UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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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 Identification No.)
incorporation or organization)
301 S. College St., Suite 3850, Charlotte, NC 28202-6024
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704/944-0100
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common Stock, par value $.01 per share American Stock Exchange
- -------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
The aggregate market value of the common stock held by non-affiliates of the
registrant at February 23, 2005, was approximately $144.2 million.
The number of shares of the registrant's common stock outstanding on February
23, 2005, was 9,101,667.
Index to exhibits at pate 82
BNP RESIDENTIAL PROPERTIES, INC.
TABLE OF CONTENTS
Item No. FINANCIAL INFORMATION Page No.
PART I
1 Business 3
2 Properties 5
3 Legal Proceedings 10
4 Submission of Matters to a Vote of Security Holders 10
X Executive Officers of the Registrant 10
PART II
5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 11
Purchases of Equity Securities
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
7A Quantitative and Qualitative Disclosures About Market Risk 27
8 Financial Statements and Supplementary Data 28
9 Changes in and Disagreements With Accountants on Accounting and Financial 28
Disclosure
9A Controls and Procedures 28
9B Other Information 30
PART III
10 Directors and Executive Officers of the Registrant 30
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners and Management 34
13 Certain Relationships and Related Transactions 36
14 Principal Accounting Fees and Services 37
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38
Signatures 41
PART I
ITEM 1. BUSINESS
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust ("REIT") focused on owning and
operating apartment communities. We own and operate 25 apartment communities
containing a total of 6,113 apartments. We also provide third-party management
services for seven apartment communities containing a total of 1,799 apartments.
In January 2005, we acquired an economic interest in and became the general
partner of the entities owning three of the seven apartment communities for
which we provide management services. We have previously announced that we have
entered into contracts to acquire the remaining four managed apartment
communities. In addition to our apartment communities, we own 40 restaurant
properties that we lease on a triple-net basis to a restaurant operator under a
master lease. We currently operate in the states of North Carolina, South
Carolina and Virginia.
BNP Residential Properties, Inc. is structured as an UpREIT, or
"umbrella partnership real estate investment trust." We are the sole general
partner and own 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 common unitholders" or "minority
interest." We currently own 83% of the outstanding operating partnership common
units and 100% of the outstanding operating partnership preferred units.
As of February 23, 2005, we have 9,101,667 shares of common stock and
909,090 shares of preferred stock outstanding. We have 1,300 shareholders of
record. We estimate that there are 4,350 beneficial owners of our common stock.
Our shares are listed on the American Stock Exchange, trading under the symbol
"BNP." The operating partnership has an additional 1,865,927 operating
partnership minority common units outstanding.
We have 220 employees, including management, accounting, legal,
acquisitions, development, property management, leasing, maintenance and
administrative personnel. Our executive offices are located at 301 South College
Street, Suite 3850, Charlotte, North Carolina 28202-6024, and our telephone
number is 704/944-0100.
In addition to this Annual Report, we file quarterly and special
reports, proxy statements and other information with the SEC. All documents that
we file with the SEC are available free of charge on our corporate website,
which is www.bnp-residential.com. You may also read and copy any document that
we file at the public reference facilities of the SEC at 450 Fifth Street NW,
Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further
information about the public reference facilities. These documents also may be
accessed through the SEC's electronic data gathering, analysis and retrieval
system ("EDGAR") via electronic means, including the SEC's home page on the
Internet (http://www.sec.gov). In addition, since some of our securities are
listed on the American Stock Exchange, you can read our SEC filings at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
History and Development of BNP Residential Properties, Inc.
The company was originally incorporated in the state of Delaware in
1987. Beginning in 1987, we elected to be taxed as a REIT under the Internal
Revenue Code. As such, we generally are not, and will not be, subject to federal
or state income taxes on net income. As a REIT, we are subject to a number of
organizational and operational requirements, including a requirement that we
currently distribute at least 90% of our REIT taxable income as dividends.
In 1987, we purchased 47 existing restaurant properties located in
North Carolina and Virginia for an aggregate purchase price of $43.2 million.
From 1987 through 1992, our assets consisted primarily of
3
these 47 restaurant properties. During this period we operated as an externally
administered and externally managed REIT. We leased the restaurants on a
triple-net basis to Boddie-Noell Enterprises, Inc. ("Enterprises"), a Hardee's
franchisee, under a master lease. A master lease is a single lease that covers
multiple properties, while a triple-net lease is one where the lessee pays all
operating expenses, maintenance, property insurance and real estate taxes.
In 1993, we began to change our focus from restaurant properties to
apartment communities, with the objective of increasing funds from operations
and enhancing shareholder value. In 1994 we acquired BT Venture Corporation, an
integrated real estate company specializing in the management, development and
acquisition of apartment properties, and began operating as a self-administered
and self-managed REIT.
In 1997, we reincorporated in the state of Maryland and reorganized to
our present UpREIT structure. Through our UpREIT structure, we can acquire
properties in exchange for operating partnership units and trigger no immediate
tax obligation for certain sellers. We believe that our conversion to an UpREIT
enables us to acquire properties not otherwise available or at lower prices
because of the tax advantages to certain property sellers of receiving limited
partnership interests instead of cash as consideration. Minority unitholders
will generally be able to redeem their units for cash or, at our option as
general partner, for shares of common stock of the company on a one-for-one
basis. Distributions of cash from the operating partnership are allocated
between the REIT and the minority unitholders based on their respective unit
ownership.
In December 2001, our Board of Directors authorized the issuance of
Series B Cumulative Convertible Preferred Stock. Between 2001 and 2003, we
issued a total of 909,090 shares of this preferred stock for proceeds of $10
million.
From 1993 through 2003, we acquired 21 apartment properties through a
combination of cash purchases, assumption of long-term debt, and issuance of
operating partnership units. (We combined two of these properties to operate as
a single apartment community.)
To date we have sold seven restaurants to Enterprises, the lessee,
under an agreement that allowed Enterprises to close up to seven restaurants and
buy them back for no less than net carrying value.
Recent Developments
During 2004, we raised $30 million of new equity through the issuance
of 2.6 million shares of common stock to a number of institutional investors and
mutual funds.
We continued to add to and improve our portfolio of apartment
properties with five acquisitions in 2004. Three of these acquisitions were
direct purchases (Carriage Club Apartments in Mooresville, North Carolina, the
Fairington Apartments in Charlotte, North Carolina, and Bridges at Southpoint
Apartments in Durham, North Carolina) and two were made through the issuance of
operating partnership units (Bridges at Wind River Apartments in Durham, North
Carolina, and Savannah Shores Apartments in Myrtle Beach, South Carolina). With
these acquisitions, we owned 25 apartment communities at December 31, 2004.
In December 2004, we entered into agreements to acquire a portfolio of
four apartment communities containing a total of 1,086 apartment units. We
expect to complete these acquisitions by the end of March 2005. We currently
manage these apartment communities on a contract basis.
In January 2005, we acquired Boddie Investment Company through a
merger. As a result of this acquisition, we have assumed the role of general
partner and acquired certain economic interests in three limited partnerships
(50% interest in Marina Shores Associates One Limited Partnership, 1% interest
in The Villages of Chapel Hill Limited Partnership, and 1% interest in The
Villages of Chapel Hill - Phase 5 Limited Partnership). Prior to this
acquisition, we managed the apartment communities owned by these partnerships on
a contract basis; we will continue to manage these properties.
4
Business Strategy
Our principal investment objectives are to provide our shareholders
with current income and to increase the value of the company's common stock. We
focus on increasing long-term growth in funds from operations and funds
available for distribution per share, and on increasing the value of our
portfolio through effective management, growth, financing and investment
strategies. We expect to implement our strategies primarily through the
acquisition, operation, leasing and management of apartment communities.
We seek to acquire apartment properties in the southeastern United
States. We focus on markets that exhibit substantial economic growth and an
expanding job base that provide opportunities for us to quickly build a
significant market presence. Through our UpREIT structure, we have the ability
to acquire apartment communities by issuing operating partnership units in
tax-deferred exchanges with owners of such properties. We expect that we will
finance future acquisitions of apartment communities with operating partnership
units as well as loans and funds from additional offerings of common stock,
preferred stock or joint venture arrangements.
We will selectively consider opportunities to add additional units to
existing communities, to acquire and rehabilitate older apartment communities,
and to develop new apartment communities. Members of our management team have
directed over $115 million of development or redevelopment projects, including
13 apartment communities containing over 2,500 apartment units. This development
and redevelopment experience will enable us to build additional apartment
communities and to rehabilitate existing communities when economic conditions
and available capital make such opportunities attractive.
We strongly emphasize on-site property management. We seek
opportunities and have developed internal programs to increase average occupancy
rates, reduce resident turnover, raise rents and control costs. On-site
community managers report directly to regional managers who are locally based.
This flat organization provides for efficient staffing levels, reduces overhead
expenses, and enables us to respond to the needs of residents and on-site
employees. In an effort to reduce long-term operating costs, we regularly review
each apartment community and promptly attend to maintenance and recurring
capital needs. Our employees supervise all renovation and repair activities,
which are generally completed by outside contractors.
We continue to seek additional sources of revenue at our existing
apartment communities. These include water submetering and marketing of cable
television, high-speed Internet service and telephone services.
ITEM 2. PROPERTIES
Apartment Communities
Through the operating partnership, we own and operate 25 apartment
communities consisting of 6,113 apartment units. For the fourth quarter of 2004,
our average economic occupancy rate was 93.2%, and our average monthly revenue
per occupied unit was $744. The average age of the apartment communities is 11.9
years. Our apartment communities are generally wood framed, two- and three-story
buildings, with exterior entrances, individually metered gas and electric
service, submetered water service, and individual heating and cooling systems.
Our apartment units are comprised of 38% one-bedroom units, 54%
two-bedroom units, and 8% three-bedroom units. The units average 1,007 square
feet in area and are well equipped with modern appliances and other
conveniences. Our communities generally include swimming pools, tennis courts
and clubrooms, and most have exercise facilities.
As of December 31, 2004, our total investment, on a historical cost
basis, in our 25 apartment communities was $389.1 million, and the net carrying
value of our 25 apartment communities was $334.6
5
million (an average of $13.4 million per property). The apartment properties are
held subject to loans, discussed in the notes to the financial statements.
The table on page 8 summarizes information about each of our apartment
communities.
Restaurant Properties
We lease the restaurant properties on a triple-net basis to Enterprises
under a master lease. The master lease, as amended in 1995, has a primary term
expiring in December 2007, but grants Enterprises three five-year renewal
options. Enterprises pays annual rent equal to the greater of the specified
minimum rent or 9.875% of food sales from the restaurants. Under certain
conditions, and subject to our approval, Enterprises has the right to substitute
another restaurant property for a property covered by the lease. Assuming
renewal of the lease, after December 31, 2007, Enterprises has the right to
terminate the lease on up to five restaurant properties per year by offering to
purchase them under specified terms.
In addition, we entered into a separate agreement that allowed
Enterprises to purchase, under specified terms, up to seven restaurant
properties deemed non-economic for no less than net carrying value. The original
lease was for 47 restaurant properties; since 1999, we have sold seven
restaurants deemed non-economic to Enterprises for total proceeds of $4,373,000,
which equaled the net carrying value of the properties.
The minimum rent on the remaining 40 restaurants is $3.8 million per
year.
The average acquisition cost of the original 47 restaurant properties
was $920,000 per property. The net carrying value of the 40 restaurant
properties held at December 31, 2004, was $25.5 million (an average of $637,000
per property). The restaurant properties are held subject to a line of credit
loan, discussed in the notes to the financial statements.
The restaurant properties are operated by Enterprises, which is
responsible for all aspects of the operation, maintenance and upkeep of the
properties. In addition, Enterprises is responsible for the cost of any
improvement, expansion, remodeling or replacement required to keep the
properties competitive or in conformity with applicable codes and standards.
Thirty-nine of the restaurant properties are operated as Hardee's
restaurants pursuant to franchise agreements with Hardee's Food Systems, Inc.
One property is operated as a "BBQ and Ribs" restaurant. Enterprises converted
this property to the BBQ and Ribs concept in 2002 and paid for the entire cost
of the conversion, approximately $500,000. There is no applicable franchise
agreement for the converted restaurant, as Enterprises owns the BBQ and Ribs
concept.
Each of the restaurant properties consists of a one-story brick, stucco
or wood building that embodies a contemporary style with substantial plate glass
areas. The buildings average 3,400 square feet and are located on sites
averaging 1.2 acres. The buildings are suitable for conversion to a number of
uses, but the exteriors would have to be substantially modified prior to their
use as restaurants of another concept or for non-restaurant applications.
The locations of our restaurant properties are listed on page 9 of this
Annual Report.
Property Insurance
We carry insurance coverage on our properties of types and in amounts
that we believe are in line with coverage customarily obtained by owners of
similar properties. In addition, properties that we manage but do not own are
covered by insurance policies under which we are a named insured. Our restaurant
properties are subject to an indemnification agreement whereby Enterprises, the
lessee, is responsible for all claims, including those relating to environmental
matters, arising from a restaurant property. Enterprises is
6
required to provide insurance, which identifies the company as a named insured,
on each restaurant property.
We believe all of our properties are adequately insured, including
insurance for acts of terrorism at all of our apartment properties. There are
types of losses, however, such as from wars or catastrophic acts of nature, for
which we cannot obtain insurance at all or at a reasonable cost. In the event of
an uninsured loss or a loss in excess of our insurance limits, we could lose
both the revenues generated from the affected property and the capital we have
invested in the affected property. It is possible, depending on the specific
circumstances of the affected property, that we could be liable for any mortgage
indebtedness or other obligations related to the property. Any such loss could
materially and adversely affect our business and financial condition and results
of operations.
7
INFORMATION ABOUT APARTMENT COMMUNITIES
Total Apartment Weighted
No. of Rentable Unit Type Average
Apt. Year Date Total Area 1 2 3 Apt. Size
Community Location Units Compl Acquired Acreage (Sq. Ft.) BR BR BR (Sq. Ft.)
- ------------------- ------------------ ------ -------- ---------- --------- ---------- ----- ----- ----- ----------
Abbington Place Greensboro, NC 360 1997 12/97 37.4 400,728 96 216 48 1,113
Allerton Place Greensboro, NC 228 1998 9/98 19.2 241,842 54 126 48 1,061
Barrington Place Charlotte, NC 348 1999 5/02 29.3 386,964 132 192 24 1,112
Brookford Place Winston-Salem, NC 108 1998 5/02 6.3 103,392 36 72 - 961
Carriage Club Mooresville, NC 268 2000 6/04 22.5 253,114 110 136 22 944
Chason Ridge Fayetteville, NC 252 1994 1/99 29.1 246,886 56 164 32 980
Fairington Charlotte, NC 250 1981 8/04 32.0 267,300 108 106 36 1,069
Harrington Charlotte, NC 288 1997 8/03 25.0 321,190 103 140 45 1,115
Harris Hill Charlotte, NC 184 1988 12/94 18.4 167,920 67 117 - 912
Latitudes Virginia Beach, VA 448 1989 10/94 24.9 358,700 269 159 20 800
Madison Hall Clemmons, NC 128 1997 8/98 10.5 110,352 42 86 - 862
Marina Waterfront Cornelius, NC 290 1994 9/02 33.6 254,356 128 126 36 877
Oak Hollow Cary, NC 221 1983 7/98 30.0 215,960 56 165 - 982
Oak Hollow Ph 2 Cary, NC 240 1986 12/00 26.8 220,840 160 80 - 920
Oakbrook Charlotte, NC 162 1985 6/94 16.4 178,668 32 120 10 1,100
Paces Commons Charlotte, NC 336 1988 6/93 24.8 322,046 154 142 40 958
Paces Village Greensboro, NC 198 1988 4/96 15.5 167,886 88 110 - 848
Pepperstone Greensboro, NC 108 1992 12/97 10.1 113,076 - 108 - 1,047
Savannah Place Winston-Salem, NC 172 1991 12/97 15.4 182,196 44 128 - 1,059
Savannah Shores Myrtle Beach, SC 198 1998 7/04 13.1 215,418 84 108 6 1,088
Southpoint Durham, NC 192 1987 9.04 14.5 176,352 132 60 - 919
Summerlyn Place Burlington, NC 140 1998 9/98 12.1 156,756 48 84 8 1,120
The Place Greenville, SC 144 1985 3/03 10.1 158,264 40 104 - 1,106
Waterford Place Greensboro, NC 240 1997 12/97 20.6 277,296 72 120 48 1,155
Woods Edge Durham, NC 264 1985 6/98 32.4 268,620 66 198 - 1,018
Wind River Durham, NC 346 2000 5/04 29.4 391,120 128 153 65 1,130
Average
Average Economic Monthly Revenue
Occupancy Percent per Occupied Unit
(1)
Community Location 2004 2003 2002 2004 2003 2002
- ------------------- ------------------ - ------ ------- ------ ------ ------- ------
Abbington Place Greensboro, NC 94.2 90.9 93.2 $760 $764 $770
Allerton Place Greensboro, NC 94.8 91.4 92.6 790 745 769
Barrington Place Charlotte, NC 94.4 94.3 91.9 756 748 782
Brookford Place Winston-Salem, NC 97.0 95.1 93.4 679 667 690
Carriage Club Mooresville, NC 95.3 - - 743 - -
Chason Ridge Fayetteville, NC 96.4 96.6 96.1 797 753 717
Fairington Charlotte, NC 93.7 - - 708 - -
Harrington Charlotte, NC 93.8 92.0 - 747 739 -
Harris Hill Charlotte, NC 95.0 93.3 92.1 635 663 684
Latitudes Virginia Beach, VA 97.5 96.5 97.2 919 873 817
Madison Hall Clemmons, NC 94.0 94.2 93.9 600 578 598
Marina Waterfront Cornelius, NC 94.6 91.0 89.4 772 750 801
Oak Hollow Cary, NC 93.9 90.0 89.3 616 617 650
Oak Hollow Ph 2 Cary, NC 92.0 89.1 88.2 604 599 606
Oakbrook Charlotte, NC 94.6 91.9 90.6 698 709 763
Paces Commons Charlotte, NC 95.2 92.2 91.0 632 660 668
Paces Village Greensboro, NC 94.9 94.3 89.0 675 654 667
Pepperstone Greensboro, NC 96.3 93.8 95.4 668 655 681
Savannah Place Winston-Salem, NC 93.0 93.4 93.1 716 699 714
Savannah Shores Myrtle Beach, SC 92.7 - - 798 - -
Southpoint Durham, NC 91.3 - - 690 - -
Summerlyn Place Burlington, NC 94.3 93.5 94.5 826 832 802
The Place Greenville, SC 95.6 91.1 - 559 569 -
Waterford Place Greensboro, NC 95.1 91.8 94.7 883 852 850
Woods Edge Durham, NC 93.6 92.7 92.3 705 722 754
Wind River Durham, NC 86.1 - - 820 - -
(1) Average economic occupancy is calculated as gross potential rent less vacancy, divided by gross potential
rent.
