the quarter ended March 31, 2004:
o Current report on Form 8-K dated January 7, 2004, to furnish under
Item 9 a press release announcing the tax characteristics of the
company's 2003 dividends.
o Current report on Form 8-K dated January 13, 2004, to report under
Item 5 organizational changes in the company's board of directors.
o Current report on Form 8-K dated January 22, 2004, to furnish
under Item 12 a press release announcing the results of operations
and financial condition of the company as of and for the quarter
and year ended December 31, 2003.
o Current report on Form 8-K dated February 18, 2004, to report
under Item 5 the company's agreement to sell 1,175,519 shares of
common stock.
o Current report on Form 8-K dated February 23, 2004, to report
under Item 5 the company's completion of the sale of 1,175,519
shares of common stock.
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 7, 2004 /s/ Philip S. Payne
-------------------------------------------
Philip S. Payne
Chairman, Treasurer and
Chief Financial Officer
(Duly authorized officer)
May 7, 2004 /s/ Pamela B. Bruno
-------------------------------------------
Pamela B. Bruno
Vice President,
Chief Accounting Officer
21
INDEX TO EXHIBITS
Exhibit No.
Page
10.1* Purchase Agreement by and among BNP Residential -
Properties, Inc. and Purchasers for 1,175,519 shares
of common stock, dated as of February 17, 2004 (filed
as Exhibit 10.1 to the BNP Residential Properties,
Inc. Current Report on Form 8-K dated
February 23, 2004, and incorporated by reference herein).
31.1 Section 302 Certification by Chief Executive Officer 23
31.2 Section 302 Certification by Chief Financial Officer 24
32.1 Section 906 Certification by Chief Executive Officer 25
32.2 Section 906 Certification by Chief Financial Officer 26
*Incorporated herein by reference
22