8
RESTAURANT PROPERTIES LOCATIONS
Virginia
(27 properties)
Ashland
106 North Washington
Blackstone
North Main Street
Bluefield
701 South College Street
Chester
12401 Jefferson Davis Hwy.
Clarksville
916 Virginia Avenue
Clintwood
U.S. Highway 83
Dublin
208 College Avenue
Franklin
105 North Mechanic Street
Galax
425 Main Street
Hopewell
East City Point Road
Lebanon
Route 1
Lynchburg
8411 Timberlake Road
2231 Langhorne road
Norfolk
3908 Princess Anne Road
Orange
200 Madison Road
Petersburg
1865 Crater Road, South
Richmond
921 Myers Street
6850 Forest Hill Avenue
7917 Midlothian Pike
Roanoke
4407 Abenham Avenue SW
3401 Hollins Road
Rocky Mount
322 Tanyard Road, NE
Smithfield
Smithfield Shopping Center
Verona
160 East Route 612
Virginia Beach
4261 Holland Road
1951 Lynnhaven Parkway
Wise
US Highway 23, Business
North Carolina
(13 properties)
Burlington
2712 Alamance Road
Denver
Route 1
Eden
202 West Kings Highway
Fayetteville
3505 Ramsey Street
360 North Eastern Blvd.
Hillsborough
380 S. Churton Street
Kinston
200 West Vernon Street
1404 Richlands Street
Newton
South Ashe & North "D"
Siler City*
Chatham Shopping Center
Spring Lake
400 South Main Street
Thomasville
1116 East Main Street
Randolph Street
*operated as a "BBQ & Ribs." All other sites are operated as "Hardee's."
9
ITEM 3. LEGAL PROCEEDINGS
We are a party to a variety of legal proceedings arising in the
ordinary course of business. We do not expect any of these matters, individually
or in aggregate, to have a material adverse impact on the company.
In the event a claim was successful, we believe that we are adequately
covered by insurance and indemnification agreements. We have insurance coverage
on each of our apartment communities. Our restaurant properties are subject to
an indemnification agreement whereby Enterprises, the lessee, is responsible for
all claims arising from a restaurant property. In addition, Enterprises is
required to provide insurance, which identifies the company as a named insured,
on each restaurant property. Each apartment property that we manage but do not
own is covered by an insurance policy under which we are a named insured.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2004.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
We have set forth below a listing and brief biography of each of the
executive officers of the company.
Name Age Position Officer Since
- ------------------------------ ------- --------------------------------------------------- ------------------
Philip S. Payne 53 Chairman of the Board of Directors, October 1994
Chief Financial Officer
D. Scott Wilkerson 47 Director, President, Chief Executive Officer October 1994
Eric S. Rohm 35 Vice President, Secretary, General Counsel December 2002
Pamela B. Bruno 51 Vice President, Treasurer, Chief October 1994
Accounting Officer, Assistant Secretary
Messrs. Payne and Wilkerson are also members of our Board of Directors.
Brief biographies of Messrs. Payne and Wilkerson are included at Part III, Item
10. Directors and Officers of the Registrant in this Annual Report. Biographical
information for our other executive officers follows.
Eric S. Rohm - Vice President, Secretary, General Counsel. Mr. Rohm
joined the company in December 2002 as Vice President and General Counsel, and
was named Secretary in May 2004. Prior to joining the company, Mr. Rohm was a
partner in the Real Estate Department of Kennedy Covington Lobdell & Hickman,
LLP in Charlotte, North Carolina, where he practiced law from 1994 to 2002. Mr.
Rohm received an AB degree in government from Georgetown University in 1991, and
his JD degree from The Ohio State University College of Law in 1994. Mr. Rohm is
licensed to practice law in the State of North Carolina and is a member of the
North Carolina State Bar, the North Carolina Bar Association, and the
Association of Corporate Counsel.
Pamela B. Bruno - Vice President, Treasurer, Chief Accounting Officer,
Assistant Secretary. Ms. Bruno joined BT Venture Corporation in 1993 as
Controller and became our Vice President and Chief Accounting Officer in October
1994. She was named Treasurer in May 2004. From 1984 to 1993, Ms. Bruno was with
Ernst & Young LLP, in Charlotte, North Carolina, and Anchorage, Alaska, serving
as audit manager from 1987 through 1993. She received a BS degree in accounting
from the University of North Carolina at Charlotte in 1984. She is a licensed
certified public accountant and is a member of the North Carolina Association of
Certified Public Accountants.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Our common stock is traded on the American Stock Exchange under the
symbol "BNP." There were 1,300 common shareholders of record and one preferred
shareholder on February 23, 2005. The table below shows, for the periods
indicated, the range of high, low, and closing sale prices of our common stock
as reported by the American Stock Exchange and the dividends paid per share. As
of February 23, 2005, the closing price of the company's common stock was $16.13
per share.
Dividends
Stock Price Paid
High Low Close Per Share
----------------- ----------------- ----------------- -----------------
2004:
Fourth quarter $ 16.20 $ 13.62 $ 16.10 $ 0.25
Third quarter 13.90 12.80 13.68 0.25
Second quarter 13.24 12.35 13.14 0.25
First quarter 13.35 11.50 13.17 0.25
2003:
Fourth quarter 11.75 10.41 11.61 0.25
Third quarter 11.50 10.26 10.55 0.25
Second quarter 11.00 9.68 10.80 0.25
First quarter 10.79 9.00 9.70 0.25
We have paid regular quarterly dividends to holders of our common stock
since our inception, and we intend to continue to do so. We anticipate that we
will pay all dividends from current funds from operations. We expect
distributions to substantially exceed the 90% annual distribution requirement
for a REIT.
We have a dividend reinvestment plan that is available to all
shareholders of record. Under this plan, as amended in February 2004, the plan
administrator, Wachovia Bank, N. A., reinvests dividends on behalf of plan
participants in our common stock. Wachovia will either issue new shares or
purchase shares on the open market, at our direction. In addition, shareholders
who participate in the plan may elect to make direct cash investments or
supplement their reinvestment program with additional cash investments of any
amount from $25 to $25,000 per quarter. Participants do not pay any commissions
on stock purchased under the plan.
Sales of Unregistered Securities
On January 26, 2005, we acquired Boddie Investment Company ("BIC")
through a merger. Because of this merger, we succeeded BIC as the general
partner of, and acquired an economic interest in, three limited partnerships. As
consideration in the merger, we privately issued 508,578 shares of common stock
pursuant to the exemption provided by Section 4(2) of the Securities Act. We
issued those shares, which had a value on that date of $16.10 per share, to B.
Mayo Boddie and Nicholas B. Boddie. Upon closing the merger, we canceled 72,399
shares of our common stock that BIC held immediately before the merger. The
value of the transaction was $8.2 million based on the $16.10 per share value.
We have included information regarding securities authorized for
issuance under equity compensation plans in Part III, Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters of this Annual Report.
11
ITEM 6. SELECTED FINANCIAL DATA
We present below selected financial information. We encourage you to
read the financial statements and the notes accompanying the financial
statements in this Annual Report. This information is not intended to be a
replacement for the financial statements.
This financial information includes all apartment communities and
restaurant properties that we owned for each period shown.
Year ended December 31
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Operating data: (1)
Revenue:
Apartment rental income $ 45,808 $ 37,475 $ 32,890 $ 30,867 $ 29,269
Restaurant rental income 3,830 3,908 4,021 4,053 4,162
Other income 1,227 1,277 1,253 1,342 427
------------- -------------- ------------- -------------- -------------
Total revenue 50,865 42,660 38,164 36,262 33,858
Expenses:
Apartment operations 18,563 15,458 12,682 11,182 9,766
Administrative costs 4,520 3,907 3,358 2,956 2,391
Interest 14,608 13,000 11,452 11,100 11,151
Depreciation 11,660 10,040 8,794 7,828 7,156
Amortization (1) 375 322 256 596 579
Write-off of unamortized loan
costs at refinance 85 - 95 129 -
Costs of terminated
equity transaction - - - - 237
------------- -------------- ------------- -------------- -------------
Total expenses 49,810 42,727 36,637 33,792 31,280
------------- -------------- ------------- -------------- -------------
Income (loss) before
minority interest 1,055 (66) 1,527 2,470 2,578
Minority interest in
Operating Partnership 16 (174) 279 567 595
------------- -------------- ------------- -------------- -------------
Net income 1,039 107 1,248 1,902 1,983
Cumulative preferred dividend 1,000 661 323 3 -
------------- -------------- ------------- -------------- -------------
Income (loss) available to
common shareholders $ 39 $ (553) $ 925 $ 1,900 $ 1,983
============= ============== ============= ============== =============
Earnings per share,
basic and diluted -
Income (loss) available to
common shareholders $ 0.01 $ (0.09) $ 0.16 $ 0.33 $ 0.35
============= ============== ============= ============== =============
Dividends per common share $ 1.00 $ 1.00 $ 1.24 $ 1.24 $ 1.24
============= ============== ============= ============== =============
Balance Sheet data:
Real estate assets (before
accumulated depreciation)
Apartment communities $ 389,119 $ 299,661 $ 275,713 $ 221,589 $ 217,818
Restaurant properties 37,405 37,405 39,159 39,159 39,702
Real estate assets, net 360,071 281,014 265,423 219,997 224,705
Total assets 367,764 287,200 271,723 225,385 230,691
Total debt 286,425 229,714 211,585 162,330 163,612
Minority interest 14,394 15,895 17,947 18,174 19,737
Shareholders' equity 62,996 38,733 39,271 42,034 44,548
12
Year ended December 31
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Apartment Properties data:
Apartment communities
owned at year end 25 20 18 15 15
Apartment units owned
at year end 6,113 4,859 4,427 3,681 3,680
Average apartment
economic occupancy 94.4% 92.8% 92.8% 93.9% 95.9%
Average monthly revenue
per occupied unit $ 737 $ 725 $ 733 $ 744 $ 737
Other data:
Earnings before interest, taxes,
depreciation and
amortization (2) $ 27,783 $ 23,295 $ 22,124 $ 22,123 $ 21,463
Funds from operations (2) 11,447 9,313 9,998 10,702 10,139
Funds available
for distribution (2) 9,988 7,904 8,865 9,696 9,243
Net cash provided by
(used in):
Operating activities (3) $ 12,677 $ 9,594 $ 10,118 $ 10,729 $ 10,854
Investing activities (3) (52,848) (25,275) (32,669) (2,401) (13,407)
Financing activities 40,123 15,361 22,018 (7,966) 3,177
Weighted average number of
shares and units outstanding:
Preferred B shares 909 601 293 2 -
Common shares 7,617 5,868 5,787 5,717 5,708
Operating partnership
minority units 1,856 1,843 1,786 1,706 1,711
(1) We adopted Statement of Financial Accounting Standards ("FAS") No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. After
December 31, 2001, we no longer amortize the intangible asset related to
our 1994 acquisition of management operations. Amortization expense
related to this intangible asset was $406,000 per year in 2001 and 2000.
(2) Earnings before interest, taxes, depreciation and amortization, funds from
operations, and funds available for distribution amounts reflect
measurements for the operating partnership (before deduction for minority
interest).
Earnings before interest, taxes, depreciation and amortization is
frequently referred to as "EBITDA." This measurement is derived directly
from amounts included in the Statement of Operations. We consider EBITDA
to be a useful measurement of operations performance before the impact of
financial structure and significant non-cash charges.
We calculated EBITDA as follows (all amounts in thousands):
13
Year ended December 31
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
Income (loss) before minority
interest $ 1,055 $ (66) $ 1,527 $ 2,470 $ 2,578
Interest 14,608 13,000 11,452 11,100 11,151
Depreciation 11,660 10,040 8,794 7,828 7,156
Amortization 375 322 256 596 579
Write-off of unamortized
loan costs 85 - 95 129 -
------------- -------------- ------------- -------------- -------------
Earnings before interest,
taxes, depreciation and
amortization $ 27,783 $ 23,295 $ 22,124 $ 22,123 $ 21,463
============= ============== ============= ============== =============
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 from operating, investing or financing activities (as defined by
generally accepted accounting principals) 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.
For a reconciliation of FFO and FAD to net (loss) income before minority
interest, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Funds From Operations."
(3) Beginning in 2004, we have presented operating activities in our
consolidated statements of cash flows using the direct method, which
provides cash flow amounts corresponding directly to lines in our
statements of operations. We have adjusted the 2003 and 2002 comparative
amounts in our
14
consolidated statements of cash flows to conform to the 2004 presentation
by reclassifying the net cash flows related to funding of lender reserves
for apartment property replacements from operating activities to investing
activities. This reclassification has no impact on the net change in cash
and cash equivalents for 2003 and 2002, only in the subtotals for net cash
provided by operating activities and net cash used in investing
activities. The net effect on net cash provided by operating activities is
a decrease of $213,000 in 2003, and an increase of $133,000 in 2002, from
amounts previously reported.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains forward-looking statements. 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.
We cannot guaranty that we will achieve the plans, intentions or
expectations suggested by these forward-looking statements, even though we
believe them to be reasonable. 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 apartments
or 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 be unable 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 be unable to complete anticipated acquisitions;
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 our expectations;
o we may be unable 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 revise these
forward-looking statements if future events or circumstances render them
inaccurate.
You should read this discussion in conjunction with the financial
statements and notes thereto included in this Annual Report.
Overview
2004 was a year of significant growth for us. During the year we
acquired five apartment communities that increased our apartment holdings by
26%, completed two equity offerings in which we raised approximately $30
million, and consummated seven financing and four refinancing transactions for
various apartment properties. As a result of these activities, we saw
significant increases in revenue, expenses, debt and equity.
15
For the year, total revenue increased by $8.2 million (19.2%) over
2003. This increase was attributable to an $8.3 million (22.2%) increase in
apartment rental income in 2004. While the majority of the increase in apartment
rental income ($6.9 million) was the result of five apartment acquisitions in
2004 and two apartment acquisitions in 2003, significant improvement in
apartment occupancy and rental rates in 2004 made a meaningful contribution
($1.4 million) to the increase. On a same units basis (for the 4,427 units that
we owned throughout 2004 and 2003), apartment rental income increased by 4.0%.
Average economic occupancy for these units was 94.8% in 2004 as compared to
92.9% in 2003, and average monthly revenue per occupied unit was $739 in 2004 as
compared to $728 in 2003.
The increase in apartment rental revenue was partially offset by a 2.0%
($0.1 million) decline in restaurant rental income due to the sale of two
restaurant properties in 2003. This decline from the sale of the two restaurant
properties actually masked continued improvement in food sales at our restaurant
properties.
In an attempt to reverse years of declining sales, Hardee's, the
concept at 39 of our 40 restaurant properties, introduced the "Thick-Burger"
product line in 2003. Almost immediately we began to see significant sales
increases with same store sales at our restaurant properties increasing by 2.4%
in 2003. These increases continued into 2004 with same store sales for 2004
improving by 8.5% over 2003 levels. The rent we receive from the restaurants is
the greater of percentage rent (9.875% of annual food sales) or a set minimum
rent (currently $3.8 million per annum). We received the minimum rent in 2004.
For us to receive percentage rent in 2005, same store sales would have to
increase by 1.3%. Given the current state of flux in the fast food industry, we
are uncomfortable making a prediction or relying on the forecasts of others as
to future sales trends for Hardee's. For this reason, we have based our plans
and expectations on continuing to receive the minimum rent in 2005.
The growth in the size of our apartment portfolio led to significant
growth in total expenses (16.6%) with large increases in apartment operations
(20.1%), apartment administration (29.2%), interest expense (12.4%), and
depreciation (16.1%). Interestingly, on a same units basis, apartment operating
expense for 2004 increased by only 0.3%. It is also interesting to note that as
a percentage of apartment rental income, apartment operating expense decreased
from 41.2% in 2003 to 40.5% in 2004.
The positive impact of the new apartment communities and improving
apartment operations were reflected in positive corporate operating results. Net
income (after the minority interest in the operating partnership net income or
loss, and before deduction for cumulative preferred dividend) increased to
$1,039,000 in 2004 from $107,000 in 2003, while funds from operations in 2004
increased by 22.9% compared to 2003.
After several difficult years, we began to see significant improvement
in our apartment operations in mid-2003. This improvement continued throughout
2004 with improving occupancies and improving rental rates. With economic
occupancy for all apartments for 2004 averaging 94.4% it will be difficult for
us to make significant gains in occupancy going forward, therefore our emphasis
will turn to increasing rental rates. While we have some concerns, we are
confident that we are in good position to enjoy continued improvement in our
apartment operations. This confidence is based on a number of factors:
o Most important among these is our emphasis on middle market apartments.
We believe there is an increasing need for high quality, modestly
priced apartments that are well located, extremely well maintained and
professionally managed. At an average base rental rate of slightly more
than $700 per month, we provide high quality housing for firefighters,
policemen, teachers, office workers, store clerks, young couples and an
increasing number or retirees. Our combination of affordability with
quality gives us a wide group of potential residents.
o Our properties are in good markets with excellent locations within
those markets. We operate in Virginia, North Carolina and South
Carolina. While, like much of the country, they have displayed some
weakness over the past few years, we are quite positive about the
long-term economic and demographic outlook for these states and the
markets within them in which we operate.
16
o Our properties are in very good physical condition. An essential part
of our strategy is the maintenance of our properties. We do not develop
new properties, but believe we can deliver a higher quality product at
a more reasonable price by maintaining existing apartment properties.
Maintenance is very important to us; not only because we believe it is
essential to preserving and enhancing the value of our investment, but
also because we believe it is essential to our marketing efforts to
attract residents. As a result, our properties are in very good
physical condition.
o We are well positioned to compete on price with single-family homes and
new apartment construction. Our two biggest sources of competition for
residents are single-family homes and new apartment construction. The
advent of no down payment single-family home mortgages combined with
historic low interest rates has posed a challenge for us for the past
few years. However, significant increases in construction costs and
rising home mortgage rates appear to be resolving this issue. The same
is true for new apartment construction, as rising construction costs
are making it more difficult to build new apartments of similar size,
quality and location as ours that can be profitably rented in the $700
per month range.
All in all, we are optimistic about the long-term outlook for both our
apartment markets and our apartment operations. We do, however, expect early
2005 to continue to be somewhat weak, with an expectation that apartment
performance will strengthen as the year progresses. One area of concern is
interest rates. As we enter 2005, we have $286 million of debt. While we have
attempted to mitigate interest rate risk somewhat by having approximately 75% of
this amount be at fixed rates, the balance carries a floating rate. Based on the
amounts in place at 2004 year-end a 1% rise in average annual rates for the full
year would increase our interest expense by approximately $720,000. In theory,
rising interest rates correlate with improving apartment operating fundamentals,
but whether this will in fact be the case or whether it will match in timing and
amount remains to be seen. We intend to monitor the situation and may adjust the
amount of debt or the allocation of debt between fixed and variable rates as the
year progresses.
Critical Accounting Policies
Our significant accounting policies are identified and discussed in the
notes to our financial statements included in this Annual Report. Those policies
that may be of particular interest to readers of this Annual Report are further
discussed below.
Capital expenditures and depreciation
In general, for the 16 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.
For apartment properties acquired after 2001, we performed detailed
analyses of components of the real estate assets acquired. For these properties,
we assigned estimated useful lives as follows: base building structure, 43-60
years; land improvements, 7-20 years; short-lived building components, 5-20
years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition of the related apartment
property. 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
17
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 2004 totaled
$5.2 million, including $1.1 million for acquisition improvements, $1.6 million
for additions and betterments, $0.5 million for reconstruction and replacement
of casualty losses, and $1.9 million in recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during 2004
totaled $6.6 million, including $2.5 million in compensation of service staff
and $4.1 million in payments for materials and contracted services.
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
Impairment of long-lived assets
In accordance with FAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," we periodically review our real estate assets to
determine whether our carrying amount will be recovered from their undiscounted
future operating cash flows. If the carrying value were to be greater than the
undiscounted future operating cash flows, we would recognize an impairment loss
to the extent the carrying amount is not recoverable. Our estimates of the
undiscounted future operating cash flows expected to be generated are based on a
number of assumptions that are subject to economic and market uncertainties,
including, among others, demand for apartment units, competition for tenants,
changes in market rental rates, and costs to operate each property. As these
factors are difficult to predict and are subject to future events that may alter
our assumptions, the undiscounted future operating cash flows that we estimate
in our impairment analyses may not be achieved, and it is possible that we could
be required to recognize impairment losses on our properties at some point in
the future.
Valuation of leases in place at property acquisitions
We calculate an estimate of the value of leases in place at the dates
of property acquisitions to determine if we should allocate a portion of the
purchase price to an intangible asset for the value of these leases. In
preparing this calculation, we consider the estimated costs to make an apartment
unit rent ready (frequently called turnover costs), the estimated costs and lost
income associated with executing a new lease on an apartment unit, and the
remaining terms of leases in place, and we compare rental rates on leases in
place to our estimate of prevailing market rates in the neighborhood of the
acquired property.
Based on our analyses for the seven apartment properties that we
acquired in 2004 and 2003, we determined that the net value of leases in place
at the dates of acquisition was insignificant to the acquisition costs, and we
did not record any intangible asset for leases in place. This result is
primarily due to the relatively short-term nature of apartment leases, the
regular pattern of turnover of apartment leases, and the relatively gradual
movement of prevailing rental rates in the respective neighborhoods. We plan to
prepare similar calculations in conjunction with future property acquisitions.
Revenue recognition
We record rental and other income monthly as it is earned. We record
rental payments that we receive prior to the first of a given month as prepaid
rent. We hold tenant security deposits in trust in bank accounts separate from
operating cash (these amounts are included in other current assets on our
balance sheet), and we record a corresponding liability for security deposits on
our balance sheet.
We amortize any cash concessions given at the inception of an apartment
lease over the approximate life of the lease, which is generally one year or
less. In general, cash concessions range from $100 to $300 and are taken by
residents during the first two months of the lease.
18
Results of Operations
2004 compared to 2003
Revenues
Revenues in 2004 totaled $50.9 million, an increase of 19.2% compared
to 2003. Apartment related income (apartment rental income plus income from
apartment management and investment activities) accounted for 92.5% of our total
revenue in 2004, compared to 90.8% in 2003.
Apartment rental income in 2004 totaled $45.8 million, an increase of
22.2%, or $8.3 million, compared to 2003. $6.9 million of this increase is
attributable to rental income at seven apartment communities that we acquired
during 2004 and 2003. On a same-units basis (for the 4,427 units that we owned
throughout all of both 2004 and 2003), apartment rental income increased by $1.4
million, or 4.0%, compared to 2003.
On a same-units basis, average economic occupancy was 94.8% in 2004
compared to 92.9% in 2003, and average monthly revenue per occupied unit was
$739 in 2004 compared to $728 in 2003. In 2004, for all apartment units, average
economic occupancy was 94.4%, and average revenue per occupied unit was $737.
Restaurant rental income in 2004 totaled $3.8 million, a decline of
2.0% compared to 2003. The decrease in restaurant rental income is due to the
sale of two restaurant properties in 2003. We received the minimum rent
specified in the lease agreement throughout both years. Under our master lease
with Boddie-Noell Enterprises, restaurant rental income payments are the greater
of specific minimum rent or 9.875% of food sales. Minimum rent is set at
approximately $8,000 per month, or $96,000 per year, per restaurant property. We
currently hold 40 restaurant properties under this lease, and minimum rent is
currently set at $319,000 per month, or $3.8 million per year.
Same-store sales (for the 40 restaurants that were open throughout all
of both 2004 and 2003) increased by 8.5% in 2004 compared to 2003. For the first
time in almost nine years, during the second and third quarters of 2004, sales
at our restaurant properties exceeded the threshold for percentage rent;
however, for the full 12-month period, sales fell 1.3% short of the threshold
for rent exceeding the minimum rent.
Management fee income in 2004 totaled $0.8 million, a decline of 12.8%
compared to 2003. This decrease is primarily attributable to our acquisitions of
two previously managed properties (one in August 2003, and one in July 2004). We
expect that management fee income will further decline significantly in 2005 as
a result of our anticipated acquisitions of managed properties.
During 2004, we recorded casualty gains of $269,000 related to fires
that occurred at two apartment communities - in each case, one building incurred
substantial damage. We received insurance proceeds totaling $895,000, against
which we identified and wrote off $626,000 net carrying value of assets
destroyed. Generally accepted accounting principles require us to recognize this
difference as a gain. However, we intend to reinvest all of the insurance
proceeds in replacement assets. We are fully insured for the losses, including
rent continuation insurance which covers 100% of lost rental income.
Expenses
Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, totaled $49.8 million in
2004, an increase of 16.6% compared to 2003.
Apartment operations expense includes only direct costs of on-site
operations. This line item totaled $18.6 million in 2004, an increase of 20.1%,
or $3.1 million, compared to 2003. This increase is primarily attributable to
operating expenses at seven apartment communities that we acquired during 2004
19
and 2003. On a same-units basis, apartment operations expense increased by only
0.3% in 2004 compared to 2003, reflecting higher costs for compensation, offset
by reductions in insurance, leasing and turnover costs. As a percentage of
apartment rental income, apartment operations expense decreased from 41.2% in
2003 to 40.5% in 2004.
We incur no operating expenses for restaurant properties because the
triple-net lease arrangement requires the lessee to pay virtually all costs and
expenses associated with the restaurant properties.
Apartment administration expense (the costs associated with oversight,
accounting, and support of our apartment management activities for both
properties we own and properties we manage) totaled $2.2 million in 2004, an
increase of 29.2% compared to 2003. Corporate administration expense totaled
$2.3 million in 2004, an increase of 5.2% compared to 2003. These increases are
attributable to additional corporate support staff, software and insurance
costs, as well as approximately $100,000 spent in 2004 for development of
compliance documentation required by Section 404 of the Sarbanes-Oxley Act of
2002. Going forward, we expect to incur ongoing expenses for professional
services related to compliance with Section 404 of the Sarbanes-Oxley Act of
2002.
Interest expense totaled $14.6 million in 2004, an increase of $1.6
million, or 12.4%, compared to 2003. This increase reflects the impact of a net
increase in outstanding debt of $57 million, primarily at fixed rates, in 2004,
related to apartment acquisitions. During 2004, fixed-rate debt increased by $48
million while the average rate on fixed-rate debt outstanding declined from 6.8%
to 6.4%. Variable interest rates increased by 1.3% during the last half of 2004.
Overall, weighted average interest rates were 5.7% in 2004 and 5.9% in 2003.
Depreciation expense totaled $11.7 million in 2004, an increase of $1.6
million, or 16.1%, compared to 2003. This increase is attributable to the
addition of seven apartment communities during 2004 and 2003 and the impact of
additions and replacements at other apartment communities. We generally assign
those additions and replacements shorter lives than the composite lives we
assigned at the acquisition of the assets to which the additions and
replacements relate.
Net income
Operating partnership earnings before non-cash charges for
depreciation, amortization and write-off of unamortized loan costs totaled $13.2
million in 2004, an increase of $2.9 million, or 28.0%, compared to 2003. After
including these non-cash charges, the operating partnership net income was
$1,055,000 in 2004, compared to a net loss of $66,000 in 2003.
Net income (after the minority interest in the operating partnership
net income or loss, and before deduction for cumulative preferred dividend) was
$1,039,000 in 2004, compared to $107,000 in 2003.
Because the preferred shareholder has priority over common shareholders
for receipt of dividends, we deduct the amount of net income that will be paid
to the preferred shareholder in calculating net income available to common
shareholders. 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 $1,000,000 for 2004, compared to $661,000
for 2003. The dividend on the Series B shares is $1.10 per year per share, or
$1,000,000 for the 909,090 shares currently outstanding.
Income available to common shareholders in 2004 was $39,000, or $0.01
on a diluted per share basis, compared to loss attributable to common
shareholders in 2003 of $553,000, or $0.09 on a diluted per share basis.
These favorable comparisons are primarily attributable to the positive
impact of new apartment communities and improvements in apartment operating
results.
20
2003 compared to 2002
Revenues
Revenues in 2003 totaled $42.7 million, an increase of 11.8% compared
to 2002. Apartment related income (apartment rental income plus income from
apartment management and investment activities) accounted for 90.8% of our total
revenue in 2003, compared to 89.5% in 2002.
Apartment rental income in 2003 totaled $37.5 million, an increase of
13.9%, or $4.6 million, compared to 2002. This increase is attributable to
rental income at five apartment communities that we acquired during 2003 and
2002, which offsets a slight decline at other communities. On a same-units basis
(for the 3,681 units that we owned throughout all of both 2003 and 2002),
apartment rental income declined by 0.4% in 2003 compared to 2002.
On a same-units basis, average economic occupancy was 92.9% in 2003
compared to 92.8% in 2002, and average monthly revenue per occupied unit was
$727 in 2003 compared to $730 in 2002. In 2003, average economic occupancy for
all apartments was 92.8%, and average revenue per occupied unit was $725.
Restaurant rental income in 2003 totaled $3.9 million, a decline of
2.8% compared to 2002. The decrease in restaurant rental income was due to the
sale of two restaurant properties in 2003. We received the minimum rent
specified in the lease agreement throughout both years. Same-stores sales (for
the 40 restaurants that were open throughout all of both 2003 and 2002)
increased by 2.4% in 2003 compared to 2002.
Management fee income in 2003 totaled $873,000, a decline of 20.3%
compared to 2002. This decrease is attributable to our acquisition of two
previously managed properties in May 2002, as well as the termination of
management contracts for several smaller properties in the first quarter of
2003.
Expenses
Total expenses, including non-cash charges for depreciation and
amortization, in 2003 were $42.7 million, an increase of $6.l million, or 16.6%,
compared to 2002.
Apartment operations expense totaled $15.5 million in 2003, an increase
of 21.9%, or $2.8 million, compared to 2002. This increase was primarily
attributable to the addition of five apartment communities during 2003 and 2002.
On a same-units basis, apartment operations expense increased by 4.2% in 2003
compared to 2002, reflecting higher costs for compensation, contracted services,
and turnover costs. Apartment operations expense in 2003 represented 41.2% of
related apartment rental income, compared to 38.6% in 2002.
Apartment administration expense totaled $1.7 million in 2003, an
increase of 25.4% compared to 2002. Corporate administration expense totaled
$2.2 million in 2003, an increase of 10.1% compared to 2002. These increases
reflected the impact of additional executive and corporate support staff and
related compensation and increased corporate insurance and software costs.
Interest expense totaled $13.0 million in 2003, an increase of 13.5%,
or $1.5 million, compared to 2002. This increase reflected the impact of $69
million in new debt related to apartment acquisitions since June 2002, offset by
the effect of lower interest rates on our variable-rate debt. Variable interest
rates declined 0.3% during 2003. Overall, weighted average interest rates were
5.9% in 2003, compared to 6.2% in 2002.
Depreciation expense totaled $10.0 million in 2003, an increase of
14.2%, or $1.2 million, compared to 2002. This increase was attributable to the
addition of five apartment communities in 2003 and 2002, as well as the impact
of additions and replacements at other apartment communities.
21
Net income
Operating partnership earnings before non-cash charges for depreciation
and amortization totaled $10.3 million, a decrease of 3.5% compared to 2002.
After including these non-cash charges, the operating partnership loss in 2003
was $66,000, compared to operating partnership net income of $1.5 million in
2002. The minority interest in operating partnership earnings absorbed $174,000
of the loss in 2003, compared to $279,000 of earnings in 2002.
Net income (after the minority interest in the operating partnership
net income or loss, and before deduction for cumulative preferred dividend) was
$107,000 in 2003, compared to $1.2 million in 2002.
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 $661,000 for 2003, compared to $323,000 for 2002.
Loss available to common shareholders in 2003 was $553,000, or $.09 on
a diluted per share basis, compared to income available to common shareholders
in 2002 of $925,000, or $0.16 on a diluted per share basis.
These comparisons reflected the impact of declining margins in
apartment operations in 2003 compared to 2002, and the increased cumulative
preferred dividend in 2003, offset somewhat by the favorable impact of lower
interest rates.
Reclassifications
In January 2003, we adopted FAS 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
FAS 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 FAS 4. We reclassified the
extraordinary item for loss on early extinguishment of debt in 2002 to conform
to FAS 145. While adoption of FAS 145 had no impact on net income, it increased
total expenses, reduced income before extraordinary items and eliminated the
extraordinary item as previously reported in our 2002 Annual Report.
Funds from Operations
Funds from operations and funds available for distribution are defined
in footnote 2 on page 14. Both of these measures are made at the operating
partnership level. You should read and understand that footnote before reviewing
the following discussion.
We calculated FFO as follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Income (loss) before minority interest $ 1,055 $ (66) $ 1,527
Less casualty gains (269) - -
Cumulative preferred dividend (1,000) (661) (323)
Depreciation 11,660 10,040 8,794
--------------- -------------- --------------
Funds from operations $ 11,447 $ 9,313 $ 9,998
=============== ============== ==============
22
A reconciliation of FFO to FAD follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Funds from operations $ 11,447 $ 9,313 $ 9,998
Amortization of loan costs 375 322 256
Write-off of unamortized loan costs at refinance 85 - 95
Recurring capital expenditures (1,918) (1,731) (1,484)
--------------- -------------- --------------
Funds available for distribution $ 9,988 $ 7,904 $ 8,865
=============== ============== ==============
A further reconciliation of FAD to net cash provided by operating
activities follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Funds available for distribution $ 9,988 $ 7,904 $ 8,865
Add casualty losses charged to operations 14 - -
Cumulative preferred dividend 1,000 661 323
Recurring capital expenditures 1,918 1,731 1,484
Amortization of deferred interest defeasance (105) (228) (167)
Changes in operating assets and liabilities (138) (472) (388)
--------------- -------------- --------------
Net cash provided by operating activities $ 12,677 $ 9,594 $ 10,118
=============== ============== ==============
Other information about our historical cash flows follows (all amounts
in thousands):
2004 2003 2002
--------------- -------------- --------------
Net cash provided by (used in)
Operating activities $ 12,677 $ 9,594 $ 10,118
Investing activities (52,848) (25,275) (32,669)
Financing activities 40,123 15,361 22,018
Dividends and distributions paid to
Preferred shareholder $ 1,000 $ 537 $ 200
Common shareholders 7,551 5,859 7,163
Minority unitholders in operating partnership 1,847 1,845 2,171
Scheduled debt principal payments $ 1,378 $ 1,172 $ 417
Non-recurring capital expenditures
Acquisition improvements and replacements $ 1,104 $ 1,053 $ 860
Apartment property additions and betterments 1,613 565 387
Reconstruction and replacement of casualty losses 526 - -
Weighted average Preferred B shares outstanding 909 601 293
Weighted average common shares outstanding 7,617 5,868 5,787
Weighted average operating partnership
minority units outstanding 1,856 1,843 1,786
Funds from operations in 2004 totaled $11.5 million, an increase of
22.9% compared to 2003. Funds from operations in 2003 totaled $9.3 million, a
decrease of 6.9% compared to $10.0 million in 2002. These comparisons reflect
the positive impact of new apartment communities and improved margins in
apartment operations in 2004, unlike the declining margins in apartment
operations in 2003 as compared to 2002.
23
Funds available for distribution totaled $9.9 million in 2004, an
increase of 26.4% compared to 2003. Funds available for distribution totaled
$7.9 million in 2003, a decrease of 10.8% compared to $8.9 million in 2002. The
variance in comparison of FAD and FFO reflects the impact of recurring capital
expenditures for operating replacements and major capital replacements at our
older communities. Recurring capital expenditures averaged $354 per apartment
unit in 2004, $374 per apartment unit in 2003, and $369 per apartment unit in
2002.
Capital Resources and Liquidity
Capital Resources
We intend to pursue our growth strategy through the utilization of our
flexible capital structure. This may include the issuance of operating
partnership units, common stock and/or preferred stock, additional debt, and
joint venture investments. We may use our lines of credit or variable- and
fixed-rate, long-term debt to acquire and refinance apartment communities.
Long-term Debt
All of our properties are encumbered by or serve as collateral for
debt. As of December 31, 2004, total long-term debt was $286.4 million,
including $215.6 million at effective fixed interest rates ranging from 5.0% to
8.6%, and $70.8 million at variable rates indexed on 30-day LIBOR rates. The
weighted average interest rate on debt outstanding at December 31, 2004, was
5.9%, compared to 5.8% at December 31, 2003.
During 2004, we issued $58 million in four new fixed-rate notes payable
at effective rates ranging from 5.0% to 5.7%, and retired a fixed-rate note
payable at 8.5%. As a result of these transactions, the weighted average rate on
our fixed-rate notes payable declined from 6.8% at the end of 2003 to 6.4% at
the end of 2004.
Also during 2004, we issued $34 million in new variable-rates notes,
retired one $14 million variable-rate note, and reduced our variable-rate line
of credit by $10 million, for a net increase in variable-rate notes payable of
$10 million. The weighted average rate on our variable-rate notes payable
increased from 2.9% at the end of 2003 to 4.2% at the end of 2004, primarily as
a result of increases in variable rates during the last half of 2004. At our
level of variable-rate debt, a 1% fluctuation in variable interest rates would
increase or decrease our annual interest expense by $720,000.
In June 2004, we modified our revolving line of credit with a bank
secured by the Latitudes Apartments to increase the maximum loan amount to $30.0
million, extend the term of the loan through November 2007, and reduce the
variable interest rate on outstanding amounts to 30-day LIBOR plus 1.65%. We
currently have $19 million available for draw under this line of credit.
A summary of scheduled principal payments on long-term debt is included
in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and the
notes to the financial statements in this Annual Report. Significant scheduled
balloon payments include maturities of:
o our deed of trust loan for Harris Hill Apartments, due June 2005 ($5.5 million
outstanding at December 31, 2004);
o our line of credit secured by deeds of trust and assignments of rents of our
restaurant properties, due January 2006 ($16.3 million outstanding at December
31, 2004);
o our revolving line of credit secured by a deed of trust and assignment of
rents of Latitudes Apartments, due November 2007 (up to $30.0 million, $10.2
million outstanding at December 31, 2004);
o deed of trust loans for six apartment communities due in 2007 totaling $57.8
million;
24
o deed of trust loans for five apartment communities due in 2008 totaling $36.5
million; and
o deed of trust loans for five apartment communities due in 2009 totaling $52.5
million.
The deed of trust loan for Harris Hill Apartments expires in June 2005.
Based on our estimate of the underlying value of the property, we expect to
refinance this loan at a lower rate than the 8.55% loan currently in place.
Capital Stock and Operating Partnership Units
At December 31, 2004, we had 8.7 million common shares and 0.9 million
preferred shares outstanding. In addition, there were 1.8 million operating
partnership minority common units outstanding.
During 2004, we issued 2.6 million new common shares, through two
placements, to a number of institutional investors and mutual funds, for net
proceeds of $30.0 million. We also issued 66,000 common shares through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of $0.8 million, and
60,000 common shares through our employee Stock Option and Incentive Plan for
net proceeds of $0.7 million. We applied these proceeds to acquire apartment
properties and reduce our operating line of credit. In addition, we issued
25,000 common shares in non-cash transactions to redeem a like number of
operating partnership minority units.
In addition, during 2004 the operating partnership issued 49,000 common
units in conjunction with acquisitions of apartment properties. All of the
operating partnership units held by minority interest owners were issued in 1997
through 2004 in conjunction with acquisitions of apartment communities. Holders
of operating partnership units generally are able to redeem their units for cash
or, at our option, for shares of our common stock on a one-for-one basis after
one year from issuance.
Cash Flows and Liquidity
Net cash flows from operating activities totaled $12.7 million in 2004,
$9.6 million in 2003, and $10.1 million in 2002. The increase in cash flows from
operating activities in 2004 is primarily attributable to the positive impact of
new apartment communities in 2003 and 2004 and improvements in apartment
operating results. Investing and financing activities focused primarily on
apartment acquisitions and capital expenditures at apartment communities, along
with payments of dividends and distributions. During the three-year period, we
acquired a total of ten apartment communities - five in 2004, two in 2003, and
three in 2002.
We paid dividends to common shareholders of $0.25 per share per quarter
in each quarter of 2004 and 2003, and $0.31 per share per quarter in each
quarter of 2002. Our payout ratio (the ratio of common dividends plus
distributions paid, divided by operating partnership funds from operations) was
82.1% in 2004, 82.5% in 2003, and 93.4% in 2002. We intend to pay dividends
quarterly, expect that these dividends will substantially exceed the 90%
distribution requirement for REITs, and anticipate that all dividends will be
paid from current funds from operations.
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- 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.
We received 7.5% of our revenue in 2004, 9.2% of our revenue in 2003,
and 10.5% of our revenue in 2002, from rent received from Boddie-Noell
Enterprises for the use of our restaurant properties. In
25
addition, Enterprises is responsible for all of the costs associated with the
maintenance and operations of these properties. Over time, we expect that
restaurant rental income will continue to represent a decreasing percentage of
our total revenue.
Enterprises is a privately owned company with total assets exceeding
$240 million and net equity exceeding $90 million. Its principal line of
business is the operation of 317 Hardee's restaurants. In addition to its
Hardee's operations, Enterprises is the owner of Texas Steakhouse and Saloon, a
casual dining concept with 29 restaurants; Cafe Carolina, a cafe bakery/fast
casual dining concept with seven restaurants; and BBQ and Ribs, a fast-food
barbeque concept with two restaurants. Enterprises also operates four Moe's
Southwestern Grills. In addition to its restaurant operations, Enterprises
conducts extensive real estate investment and development activities through BNE
Land and Development. These activities involve a full range of property types,
including land, commercial, retail, office, apartment and single-family
properties. We have had extensive discussions with management of Enterprises and
have reviewed their financial statements, cash flow analysis, restaurant
contribution analysis, sales trend analysis and forecasts. We believe that
Enterprises will have sufficient liquidity and capital resources to meet its
obligations under the master lease as well as its general corporate operating
needs.
Contractual obligations
In December 2004, we entered into agreements to acquire a portfolio of
four apartment communities containing a total of 1,086 apartment units. The
aggregate purchase price for the properties will be approximately $51.8 million,
and consists of the assumption or refinancing of up to $43.2 million of debt on
the properties, with the remaining amount (estimated at $8.6 million) to be paid
in operating partnership units. We expect to complete these acquisitions by the
end of March 2005. We currently manage these apartment communities on a contract
basis.
Our other contractual obligations as of December 31, 2004, are
summarized as follows (all amounts in thousands):
Payments due by period
Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
------------ ------------- ------------ ------------- ------------
Long-term debt obligations $286,425 $7,869 $87,325 $102,007 $89,224
Operating lease - corporate office 630 180 360 90 -
Purchase obligation - reconstruction of
apartment building at Latitudes 705 705 - - -
------------ ------------- ------------ ------------- ------------
Total $287,760 $8,754 $87,685 $102,097 $89,224
============ ============= ============ ============= ============
Off balance sheet arrangements
In January 2005, we acquired Boddie Investment Company ("BIC") through
a merger. We issued 508,578 shares of common stock, and cancelled 72,399 shares
of common stock that BIC held immediately before the merger. The value of this
transaction was $8.2 million. As a result of this acquisition, we have assumed
the role of general partner and acquired certain economic interests in three
limited partnerships (50% interest in Marina Shores Associates One Limited
Partnership, 1% interest in The Villages of Chapel Hill Limited Partnership, and
1% interest in The Villages of Chapel Hill - Phase 5 Limited Partnership). Prior
to this acquisition, we managed the apartment communities owned by these
partnerships on a contract basis; we will continue to manage these properties.
We expect that, going forward, we will include the accounts of Marina
Shores Apartments in our consolidated financial statements, and that Marina
Shores will generate revenues, expenses and cash flows commensurate with the
properties in which we own 100% interest. We have not completed the detailed
26
analyses necessary to determine whether we will consolidate The Villages of
Chapel Hill and The Villages of Chapel Hill - Phase 5; however, we do not expect
that our 1% interest in these partnerships will have a significant impact on our
financial condition or operating results.
Inflation
We do not believe that inflation poses a material risk to the company.
The leases at our apartment properties are short term in nature. None are longer
than two years. The restaurant properties are leased on a triple-net basis,
which places the risk of rising operating and maintenance costs on the lessee.
Environmental Matters
Phase I environmental studies performed on the apartment communities
when we acquired each of them did not identify any problems that we believe
would have a material adverse effect on our results of operations, liquidity or
capital resources. Environmental transaction screens for each of the restaurant
properties in 1995 did not indicate existence of any environmental problems that
warranted further investigation. Enterprises has indemnified us under the master
lease for environmental problems associated with the restaurant properties.
Additional Information
We provide the following information to analysts and other members of
the financial community for use in their detailed analysis. This information has
not been included in our Annual Report to Shareholders.
A summary of capital expenditures, in aggregate and per apartment unit,
follows:
2004 2003 2002
Total Per unit Total Per unit Total Per unit
---------- ------------ --------- ------------ --------- ------------
(000's) (000's) (000's)
Recurring capital expenditures:
Floor coverings $ 775 $143 $ 772 $167 $ 593 $148
Appliances/HVAC 385 71 256 55 212 53
Exterior paint - - 183 39 182 45
Computer/support equipment 4 1 85 18 102 25
Other 754 139 436 94 396 98
----------- ----------- ---------- ----------- ---------- -----------
$1,918 $354 $1,731 $374 $1,484 $369
=========== =========== ========== =========== ========== ===========
Non-recurring capital
expenditures:
Acquisition improvements $1,104 $1,053 $ 861
Additions and betterments 1,541 508 303
Replacements of casualty losses 526 - -
Computer/support equipment 72 57 84
----------- ---------- ----------
$3,243 $1,619 $1,248
=========== ========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A summary of long-term debt as of December 31, 2004 and 2003 is
included in the notes to the financial statements in this Annual Report. At
December 31, 2004, long-term debt totaled $286.4 million, including $215.6
million notes payable at fixed interest rates ranging from 5.0% to 8.6%, and
$70.8 million at variable rates indexed on 30-day LIBOR rates. The weighted
average interest rate on debt outstanding was 5.9% at December 31, 2004, 5.8% at
December 31, 2003, and 6.1% at December 31, 2002. At our
27
current level of variable-rate debt, a 1% change in variable interest rates
would increase or decrease our annual interest expense by $720,000.
The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on those instruments (all amounts in thousands):
Expected maturity dates
2005 2006 2007 2008 2009 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 6,784 $ 1,597 $49,536 $38,453 $29,996 $89,224 $215,590
Average interest rate 8.12% 6.08% 6.93% 6.55% 5.28% 6.29% 6.40%
Variable rate notes $ 1,085 $15,745 $20,446 $ 774 $32,784 $ - $70,835
Average interest rate 4.27% 4.26% 4.21% 4.22% 4.22% 4.23%
We estimate the fair value of fixed-rate and variable-rate notes using
discounted cash flow analysis, based on our current incremental borrowing rates
for similar types of borrowing arrangements. The fair value of our notes payable
at December 31, 2004, totaled $296 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item
15(a) and filed as part of this Annual Report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management's Conclusions Regarding the Effectiveness of Disclosure Controls and
Procedures
We have performed a review and evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer, the
Chief Financial Officer and the Chief Accounting Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the
end of the period covered by this annual report on Form 10-K. Based on our
review and evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that, as of December 31, 2004, our disclosure controls
and procedures, as designed and implemented, were effective to provide
reasonable assurance that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required, including reasonable
assurance that information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Management Report on Internal Control Over Financial Reporting
Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the company's principal executive and principal financial officers and effected
by the company's Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
28
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the company's assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and Directors of the company; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's assets
that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of
internal controls, including the possibility of human error and the
circumvention or overriding of controls and procedures. Accordingly, even
effective internal control over financial reporting may not prevent or detect
misstatements. Further, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions or that the degree of compliance with policies or
procedures may deteriorate.
Management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, the company's management believes that, as of December
31, 2004, the company's internal control over financial reporting was effective
based on those criteria.
Our independent auditors, Ernst & Young, have issued an audit report on
management's assessment of the company's internal control over financial
reporting, a copy of which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of their evaluation. There were no material weaknesses identified in
the course of our review and evaluation.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
BNP Residential Properties, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that BNP Residential
Properties, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). BNP Residential
Properties Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable
29
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that BNP Residential Properties, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, BNP Residential Properties, Inc. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
BNP Residential Properties, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004 of BNP
Residential Properties, Inc. and our report dated March 2, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 2, 2005
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors hold office for the terms described below or
until their successors are elected and qualified. The current members of our
Board of Directors are identified in the following table, followed by
biographical information on each member.
30
Name Age Position Director Since
- ---------------------------- ---------- ------------------------------------------------ -------------------
Directors serving until the 2005 annual meeting:
D. Scott Wilkerson 47 Director, President, Chief Executive Officer December 1997
Paul G. Chrysson 50 Director December 1997
Peter J. Weidhorn 57 Series B Director (1) December 2001
Directors serving until the 2006 annual meeting:
W. Michael Gilley 49 Director December 1997
Directors serving until the 2007 annual meeting:
Philip S. Payne 53 Chairman, Chief Financial Officer December 1997
Stephen R. Blank 59 Director May 1999
(1) The terms of the Certificate of Designation establishing the rights and
preferences of the Series B Convertible Preferred Stock provide that the
holders of a majority in interest of the Series B Convertible Preferred
Stock can elect one director, to whom we refer as the "Series B Director."
Philip S. Payne - Chairman of the Board of Directors, Chief Financial Officer.
Mr. Payne joined BT Venture Corporation, which was subsequently purchased by the
company, in 1990 as Vice President of Capital Markets Activities and became
Executive Vice President and Chief Financial Officer in January 1993. He was
named Treasurer in April 1995 and a Director in December 1997. In January 2004,
Mr. Payne was named Chairman of the Board of Directors and continues in his role
as Chief Financial Officer. From 1987 to 1990, he was a principal in Payne
Knowles Investment Group, a financial planning firm. From 1983 to 1987, he was a
registered representative with Legg Mason Wood Walker. From 1978 to 1983, Mr.
Payne practiced law, and he currently maintains his license to practice law in
Virginia. He received a BS degree from the College of William and Mary in 1973
and a JD degree in 1978 from the same institution. He is a member of the board
of directors of the National Multi Housing Council and is a member of the Urban
Land Institute (Multi Family Council - Gold). In addition, he is a member of the
board of directors of Ashford Hospitality Trust, a REIT focused on the
hospitality industry, and serves as chairman of its audit committee.
D. Scott Wilkerson - Director, President, Chief Executive Officer. Mr. Wilkerson
joined BT Venture Corporation, which was subsequently purchased by the company,
in 1987 and served in various officer-level positions, including Vice President
of Administration and Finance and Vice President for Acquisitions and
Development before becoming President in January 1994. He was named Chief
Executive Officer in April 1995 and a Director in December 1997. From 1980 to
1986, Mr. Wilkerson was with Arthur Andersen LLP in Charlotte, North Carolina,
serving as tax manager from 1985 to 1986. His specialization was in the
representation of real estate investors, developers and management companies.
Mr. Wilkerson received a BS degree in accounting from the University of North
Carolina at Charlotte in 1980. He is a certified public accountant and licensed
real estate broker. He serves on the boards of directors of the National Multi
Housing Council and the National Apartment Association. He is President of the
Apartment Association of North Carolina and is a past president of the Charlotte
Apartment Association. He is active in various professional, civic and
charitable activities.
Stephen R. Blank - Director. Mr. Blank is a Senior Fellow, Finance, with the
Urban Land Institute, and an Adjunct Professor at the Columbia University
Graduate School of Business. From 1993 to 1998, he was the Managing Director for
Real Estate Investment Banking with CIBC Oppenheimer Corp. He is an independent
trustee of Ramco-Gershenson Properties Trust and Atlantic Realty Trust, and
serves on the boards of directors of WestCoast Hospitality Corporation and MFA
Mortgage Investments, Inc. In addition, he serves as a member of the board of
advisors of Paloma, LLC, the principal investor in a private multifamily real
estate investment trust. Mr. Blank serves as the chair of the audit committees
for both Ramco-Gershenson Properties Trust and MFA Mortgage Investments, Inc. He
has over 20 years experience as a senior real estate investment banking officer,
advising and evaluating a wide array of real estate companies, including
publicly reporting companies.
31
Paul G. Chrysson - Director. Mr. Chrysson is President of C.B. Development
Company, Inc., a developer of single-family and multi-family residential
properties. Mr. Chrysson is a member of the Board of Advisors of Wachovia Bank
(Forsyth County). He is a former director of Triad Bank and United Carolina Bank
(North Carolina) and has served on the boards of various charitable
organizations. He has been a licensed real estate broker since 1974 and has been
actively involved in construction since 1978.
W. Michael Gilley - Director. Mr. Gilley is a private real estate investor and
developer of single-family and multi-family residential properties. From January
1995 to January 1997, he was Executive Vice President of Greenbriar Corporation.
He also served on their board of directors from September 1994 to September
1996. He has been a licensed real estate broker since 1984.
Peter J. Weidhorn - Series B Director. Mr. Weidhorn is a consultant and private
real estate investor in the multi-family housing market. From 1998 to 2000, he
was Chairman of the Board, President and Director of WNY Group, Inc., a real
estate investment trust that owned and operated 8,000 apartment units throughout
New Jersey, Pennsylvania, Delaware and Maryland prior to its sale to the Kushner
Companies. From 1981 to 1998, he was President of WNY Management Corp. Mr.
Weidhorn serves on the boards of directors of Monmouth Real Estate Investment
Corporation and The Community Development Trust, and is a past president of the
New Jersey Apartment Association. Mr. Weidhorn currently serves as the chair of
the audit committee of Monmouth Real Estate Investment Corporation and as a
member of the audit committee of The Community Development Trust. He has over 30
years of experience in the management, acquisition, and financing of commercial
real estate. Mr. Weidhorn is a certified public accountant (inactive). He is
active in various professional, civic and charitable activities.
Information about our executive officers is included in Part I, Item X.
Executive Officers of the Registrant, in this Annual Report.
Audit Committee Financial Experts
The members of our Audit Committee are Messrs. Blank, Gilley, and
Weidhorn. Our Board of Directors has determined that Messrs. Blank and Weidhorn
qualify as "audit committee financial experts" as defined by SEC regulations.
All three members are considered "independent" as defined by SEC regulations and
rules of the American Stock Exchange, and "financially literate" under the rules
of the American Stock Exchange. Messrs. Blank's and Weidhorn's relevant
experience is described above in the biographical information for each.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of the forms in its possession,
and on written representations from certain reporting persons, the company
believes that during 2004 all of its executive officers and directors filed the
reports required under Section 16(a) on a timely basis.
Code of Ethics
Our Board of Directors has adopted a Code of Conduct and Business
Ethics that is applicable to all directors, officers and employees of the
company. You may view this document at our Internet website at
www.bnp-residential.com. You may obtain a copy of this document free of charge
by mailing a written request to: Investor Relations, BNP Residential Properties,
Inc., 301 South College Street, Suite 3850, Charlotte, NC 28202, or by sending
an email request to: investor.relations@bnp-residential.com.
32
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following tables provide information regarding the annual and
long-term compensation of our chief executive officer, and the other most highly
paid executive officers whose total salary and bonus exceeded $100,000 in 2004.
We refer to them as the "named executive officers."
Annual Compensation
- ------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Other (1)
- -----------------------------------------------------------------------------------------------------------
D. Scott Wilkerson, President, 2004 $228,750 $11,250 $73,249
Chief Executive Officer 2003 225,000 - -
2002 200,000 25,000 -
Philip S. Payne, Chairman of the Board of 2004 $228,750 $11,250 $79,956
Directors, Chief Financial Officer 2003 225,000 - -
2002 200,000 25,000 -
Eric S. Rohm, Vice President, Secretary, 2004 $145,000 $15,000 -
General Counsel 2003 140,000 - -
Pamela B. Bruno, Vice President, Treasurer, 2004 $145,000 $15,000 $17,395
Chief Accounting Officer, Assistant Secretary 2003 136,250 18,750 -
2002 125,000 - -
(1) Amounts for 2004 include the value realized in exercise of stock options,
included in the table below. No amounts have been included for 2003 and
2002 because perquisites received by the named executive officers were less
than 10% of the total of their annual salary and bonus amounts.
The following table provides information regarding exercises of stock
options by named executive officers during 2004 as well as the value of
unexercised stock options held by named executive officers as of December 31,
2004. No options were granted during the year ended December 31, 2004.
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Value Options at In-the-Money Options at
Acquired in Realized in Fiscal Year End Fiscal Year End
Name Exercise Exercise Exercisable/Unexercisable Exercisable/Unexercisable
- -----------------------------------------------------------------------------------------------------------
D. Scott Wilkerson 43,844 $59,189 100,000 - $341,250 -
Philip S. Payne 50,000 67,500 100,000 - 341,250 -
Pamela B. Bruno 6,000 8,100 30,000 - 98,000 -
We do not have a long-term incentive plan in place other than our Stock
Option and Incentive Plan described in Item 12 below.
Compensation of Directors
During 2004, we paid directors' fees to each director who is not an
executive officer of the company. During the year ended December 31, 2004,
Messrs. Blank, Chrysson, Gilley, and Weidhorn were
33
each paid annual retainers of $12,000 plus fees totaling $5,650 each for
participation in board meetings. In addition, Messrs. Blank, Gilley and Weidhorn
each received $200 for participation in Audit Committee meetings. Messrs.
Wilkerson and Payne did not receive any compensation for their service as
directors.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In July 1997, we entered into substantially identical employment
agreements with D. Scott Wilkerson (President and Chief Executive Officer) and
Philip S. Payne (Chief Financial Officer). The term of the agreements is four
years, subject to automatic annual renewal for additional one-year periods
extending the term to a maximum of ten years. The agreements provide for initial
annual base salaries of $139,920, annual discretionary bonuses as determined by
the Board of Directors and participation in an incentive compensation plan,
along with specified death and disability benefits. The agreements provide for
severance payments equal to the then current base salary for the remaining term
of the contract (excluding any unexercised renewal periods) in the event of
termination without cause. In the event of a change in control of the company,
the agreements provide for payments of three times base salary then in effect
and three times average discretionary bonus and annual bonus over the prior
three fiscal years. In addition, the agreements provide for a lump sum cash
payment of the benefit the executive would otherwise have received had all stock
options and other stock based compensation been fully vested, been exercised and
become due and payable.
In July 1997, we entered into an employment agreement with Pamela B.
Bruno (Vice President, Treasurer, Chief Accounting Officer and Assistant
Secretary). The two-year agreement (with automatic annual renewal periods) is
substantially identical to the agreements signed by Messrs. Wilkerson and Payne,
except that this agreement provides for an initial annual base salary of $90,000
and limits severance payments to no more than the greater of the then-remaining
term of the agreement or one year's total compensation.
In December 2002, we entered into an employment agreement with Eric S.
Rohm (Vice President, Secretary and General Counsel). The two-year agreement
(with automatic annual renewal periods) is substantially identical to the
agreement signed by Ms. Bruno, except that this agreement provides for an
initial annual base salary of $140,000.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are Messrs. Blank, Chrysson and
Weidhorn. All three members are considered "independent" as defined by SEC
regulations and rules of the American Stock Exchange. Mr. Weidhorn is identified
in Item 13. Certain Relationships and Related Transactions in our discussion of
"BNP Residential Properties, Inc. and Preferred Investment I, LLC." Mr. Chrysson
is identified in Item 13 in our discussion of "BNP Residential Properties, Inc.
and the Chrysson Parties."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan
We have reserved 470,000 shares of the company's common stock for
issuance under our employee Stock Option and Incentive Plan. Options have been
granted to employees at prices equal to the fair market value of the stock on
the dates the options were granted or repriced. Options are generally
exercisable in four annual installments beginning one year after the date of
grant, and expire ten years after the date of grant.
The following table provides summary information about securities to be
issued under our equity compensation plan. More detailed information is provided
in the notes to our financial statements included in this Annual Report.
34
Number of securities
Number of securities to Weighted average remaining available for
be issued upon exercise exercise price of future issuance
of outstanding options, outstanding options, under equity
Plan category warrants and rights warrants and rights compensation plans
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans
approved by security
holders 327,500 $12.04 142,656
Equity compensation plans
not approved by security
holders - - -
-------------------------- -------------------------- --------------------------
Total 327,500 $12.04 142,656
========================== ========================== ==========================
Security Ownership of Certain Beneficial Owners and Management - Common Stock
The following table provides certain information regarding beneficial
ownership of common stock as of February 23, 2005, by each person or group known
to be the beneficial owner of more than 5% of the company's common stock.
Common Shares
Beneficially Owned
Name and address of beneficial owner Number Percent
- ------------------------------------------------- ------------- ---------------
B. Mayo Boddie 436,038 5.3%
P. O. Box 1908, Rocky Mount, NC 27802
Kensington Investment Group, Inc. 457,900 5.0%
4 Orinda Way, Suite 200C, Orinda, CA 94563
Preferred Investment I, LLC (1) 909,090 9.1%
60 Thomas Drive, Manalapan, NJ 07726
(1) Includes 909,090 shares of Series B Cumulative Convertible Preferred stock
owned by Preferred Investment I, LLC which is convertible into common
shares on a one-to-one basis.
The following table provides certain information regarding beneficial
ownership of common stock as of February 23, 2005, by each of the directors and
named executive officers, and by all directors and officers as a group.
Common Shares
Beneficially Owned
Directors and Officers (1) Number Percent
- ----------------------------------------------- ---------------- --------------
Philip S. Payne (2) 189,570 2.1%
D. Scott Wilkerson (2) 143,343 1.6%
Stephen R. Blank 1,000 *
Paul G. Chrysson (3) 267,612 2.9%
W. Michael Gilley (4) 265,991 2.8%
Peter J. Weidhorn (5) 917,290 9.2%
Eric S. Rohm -0- *
Pamela B. Bruno (6) 40,334 *
35
Common Shares
Beneficially Owned
Directors and Officers (1) Number Percent
- ----------------------------------------------- ---------------- --------------
All directors and executive officers
as a group (8 persons) (7) 1,825,140 17.0%
* Less than 1 percent.
(1) Address for each person listed herein is 301 South College Street, Suite
3850, Charlotte NC 28202.
(2) Includes exercisable options for 100,000 shares of common stock.
(3) Includes 250,612 shares issuable (at the company's option) in satisfaction
of the right to redeem the same number of units owned by Mr. Chrysson in
the operating partnership.
(4) Includes 265,991 shares issuable (at the company's option) in satisfaction
of the right to redeem the same number of units owned by Mr. Gilley in the
operating partnership.
(5) Includes 909,090 shares of Series B Cumulative Convertible Preferred stock
owned by Preferred Investment I, LLC (of which Mr. Weidhorn is the managing
director) which is convertible into common shares on a one-to-one basis.
(6) Includes exercisable options for 30,000 shares of common stock.
(7) Includes exercisable options for 230,000 shares, 909,090 shares issuable
upon conversion of Series B Cumulative Convertible Preferred stock, and
516,603 shares issuable (at the company's option) in satisfaction of the
right to redeem the same number of units in the operating partnership.
Security Ownership of Certain Beneficial Owners and Management - Preferred Stock
The following table provides certain information regarding beneficial
ownership of Series B Cumulative Convertible Preferred stock as of February 23,
2005. These shares have limited voting rights.
Series B Preferred Shares
Beneficially Owned
Name and address of beneficial owner Number Percent
- -------------------------------------------------- -------------- --------------
Preferred Investment I, LLC 909,090 100.0%
60 Thomas Drive, Manalapan, NJ 07726
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BNP Residential Properties, Inc. and Preferred Investment I, LLC
During 2001 through 2003, we issued a total of 909,090 shares of our
Series B Cumulative Convertible Preferred Stock to Preferred Investment I, LLC
for net proceeds of $9.6 million. We describe and discuss these transactions in
the notes to our financial statements.
Peter J. Weidhorn, the managing member of Preferred Investment I, LLC,
serves as the Series B Director on our Board of Directors.
BNP Residential Properties, Inc. and Boddie-Noell Enterprises, Inc.
We lease 40 restaurant properties to Boddie-Noell Enterprises, Inc.
("Enterprises") under a master lease on a triple-net basis. We describe and
discuss this relationship in the notes to our financial statements and at Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cash Flows and Liquidity.
36
B. Mayo Boddie served on our Board of Directors from the company's
inception in 1987 until May 2004. Mr. Boddie is Chairman of the Board of
Directors and Chief Executive Officer of Enterprises. Mr. Boddie and certain of
his family members, including Nicholas B. Boddie, are the sole owners of
Enterprises.
Douglas E. Anderson served as Vice President and Secretary of our
company from our inception in 1987 until May 2004. He has been with Enterprises
since 1977 and is currently a director, executive vice president and secretary
of Enterprises. Mr. Anderson is also president of BNE Land and Development
Company, the real estate development division of Enterprises.
BNP Residential Properties, Inc. and Boddie Investment Company
We provided fee management for three limited partnerships, of which
Boddie Investment Company ("BIC") was the general partner, and the apartment
communities owned by those partnerships, until January 2005. We recorded fee
revenues totaling $409,000 from these limited partnerships in 2004.
In January 2005, we acquired BIC in exchange for 508,578 shares of our
common stock, valued at $8.2 million, which we issued to Messrs. Boddie and
Boddie. As part of this acquisition, BIC surrendered, and we cancelled, 72,399
shares of our common stock valued at $1.2 million. As a result of this
acquisition, we have assumed the role of general partner and acquired the
economic interests in the three limited partnerships to which we previously
provided fee management services. We will continue to manage the properties
following this acquisition.
In addition, we are the lender in a participating loan agreement with
The Villages of Chapel Hill Limited Partnership, one of the limited partnerships
identified above. We describe and discuss this relationship in the notes to our
financial statements.
Messrs. Boddie and Boddie were the sole shareholders and directors of
Boddie Investment Company. Mr. Anderson was vice president and secretary of
Boddie Investment Company.
BNP Residential Properties, Inc. and the Chrysson Parties
In July 2004, we acquired Savannah Shores Apartments and issued 7,695
operating partnership common units to members of a group that we refer to as the
Chrysson Parties. Prior to this acquisition, we managed this community on a
contract basis. In previous years during 1997 through 2002, we issued 1.5
million operating partnership common units to acquire eight apartment
communities from this group. We describe and discuss this relationship in the
notes to our financial statements.
Messrs. Chrysson and Gilley, who serve on our Board of Directors, are
members of the Chrysson Parties.
Notes Receivable from Management
In 1996 through 1999, Messrs. Wilkerson and Payne each borrowed $70,000
on an interest-free basis from the company. The loans are secured by shares of
the company's common stock and are payable in full six months after termination
of employment.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young LLP has served as our principal accountant and
independent auditor since October 1996.
37
The Board of Directors, upon the recommendation of the Audit Committee,
engaged Ernst & Young LLP to serve as our independent auditors for the fiscal
years ending December 31, 2004 and 2003. The Audit Committee also approves in
advance all engagements of Ernst & Young LLP for audit-related, tax and other
services.
The following table reflects fees billed by Ernst & Young LLP for
services rendered to the company and its subsidiaries in 2004 and 2003:
Nature of Services 2004 2003
- ----------------------------------------------------------------------- ------------------- -------------------
Audit fees - $224,000 $117,000
For audit of our annual financial statements, audit of internal
control over financial reporting (in 2004), and review of
financial statements included in our Forms 10-Q
Audit-related fees - 174,000 22,000
For services related to business acquisitions, accounting
consultations, SEC registration statements, and audit of the
company's 401(k) plan
Tax fees - 115,000 108,000
For tax compliance, tax advice, and tax planning
All other fees - (none in 2004 or 2003) - -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. and 2. Financial Statements and Schedules
The financial statements and schedules listed below are filed as part
of this Annual Report on the pages indicated.
Index to Financial Statements and Schedules
Page
BNP Residential Properties, Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 42
Consolidated Balance Sheets as of December 31, 2004 and 2003 43
Consolidated Statements of Operations for the Years Ended 44
December 31, 2004, 2003, and 2002
Consolidated Statements of Shareholders' Equity for the Years Ended 45
December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the Years Ended 46
December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements 47
Statements of Revenue and Certain Operating Expenses of Acquired Properties
Oakwood Raleigh Apartments - For the year ended December 31, 2003, and for
the unaudited 64 period January 1 through May 11, 2004
Carriage Club Apartments - For the year ended December 31, 2003, and for the unaudited 67
period January 1 through June 28, 2004
38
Page
Savannah Shores Apartments - For the years ended December 31, 2003 and 2002, and for the 70
period January 1 through June 30, 2004
Fairington Apartments - For the year ended December 31, 2003, and for the unaudited 73
period January 1 through August 4, 2004
Sterling Park Apartments - (Unaudited) - For the year ended December 31, 2003, and for 76
the period January 1 through September 29, 2004
Schedules:
Schedule III - Real Estate and Accumulated Depreciation 78
The financial statements and schedules are filed as part of this
report. All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.
(a) 3. Exhibits
The Registrant agrees to furnish a copy of all agreements related to
long-term debt upon request of the Commission.
Exhibit No.
2.1* Master Agreement of Merger and Acquisition by and among BNP
Residential Properties, Inc., BNP Residential Properties Limited
Partnership, Paul G. Chrysson, James G. Chrysson, W. Michael
Gilley, Matthew G. Gallins, James D. Yopp, and the partnerships
and limited liability companies listed therein, dated September
22, 1997 (filed as Exhibit 2.1 to Registration Statement No.
333-39803 on Form S-2, December 16, 1997, and incorporated
herein by reference)
2.2* Amendment to Master Agreement of Merger and Acquisition dated
September 22, 1997, by and among BNP Residential Properties,
Inc., BNP Residential Properties Limited Partnership, Paul G.
Chrysson, James G. Chrysson, W. Michael Gilley, Matthew G.
Gallins, James D. Yopp, and the partnerships and limited
liability companies listed therein, dated November 3, 1997
(filed as Exhibit 2.3 to BNP Residential Properties, Inc.
Current Report on Form 8-K dated December 1, 1997, and
incorporated herein by reference)
3.1* Articles of Incorporation (filed as Exhibit 3.1 to BNP
Residential Properties, Inc., Current Report on Form 8-K dated
March 17, 1999, and incorporated herein by reference)
3.2* Articles Supplementary, Classifying and Designating 909,090
Shares of Series B Cumulative Convertible Preferred Stock, dated
December 28, 2001 (filed as Exhibit 3.1 to BNP Residential
Properties, Inc. Current Report on Form 8-K dated December 28,
2001, and incorporated herein by reference)
3.3* Amended and Restated By-Laws adopted May 20, 2004 (filed as
Exhibit 3.1 to BNP Residential Properties, Inc., Current Report
on Form 8-K dated July 14, 2004, and incorporated herein by
reference)
4.1* Rights Agreement, dated March 18, 1999, between the Company and
First Union National Bank (filed as Exhibit 4 to BNP Residential
Properties, Inc. Current Report on Form 8-K dated March 17,
1999, and incorporated herein by reference)
4.2* Registration Rights Agreement By and Among BNP Residential
Properties, Inc. and Preferred Investment I, LLC, dated December
28, 2001 (filed as Exhibit 4 to BNP Residential Properties, Inc.
Current Report on Form 8-K dated December 28, 2001, and
incorporated herein by reference)
10.1* Second Amended and Restated Agreement of Limited Partnership of
BNP Residential Properties Limited Partnership dated as of March
17, 1999 (filed as Exhibit 10.1 to the
39
company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference)
10.2* Amendment to Second Amended and Restated Agreement of Limited
Partnership of BNP Residential Properties Limited Partnership,
dated December 28, 2001 (filed as Exhibit 10.1 to BNP
Residential Properties, Inc. Current Report on Form 8-K dated
December 28, 2001, and incorporated herein by reference)
10.3* Investment Agreement By and Between BNP Residential Properties,
Inc. and Preferred Investment I, LLC, dated December 28, 2001
(filed as Exhibit 10.2 to BNP Residential Properties, Inc.
Current Report on Form 8-K dated December 28, 2001, and
incorporated herein by reference)
10.4* Amended and Restated Master Lease Agreement dated December 21,
1995, between BNP Residential Properties, Inc. and Boddie-Noell
Enterprises, Inc. (filed as Exhibit 10.1 to BNP Residential
Properties, Inc. Annual Report on Form 10-K dated December 31,
1995, and incorporated herein by reference)
10.5* Amended and Restated 1994 Stock Option and Incentive Plan (filed
as Exhibit 10.8 to BNP Residential Properties, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, and
incorporated by reference herein)
10.6* Form and description of Employment Agreements dated July 15,
1997, and December 1, 2002, between BNP Residential Properties,
Inc. and certain officers (filed as Exhibit 10 to BNP
Residential Properties, Inc. Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997; and as Exhibit 10.7 to BNP
Residential Properties, Inc. Annual Report on Form 10-K for the
year ended December 31, 2002, and incorporated herein by
reference)
10.7* 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 BNP Residential
Properties, Inc. Current Report on Form 8-K dated February 23,
2004, and incorporated herein by reference)
10.8* Purchase Agreement by and among BNP Residential Properties, Inc.
and Purchasers for 1,420,000 shares of common stock, dated as of
July 14, 2004 (filed as Exhibit 10.1 to BNP Residential
Properties, Inc. Current Report on Form 8-K dated July 14, 2004,
and incorporated herein by reference)
10.9 Exchange Agreement among BNP Residential Properties, Inc., BNP
Residential Properties Limited Partnership, and Beach Investment
Properties, LLC and members thereof, dated as of December 7,
2004
10.10 Exchange Agreement among BNP Residential Properties, Inc., BNP
Residential Properties Limited Partnership, and Timberline
Ventures, LLC and members thereof, dated as of December 7, 2004
10.11 Exchange Agreement among BNP Residential Properties, Inc., BNP
Residential Properties Limited Partnership, and Laurel Springs
II, LLC and members thereof, dated as December 7, 2004
10.12 Exchange Agreement among BNP Residential Properties, Inc., BNP
Residential Properties Limited Partnership, and Salem
Ridge/Shugart, LLC and members thereof, dated as of
December 7, 2004
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial
Officer
32.1 Section 1350 Certification by Chief Executive Officer
32.2 Section 1350 Certification by Chief Financial Officer
* Incorporated herein by reference
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: March 3, 2005 /s/ Philip S. Payne
----------------------------------------
Philip S. Payne
Chairman of the Board of Directors,
Chief Financial Officer
Date: March 3, 2005 /s/ Pamela B. Bruno
----------------------------------------
Pamela B. Bruno
Vice President,
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature: Title: Date:
/s/ Philip S. Payne Chairman of the Board of Directors, March 3, 2005
- -------------------------------
Philip S. Payne Chief Financial Officer
/s/ D. Scott Wilkerson President, Chief Executive March 3, 2005
- -------------------------------
D. Scott Wilkerson Officer, Director
/s/ Pamela B. Bruno Vice President, Treasurer, March 3, 2005
- -------------------------------
Pamela B. Bruno Chief Accounting Officer
/s/ Stephen R. Blank Director March 3, 2005
- -------------------------------
Stephen R. Blank
/s/ Paul G. Chrysson Director March 3, 2005
- -------------------------------
Paul G. Chrysson
/s/ W. Michael Gilley Director March 3, 2005
- -------------------------------
W. Michael Gilley
/s/ Peter J. Weidhorn Director March 3, 2005
- -------------------------------
Peter J. Weidhorn
41
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
BNP Residential Properties, Inc.
We have audited the accompanying consolidated balance sheets of BNP Residential
Properties, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BNP Residential
Properties, Inc. at December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of BNP Residential
Properties, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 2, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 2, 2005
42
BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Balance Sheets
(all amounts in thousands except share data)
December 31
2004 2003
------------------ ------------------
Assets
Real estate investments at cost:
Apartment properties $ 389,119 $ 299,661
Restaurant properties 37,405 37,405
------------------ ------------------
426,525 337,067
Less accumulated depreciation (66,454) (56,053)
------------------ ------------------
360,071 281,014
Cash and cash equivalents 517 564
Prepaid expenses and other assets 4,516 3,408
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,115 1,115
Deferred financing costs 1,545 1,098
------------------ ------------------
Total assets $ 367,764 $ 287,200
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $ 286,425 $ 229,714
Accounts payable and accrued expenses 897 354
Accrued interest on notes payable 1,264 1,055
Deferred revenue and security deposits 1,787 1,344
Deferred credit for interest defeasance - 105
------------------ ------------------
290,373 232,572
Minority interest in Operating Partnership 14,394 15,895
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
909,090 shares issued and outstanding at
December 31, 2004, and at December 31, 2003 10,000 10,000
Common stock, $.01 par value, 100,000,000 shares authorized,
8,652,740 shares issued and outstanding at December 31, 2004,
5,907,133 shares issued and outstanding at December 31, 2003 87 59
Additional paid-in capital 103,221 71,473
Dividend distributions in excess of net income (50,311) (42,800)
------------------ ------------------
Total shareholders' equity 62,996 38,733
------------------ ------------------
Total liabilities and shareholders' equity $ 367,764 $ 287,200
================== ==================
See accompanying notes.
43
BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Operations
(all amounts in thousands except per share amounts)
Years ended December 31
2004 2003 2002
------------- ------------- -------------
Revenues
Apartment rental income $ 45,808 $ 37,475 $ 32,890
Restaurant rental income 3,830 3,908 4,021
Management fee income 761 873 1,095
Casualty gains 269 - -
Interest and other income 197 404 158
------------- ------------- -------------
50,865 42,660 38,164
Expenses
Apartment operations 18,563 15,458 12,682
Apartment administration 2,210 1,711 1,364
Corporate administration 2,309 2,196 1,994
Interest 14,608 13,000 11,452
Depreciation 11,660 10,040 8,794
Amortization of deferred loan costs 375 322 256
Write-off of unamortized loan costs at debt refinance 85 - 95
------------- ------------- -------------
49,810 42,727 36,637
------------- ------------- -------------
Income (loss) before minority interest 1,055 (66) 1,527
Minority interest in operating partnership 16 (174) 279
------------- ------------- -------------
Net income 1,039 107 1,248
Cumulative preferred dividend 1,000 661 323
------------- ------------- -------------
Income (loss) available to common shareholders $ 39 $ (553) $ 925
============= ============= =============
Weighted average common shares outstanding 7,617 5,868 5,787
Per common share amounts:
Earnings per common share - basic
Net income $ 0.14 $ 0.02 $ 0.22
Income (loss) available to common shareholders 0.01 (0.09) 0.16
Earnings per common share - diluted
Net income (loss) 0.11 (0.01) 0.20
Income (loss) available to common shareholders 0.01 (0.09) 0.16
Dividends declared per common share 1.00 1.00 1.24
See accompanying notes.
44
BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Shareholders' Equity
(all amounts in thousands)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2001 227 $ 2,500 5,745 $ 57 $ 69,873 $ (30,396) $ 42,034
Preferred stock issued 227 2,500 - - (108) - 2,392
Common stock issued - - 86 1 960 - 961
Dividends paid - preferred - - - - - (200) (200)
Dividends paid - common - - - - - (7,163) (7,163)
Net income - - - - - 1,248 1,248
--------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2002 454 5,000 5,831 58 70,725 (36,512) 39,271
Preferred stock issued 455 5,000 - - (54) - 4,947
Common stock issued - - 76 1 803 - 803
Dividends paid - preferred - - - - - (537) (537)
Dividends paid - common - - - - - (5,859) (5,859)
Net income - - - - - 107 107
--------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2003 909 10,000 5,907 59 71,473 (42,800) 38,733
Common stock issued - - 2,746 27 31,747 - 31,775
Dividends paid - preferred - - - - - (1,000) (1,000)
Dividends paid - common - - - - - (7,551) (7,551)
Net income - - - - - 1,039 1,039
--------- ---------- --------- ---------- ------------ -------------- ----------
Balance December 31, 2004 909 $ 10,000 8,653 $ 87 $ 103,221 $ (50,311) $ 62,996
========= ========== ========= ========== ============ ============== ==========
See accompanying notes.
45
BNP RESIDENTIAL PROPERTIES, INC.
Consolidated Statements of Cash Flows
(all amounts in thousands)
Years ended December 31
2004 2003 2002
-------------- ------------- --------------
Operating activities
Apartment rental receipts, net $ 45,717 $ 37,491 $ 32,535
Restaurant rental receipts 3,920 3,908 4,021
Management fee receipts 762 826 1,088
Interest and other income receipts 185 404 184
Operating and administrative expense payments (23,402) (19,843) (16,209)
Interest payments (14,504) (13,192) (11,502)
-------------- ------------- --------------
Net cash provided by operating activities 12,677 9,594 10,118
Investing activities
Acquisitions of apartment properties (48,148) (23,382) (29,804)
Additions to apartment communities (5,161) (3,349) (2,731)
Net (funding of) release from lender reserves for replacements (457) 213 (133)
Casualty and other proceeds from apartment assets 918 - -
Sale of restaurant properties - 1,244 -
-------------- ------------- --------------
Net cash used in investing activities (52,848) (25,275) (32,669)
Financing activities
Net proceeds from issuance of preferred stock - 4,946 2,232
Net proceeds from issuance of common stock 31,462 770 864
Distributions to operating partnership minority unitholders (1,847) (1,845) (2,171)
Payment of dividends to preferred shareholder (1,000) (537) (200)
Payment of dividends to common shareholders (7,551) (5,859) (7,163)
Proceeds from notes payable 111,906 25,986 43,347
Principal payments on notes payable (91,941) (7,856) (14,425)
Payment of deferred financing costs (906) (244) (465)
-------------- ------------- --------------
Net cash provided by financing activities 40,123 15,361 22,018
-------------- ------------- --------------
Net decrease in cash and cash equivalents (47) (320) (533)
Cash and cash equivalents at beginning of year 564 884 1,418
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 517 $ 564 $ 884
============== ============= ==============
Reconciliation of net income to
net cash provided by operating activities:
Net income $ 1,039 $ 107 $ 1,248
Casualty gains, net of losses (255) - -
Write-off of unamortized loan costs at debt refinance 85 - 95
Minority interest in operating partnership 16 (174) 279
Depreciation and amortization of intangible assets 12,035 10,361 9,050
Amortization of defeasance credit (105) (228) (167)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (336) (297) (2)
Accounts payable and accrued expenses 119 (97) (163)
Deferred revenue, prepaid rent and security deposits 79 (79) (223)
-------------- ------------- --------------
Net cash provided by operating activities $ 12,677 $ 9,594 $ 10,118
============== ============= ==============
See accompanying notes.
46
BNP RESIDENTIAL PROPERTIES, INC.
Notes to Consolidated Financial Statements
December 31, 2004
Note 1. Summary of Significant Accounting Policies
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"). All significant intercompany balances
and transactions have been eliminated in these consolidated financial
statements.
We are a self-administered and self-managed real estate investment trust
("REIT") with operations in North Carolina, South Carolina and Virginia. Our
primary activity is the ownership and operation of apartment communities. As of
December 31, 2004, we managed 32 multi-family communities containing 7,912
units. Of these, we owned 25 apartment communities, containing 6,113 units.
Third parties owned the remaining seven communities, containing 1,799 units, and
we managed them on a contract basis. In addition to our apartment communities,
at December 31, 2004, we owned 40 properties that we lease to a third party
under a master lease on a triple-net lease basis. The lessee operates these
properties as restaurants and, under the terms of the lease, is totally
responsible for the operation and maintenance of the properties.
UpREIT Structure
We are structured as an UpREIT, or umbrella partnership real estate investment
trust. The company is the general partner and owns a majority interest in the
operating partnership, through which we conduct all of our operations. At
December 31, 2004, we owned 82% of the common ownership units of the operating
partnership and 100% of the preferred ownership units of the operating
partnership. We refer to the limited partners of the operating partnership as
minority common unitholders or as the minority interest. Limited partners will
generally be able to redeem their units for cash or, at our option as general
partner, for shares of common stock of the company on a one-for-one basis.
UpREITs are generally structured so that distributions of cash from the
operating partnership are allocated between the REIT and the limited partners
based on their respective unit ownership.
Reclassifications
We have reclassified certain 2003 and 2002 amounts to conform to the current
year presentation in the accompanying financial statements.
Beginning in 2004, we have presented operating activities in our consolidated
statements of cash flows using the direct method, which provides cash flow
amounts corresponding directly to lines in our statements of operations. (In
previous years, we presented this information using the indirect method, which
reconciles net income to net cash provided by operating activities.) We have
also adjusted the 2003 and 2002 comparative amounts in our consolidated
statements of cash flows to conform to the 2004 presentation by reclassifying
the net cash flows related to funding of lender reserves for apartment property
replacements from operating activities to investing activities. This
reclassification has no impact on the net decrease in cash and cash equivalents
for 2003 and 2002, only in the subtotals for net cash provided by operating
activities and net cash used in investing activities, as follows:
47
As Currently As Previously
Presented Adjustments Reported
----------------- ----------------- -----------------
(000's) (000's) (000's)
Year ended December 31, 2003
Net cash provided by operating activities $ 9,594 $(213) $ 9,807
Net cash used in investing activities (25,275) 213 (25,488)
Year ended December 31, 2002
Net cash provided by operating activities 10,118 133 9,984
Net cash used in investing activities (32,669) (133) (32,535)
We adopted Statement of Financial Accounting Standards ("FAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement
No. 13, and Technical Corrections," effective January, 2003. FAS 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 FAS 4. We reclassified the extraordinary item for loss
on early extinguishment of debt in 2002 to conform to FAS 145 in our 2003 Annual
Report. While adoption of FAS 145 had no impact on net income, it reduced income
before extraordinary items and eliminated the extraordinary item as previously
reported in our 2002 Annual Report, as follows:
As Previously
As Currently Reported in
Presented Adjustments 2002
----------------- ----------------- -----------------
(000's) (000's) (000's)
Year ended December 31, 2002
Revenues $38,164 $ - $38,164
Expenses 36,637 95 36,542
----------------- ----------------- -----------------
Income before minority interest and
extraordinary item 1,527 (95) 1,622
Minority interest in Operating Partnership 279 (22) 300
----------------- ----------------- -----------------
Income before extraordinary item 1,248 (73) 1,321
Extraordinary item - loss on early
extinguishment of debt - (73) 73
----------------- ----------------- -----------------
Net income $ 1,248 $ - $ 1,248
================= ================= =================
Segment Reporting
Operating segments are revenue-producing components of the company for which
separate financial information is produced internally for our management. Under
this definition, we operated, for all periods presented, as a single segment
(apartment operations). Our apartment operating activities are located within a
relatively small geographic area, and our chief operating decision maker does
not receive or utilize financial information on the basis of geographic areas.
We evaluate each community's performance individually; however, all of these
communities are garden-style construction, operate in the mid-market price
range, share similar economic characteristics, and provide similar services. We
do not conduct any operating activities with regard to restaurant rental income;
the triple-net lease arrangement for these properties requires the lessee to pay
virtually all of the costs associated with these properties.
Real Estate Investments
Real estate investments are stated at the lower of cost, less accumulated
depreciation, or fair value. In general, for properties acquired prior to 2002,
we compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings. For properties acquired after 2001, we performed detailed
analyses of components of the real estate assets acquired. For
48
these properties, we assigned estimated useful lives as follows: base building
structure, 43-60 years; land improvements, 7-20 years; short-lived building
components, 5-20 years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements (expenditures that
have been identified at the time the property is acquired, and which are
intended to position the property consistent with our physical standards) within
one to two years of acquisition of the related apartment property. 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 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. We
expense ordinary repairs and maintenance costs at apartment communities. Costs
of repairs and maintenance and capital improvements at restaurant properties are
borne by the lessee.
We evaluate our real estate assets from time to time, or upon occurrence of
significant adverse changes in operations, to assess whether any impairment
indicators are present that affect the recovery of the recorded values. If we
considered any real estate assets to be impaired, we would record a loss to
reduce the carrying value of the property to its estimated fair value. At
December 31, 2004 and 2003, none of our assets were considered impaired.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or
less when purchased to be cash equivalents.
Deferred Costs
We adopted FAS 142, Goodwill and Other Intangible Assets, effective January 1,
2002. Goodwill and intangible assets deemed to have indefinite lives are no
longer amortized after December 31, 2001, but are subject to annual impairment
tests in accordance with the Statement. We perform these annual tests as of
October 1 of each year. Based on our tests through October 1, 2004, we
determined that the intangible related to our 1994 acquisition of management
operations, net of accumulated amortization, is not impaired. The historical
cost of this asset is $3.7 million, with accumulated amortization of $2.6
million at December 31, 2004 and 2003.
We defer financing costs and amortize them using the straight-line method over
the terms of the related notes. If we pay down or pay off notes prior to their
maturity, we write off the related unamortized financing costs, reflected as a
charge to operations. Accumulated amortization on these assets was $1,210,000 at
December 31, 2004, and $870,000 at December 31, 2003.
As of December 31, 2004, we estimate future amortization of deferred financing
costs will be as follows:
2005 $380,000 2008 $152,000
2006 359,000 2009 110,000
2007 308,000 Thereafter 236,000
We defer costs incurred in connection with proposed investing and financing
transactions until the proposed transactions are consummated. We include such
costs in prepaid expenses and other assets on our balance sheet. If we determine
that a proposed transaction is not probable, we charge these costs to expense.
At December 31, 2004, deferred costs related to proposed transactions totaled
$130,000.
Fair Values of Financial Instruments
The carrying amount reported on the balance sheet for cash and cash equivalents
approximates fair value. We estimate the fair value of fixed-rate notes and
variable-rate notes payable using discounted cash flow analysis, based on our
current incremental borrowing rates for similar types of borrowing arrangements.
49
The aggregate fair value of our deed of trust and other notes payable was $296
million at December 31, 2004, and $242 million at December 31, 2003.
Use of Estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Depreciation
amounts included in these financial statements reflect our estimate of the life
and related depreciation rates for rental properties. In addition, the carrying
amount of the intangible asset related to acquisition of management operations
reflects our assessment of the continuing value of this asset. Actual results
could differ from these estimates.
Revenue Recognition
We record rental and other revenue as it is earned, net of our provision for
estimated uncollectible revenues. We amortize any cash concessions given at the
inception of an apartment lease over the approximate life of the lease, which is
generally one year or less. We record rental payments received prior to the
first of a given month as prepaid rent. We hold tenant security deposits in
trust in bank accounts separate from operating cash; related trust account
balances are included in the balance sheet in other current assets.
In December 2000, we received an $800,000 advance payment under a contract for
use of our cable equipment at five apartment communities. This receipt, net of
$20,000 of related costs, was recorded as deferred revenue, and we are
recognizing this rental revenue over the ten-year contract term beginning in
2001.
Deferred revenue and security deposits include the following amounts:
December 31
2004 2003
----------------- -----------------
(000's) (000's)
Liability for tenant security deposits $ 556 $ 393
Insurance proceeds held pending reconstruction of apartment building 186 -
Prepaid apartment rents 494 410
Prepaid restaurant rents 91 -
Deferred cable revenue 460 540
----------------- -----------------
$ 1,787 $ 1,344
================= =================
Advertising Costs
We expense advertising costs as they are incurred. Advertising expense totaled
$530,000 in 2004, $500,000 in 2003, and $420,000 in 2002.
Earnings Per Share
We calculate earnings per share based on the weighted average number of shares
outstanding during each year.
Comprehensive Income
Comprehensive income is defined as changes in shareholders' equity exclusive of
transactions with owners (such as capital contributions and dividends). We did
not have any comprehensive income items in 2004, 2003, or 2002, other than net
income as reported.
Stock-Based Compensation
The company has one employee Stock Option and Incentive Plan in place, which is
described more fully in Note 4. As allowed by FAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and FAS 123, "Accounting
for Stock-Based Compensation," we account for this plan using the intrinsic
value method under the recognition and measurement principles of Accounting
Principles Board
50
Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. If we had
applied the fair value recognition provisions of FAS 123 to stock-based employee
compensation, the effect would have been to reduce net income as reported by
$200 in 2004, $200 in 2003, and $5,000 in 2002, with no impact on basic and
diluted earnings per share amounts as reported.
Recently Issued Accounting Standards
In December 2004 the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123 (revised 2004), Share Based Payment, ("FAS 123(R)")
which is a revision of FAS 123, Accounting for Stock-Based Compensation. FAS
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FAS 95, Statement of Cash Flows. Generally, the approach in FAS
123(R) is similar to the approach described in FAS 123. However, FAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure is no longer an alternative. FAS 123(R) must
be adopted no later than July 1, 2005, and we expect to adopt FAS 123(R) as of
that date.
FAS 123(R) permits public companies to adopt its requirements using one of two
methods: a "modified prospective" method, in which compensation cost is
recognized beginning with the effective date based on the requirements of FAS
123(R) for all share-based payments granted after the effective date, and based
on the requirements of FAS 123 for all awards granted to employees prior to the
effective date that remain unvested on the effective date; or a "modified
retrospective" method, which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under FAS 123 for purposes of pro forma
disclosures. We plan to adopt FAS 123(R) using the "modified prospective" method
described above.
As permitted by FAS 123 and discussed above under the caption "Stock Based
Compensation," we currently account for share-based payments to employees using
Opinion 25's intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. As of December 31, 2004, all
outstanding grants of employee stock options are fully vested. The adoption of
FAS 123(R)'s fair value method could have a significant impact on our results of
operations, although it will have no impact on our overall financial position.
The impact of adoption of FAS 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future. However,
had we adopted FAS 123 (R) in prior periods, the impact of that standard would
have approximated the impact of FAS 123 as described in the disclosure of pro
forma amounts above.
Note 2. Real Estate Investments
Real estate investments consist of the following:
December 31
2004 2003
----------------- -----------------
(000's) (000's)
Apartment properties
Land $ 43,684 $ 30,780
Buildings and improvements 344,395 267,901
Computer and support equipment 1,041 980
Less accumulated depreciation (54,514) (44,789)
----------------- -----------------
334,605 254,872
51
December 31
2004 2003
----------------- -----------------
(000's) (000's)
Restaurant properties
Land 10,445 10,445
Buildings and improvements 26,961 26,961
Less accumulated depreciation (11,940) (11,263)
----------------- -----------------
25,466 26,142
----------------- -----------------
$360,071 $281,014
================= =================
During the three years ended December 31, 2004, we acquired the apartment
communities listed below. The results of operations of these apartment
communities are included in the financial statements from the dates of
acquisition.
2004 acquisitions:
o Bridges at Southpoint Apartments, acquired September 2004, for a total
cost of $10.2 million, paid in cash.
o The Fairington Apartments, acquired August 2004, for a total cost of $18.6
million, paid in cash.
o Savannah Shores Apartments, acquired July 2004, for an initial purchase
cost of $12.5 million, including assumption of $12.2 million in debt
obligations and $0.2 million net operating liabilities in excess of
operating assets acquired, and issuance of 7,695 operating partnership
units with an imputed value of $0.1 million. The acquisition agreement
provides for potential earn-out of additional purchase price of up to $1.7
million within a three-year period upon attainment of certain performance
standards; this would be funded through the issuance of operating
partnership units with an imputed value of $13.00 per unit to the
contributors. Prior to this acquisition, we managed this community on a
contract basis.
o Carriage Club Apartments, acquired June 2004, for a total cost of $19.7
million, paid in cash.
o Bridges at Wind River Apartments, acquired May 2004, for a total cost of
$25.1 million, including assumption of $24.6 million in debt obligations
and issuance of 41,752 operating partnership units with an imputed value of
$0.5 million. We received $0.2 million in net operating assets, consisting
primarily of cash.
2003 acquisitions:
o The Harrington Apartments, acquired August 2003, for a total cost of $17.9
million, paid in cash.
o The Place Apartments, acquired March 2003, for a total cost of $5.6
million, paid in cash.
2002 acquisitions:
o Marina Shores Waterfront Apartments, acquired September 2002, for a total
cost of $19.2 million, paid in cash.
o Barrington Place Apartments and Brookford Place Apartments, acquired May
2002, for a total cost of $32.2 million, including assumption of debt
obligations totaling $20.3 million, assumption and retirement of existing
liabilities of the former owners totaling $10.0 million, and issuance of
146,964 operating partnership units with an imputed value of $1.8 million.
We present the following unaudited pro forma summary information as if we had
owned the five properties acquired in 2004 and the two properties acquired in
2003 throughout all of both 2004 and 2003. These pro
52
forma amounts may not represent how we would have performed if these
acquisitions had really occurred prior to 2003. In addition, they do not purport
to project our results of operations for any future period.
2004 2003
---------------- -----------------
(000's) (000's)
Total revenue $ 55,880 $ 54,592
Net income (loss) 303 (674)
Loss attributable to common shareholders (697) (1,334)
Basic earnings per share:
Net income (loss) $ 0.04 $ (0.11)
Loss attributable to common shareholders (0.09) (0.23)
Diluted earnings per share:
Net income (loss) 0.01 (0.14)
Loss income attributable to common shareholders (0.09) (0.23)
During 2003, we sold two restaurant properties to the lessee for their net
carrying values, totaling $1,244,000. We applied the proceeds from these sales
to improvements at apartment communities and to reduce our line of credit
secured by the restaurant properties.
Note 3. Notes Payable
Notes payable consist of the following:
December 31
2004 2003
------------------ ------------------
(000's) (000's)
Lines of credit with a bank:
Revolving line of credit for principal sum of up to $30.0
million, due November 2007 (as modified July 2004), secured
by a deed of trust and assignment of rents of Latitudes
Apartments. Interest-only payments on the outstanding
balance due monthly at a variable interest rate of 30-day
LIBOR plus 1.65 % (4.11% at December 31, 2004). $ 10,166 $ 19,975
Principal sum of up to $16.3 million through January 2005,
then $15.5 million, due January 2006 (as modified December
2003), secured by deeds of trust and assignments of rents of
40 restaurant properties. Interest-only payments on the
outstanding balance due monthly at a variable interest rate
of 30-day LIBOR plus 1.80% (4.26% at December 31, 2004). 16,316 16,316
Variable rate notes payable:
Notes payable to a bank, secured by deeds of trust and
assignments of rents of three apartment properties.
Interest-only payments on the outstanding principal balances
due monthly at interest rates of 30-day LIBOR plus 1.75% to
1.80% (4.21% to 4.26% at December 31, 2004) through
mid-2007, then monthly installments of principal and
interest estimated at $165,000. Maturities in mid-2009, with
estimated balloon payments totaling $32.3 million. 33,900 -
53
December 31
2004 2003
------------------ ------------------
(000's) (000's)
Note payable to a bank in the principal amount of $10.5
million (as modified December 2004), secured by a deed of
trust and assignment of rents of Oak Hollow Apartments Phase
2. Payable in monthly installments of $56,000 including
principal and interest at 30-day LIBOR plus 1.85% (4.31% at
December 31, 2004). Maturity in December 2007, with an
estimated balloon payment of $9.7 million. 10,453 10,745
Note payable to a bank, secured by a deed of trust and
assignment of rents of The Harrington Apartments.
Interest-only payments on the outstanding principal balance
due monthly at a variable interest rate of 30-day LIBOR plus
1.75%; retired July 2004. - 14,400
Fixed rate notes payable:
Notes payable comprised of 11 loans (eight loans in 2003),
payable in monthly installments totaling $813,000 including
principal and interest at rates ranging from 5.13% to 8.55%,
with maturities in 2005 through 2014. Secured by deeds of
trust and assignments of rents of 11 apartment communities. 131,225 83,852
Notes payable comprised of ten loans, interest rates ranging
from 6.35% to 6.97%, payable in interest-only monthly
installments totaling $478,000, with maturities in 2007 and
2008. Secured by deeds of trust and assignments of rents of
ten apartment communities. 84,366 84,366
Notes payable, comprised of 11 loans, payable in monthly
installments totaling $2,700 including principal and
interest at 7.90% to 7.99%, secured by 11 vehicles; retired
in 2004. - 61
------------------ ------------------
$286,425 $229,714
================== ==================
During the three years ended December 31, 2004, we executed the following notes
payable in conjunction with acquisitions of apartment communities:
o $8.2 million fixed-rate note payable, September 2004, secured by a deed of
trust and assignment of rents of Bridges at Southpoint Apartments. This
loan provides for interest at 4.93% (5.00% effective rate), payable in
monthly installments of $34,000 through October 2007, then principal and
interest payable in monthly installments of $44,000 through September 2014,
with a balloon payment of $7.3 million at maturity in October 2014. We paid
and recorded deferred loan costs of $61,000 related to this loan.
o $13.4 million variable-rate note payable, August 2004, secured by a deed of
trust and assignment of rents of Fairington Apartments. This loan provides
for interest at 30-day LIBOR plus 1.75%, payable monthly, with principal
due August 2007, subject to an optional 24-month extension. If the loan is
extended, principal payments of $31,000 will be payable monthly beginning
September 2007, with the remaining principal balance of $12.7 million due
August 2009. We paid and recorded deferred loan costs of $76,000 related to
this loan.
54
o $9.0 million variable-rate note payable, July 2004, secured by a deed of
trust and assignment of rents of Savannah Shores Apartments. This loan
provides for interest at 30-day LIBOR plus 1.8%, payable monthly, with
principal due July 2007, subject to an optional 24-month extension. If the
loan is extended, principal payments of $16,000 will be payable monthly
beginning August 2007, with the remaining principal balance of $8.6 million
due July 2009. We applied proceeds of this loan, along with additional
funds drawn on our revolving line of credit, to retire the existing $12.2
million loan obligation related to Savannah Shores. We paid and recorded
deferred loan costs of $56,000 related to this loan.
o $14.9 million fixed-rate note payable, June 2004, secured by a deed of
trust and assignment of rents of Carriage Club Apartments. This loan
provides for interest at 5.15% (5.22% effective rate), payable in monthly
installments of $65,000 through July 2005, then principal and interest
payable in monthly installments of $81,000 through June 2009, with a
balloon payment of $14.0 million at maturity in July 2009. We paid and
recorded deferred loan costs of $90,000 related to this loan.
o $19.7 million fixed-rate note payable, May 2004, secured by a deed of trust
and assignment of rents of Bridges at Wind River Apartments. This loan
provides for interest at 5.57% (5.65% effective rate) and monthly payments
of principal and interest of $113,000, with a balloon payment of $16.5
million at maturity in June 2014, subject to an optional extension for one
year with interest at a variable rate. We applied the proceeds of this
note, along with additional funds drawn on our revolving line of credit, to
retire the existing $24.6 million loan obligations related to Bridges at
Wind River. We paid and recorded deferred loan costs of $157,000 related to
this loan.
o $14.4 million variable-rate note payable, August 2003, secured by a deed of
trust and assignment of rents of Harrington Apartments. This loan provided
for interest at 30-day LIBOR plus 1.75%, payable monthly. In conjunction
with this transaction, we paid and recorded deferred loan costs of
$118,000. We subsequently retired this loan in July 2004 (see refinancing
transactions below).
o $4.6 million fixed-rate note payable, March 2003, secured by a deed of
trust and assignment of rents of The Place Apartments. This loan provides
for interest at 5.06% (5.13% effective rate) and monthly payments including
principal and interest of $25,000, with a balloon payment of $3.8 million
at maturity in March 2013. We paid and recorded deferred loan costs of
$63,000 related to this loan.
o $15.9 million fixed-rate note payable, September 2002, secured by a deed of
trust and assignment of rents of Marina Shores Waterfront Apartments. This
loan provides for interest at 5.85% (5.93% effective rate) and monthly
payments including principal and interest of $94,000, with a balloon
payment of $13.5 million in October 2012. We paid and recorded deferred
loan costs of $149,000 related to this loan.
o $20.3 million fixed-rate note payable, assumed May 2002, secured by a deed
of trust and assignment of rents of Barrington Place Apartments. This loan
provides for interest at 6.91% (7.01% effective rate) and monthly payments
including principal and interest of $136,000, with a balloon payment of
$18.0 million in November 2010. We paid and recorded deferred loan costs of
$161,000 related to this loan assumption.
o $4.9 million fixed-rate note payable, June 2002, secured by a deed of trust
and assignment of rents of Brookford Place Apartments. This loan provides
for interest at 6.97% (7.07% effective rate) and monthly payments including
principal and interest of $32,000, with a balloon payment of $4.2 million
in June 2012. We applied the proceeds of this loan to retire existing loan
obligations of the former owners of Barrington Place and Brookford Place
Apartments. We paid and recorded deferred loan costs of $65,000 related to
this loan.
During this three-year period, we executed the following notes payable in
refinancing transactions:
55
o $15.0 million fixed-rate note payable, July 2004, secured by a deed of
trust and assignment of rents of Harrington Apartments. This loan provides
for interest at 5.15% (5.22% effective rate), payable in monthly
installments of $65,000 through August 2005, then principal and interest
payable in monthly installments of $82,000, with a balloon payment of $14.1
million at maturity in August 2009. We applied the proceeds to retire a
$14.4 million variable-rate note payable. We paid and recorded deferred
loan costs of $92,000 related to this loan. In addition, we wrote off
unamortized loan costs of $85,000 related to the debt retired.
o $11.5 million variable-rate note payable, April 2004, secured by a deed of
trust and assignment of rents of Chason Ridge Apartments. This loan
provides for interest at 30-day LIBOR plus 1.75%, payable monthly, and
principal due May 2007, subject to an optional 24-month extension. If the
loan is extended, principal payments of $27,000 will be payable monthly
beginning June 2007, with the remaining principal balance of $10.9 million
due April 2009. We applied $9.4 million of these proceeds to retire an
existing 8.5% deed of trust note related to Chason Ridge. We paid and
recorded deferred loan costs of $98,000 related to this loan.
o $7.9 million fixed-rate note payable, February 2002, secured by a deed of
trust and assignment of rents of Oakbrook Apartments. This loan provides
for interest at 6.99% (7.09% effective rate) and monthly payments including
principal and interest of $52,000, with a balloon payment of $6.9 million
in February 2012. We paid and recorded deferred loan costs of $94,000
related to this loan.
We applied the proceeds of the Oakbrook note to reduce our Latitudes line
of credit. In January 2002, we applied a $6.0 million draw on this line of
credit to retire a note payable in the amount of $6.1 million related to
Oakbrook. We wrote off unamortized loan costs of $95,000 related to the
debt retired.
In June 2004, we modified our revolving line of credit with a bank secured by
Latitudes Apartments to increase our maximum loan amount to $30.0 million,
extend the term of the loan through November 2007, and reduce the variable
interest rate on outstanding amounts to 30-day LIBOR plus 1.65% (previously
1.75%). In conjunction with this modification, we paid and recorded deferred
loan costs of $184,000. We also paid and recorded $32,000 in deferred loan costs
related to this loan in conjunction with a previous modification in January
2003. As of December 31, 2004, $19.8 million was available for draw under our
Latitudes line of credit.
In December 2003, we modified and extended our line of credit with a bank
secured by our restaurant properties to extend the maturity date of this loan to
January 2006. In conjunction with this modification, we paid and recorded
$41,000 in deferred loan costs in January 2004.
Interest payments totaled $14.5 million in 2004, $13.2 million in 2003, and
$11.5 million in 2002.
The loan agreements related to the lines of credit include covenants and
restrictions relating to, among other things, specified levels of debt service
coverage, leverage and net worth. To date, we have met all applicable
requirements.
As of December 31, 2004, we estimate future scheduled principal payments will be
as follows:
2005 $ 7,900,000 2008 $ 39,200,000
2006 17,300,000 2009 62,800,000
2007 70,000,000 Thereafter 89,200,000
56
Note 4. Shareholders' Equity
Authorized Capital Stock
Our bylaws and certificate of incorporation allow the Board of Directors to
authorize the issuance of up to 100 million shares of common stock and 10
million shares of preferred stock, issuable in series whose characteristics
would be set by the Board of Directors.
We have issued 909,090 shares of the Company's Series B Cumulative Convertible
Preferred stock to a single accredited investor, as follows:
Date Number of Shares Net Proceeds
------------------------ -------------------------- --------------------------
September 2003 454,545 $4,946,091
September 2002 227,272 2,391,905
December 2001 227,273 2,274,594
These preferred shares have a purchase price and liquidation preference of
$11.00 per share. The agreement for these shares provides for an initial
dividend yield of 10% through December 2009, then 12% for two years, and
thereafter the greater of 14% or 900 basis points over the 5-year Treasury rate.
The investor has the right to convert each Series B share into one share of the
company's common stock beginning in December 2004 or in certain circumstances,
such as a change of control or if the company calls the Series B stock for
redemption. The holders of preferred shares are generally not entitled to vote
on matters submitted to shareholders. Dividends on preferred shares are subject
to declaration by the Board of Directors.
Approximately 4.2 million authorized shares of common stock are reserved for
future issuance under the company's Stock Option and Incentive Plan, Dividend
Reinvestment and Stock Purchase Plan, and for conversion of Series B Preferred
shares and Operating Partnership units.
Dividend Reinvestment and Stock Purchase Plan
Our Dividend Reinvestment and Stock Purchase Plan ("DRIP Plan") allows the
company, at its option, to issue shares directly to Plan participants. We issued
65,697 shares in 2004, 72,890 shares in 2003, and 77,607 shares in 2002 through
the Plan.
Redemption of Operating Partnership Units
We redeemed operating partnership units from former minority unitholders by
issuing shares of the company's common stock on a one-for-one basis in the
following amounts: 24,618 shares in 2004, 3,166 shares in 2003, and 8,597 shares
in 2002.
Earnings per Common Share
We calculated basic and diluted earnings per share using the following amounts:
2004 2003 2002
----------------- ----------------- -----------------
(000's) (000's) (000's)
Numerators:
Numerator for basic earnings per share -
Net income $ 1,039 $ 107 $ 1,248
Cumulative preferred dividend (1,000) (661) (323)
----------------- ----------------- -----------------
Income (loss) available to common shareholders $ 39 $ (553) $ 925
================= ================= =================
Numerator for diluted earnings per share (1) -
Income (loss) before minority interest $ 1,055 $ (66) $ 1,527
Cumulative preferred dividend (1,000) (661) (323)
----------------- ----------------- -----------------
Income (loss) available to common shareholders $ 55 $ (727) $ 1,204
================= ================= =================
57
2004 2003 2002
----------------- ----------------- -----------------
(000's) (000's) (000's)
Denominators:
Denominator for basic earnings per share -
Weighted average common shares outstanding 7,617 5,868 5,787
Effect of dilutive securities:
Convertible operating partnership units 1,856 1,843 1,786
Stock options (2) 31 6 8
----------------- ----------------- -----------------
Dilutive potential common stock 1,887 1,849 1,794
----------------- ----------------- -----------------
Denominator for diluted earnings per share -
Adjusted weighted average common shares and
assumed conversions 9,504 7,717 7,581
================= ================= =================
(1) Assumes conversion of operating partnership units to common shares.
Preferred B Shares are not dilutive.
(2) We excluded options to purchase 140,000 shares of common stock at $12.50,
110,000 shares at $12.25, 120,000 shares at $13.125, and 60,000 shares at $11.25
from the calculation of diluted earnings per share for 2003 and 2002. The
exercise price of these options was greater than the average market price of the
common shares for these periods, and the effect would be anti-dilutive.
Stock Option and Incentive Plan
We have reserved 470,000 shares of the company's common stock for issuance under
our employee Stock Option and Incentive Plan. Options have been granted to
employees at prices equal to the fair market value of the stock on the dates the
options were granted or repriced. We calculated the fair value of each option
grant on the date of grant using the Black-Scholes option-pricing model. Options
are generally exercisable in four annual installments beginning one year after
the date of grant, and expire ten years after the date of grant.
The following table summarizes information about stock options outstanding at
December 31, 2004.
Weighted
Average
Remaining Number of Number of
Contractual Options Options
Life (Years) Outstanding Exercisable
--------------- ----------------- -----------------
Exercise price $9.25 per share 5.15 37,500 37,500
Exercise price $11.25 per share 3.83 60,000 60,000
Exercise price $13.125 per share 3.50 120,000 120,000
Exercise price $12.25 per share 2.33 110,000 110,000
----------------- -----------------
All options outstanding 3.36 327,500 327,500
================= =================
There were no grants of options during 2004, 2003 or 2002. As of December 31,
2004, all outstanding options were fully vested. Changes in outstanding stock
options were as follows:
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ ------------- ------------ -------------
Beginning balance 477,500 $12.12 477,500 $12.12 477,500 $12.12
Granted - - - - - -
58
2004 2003 2002
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ ------------- ------------ -------------
Exercised (99,844) 12.50 - - - -
Repurchased - - - - - -
Forfeited (50,156) 11.85 - - - -
------------- ------------ ------------- ------------ ------------- ------------
Ending balance 327,500 $12.04 477,500 $12.12 477,500 $12.12
============= ============ ============= ============ ============= ============
Exercisable at the end of
the year 327,500 $12.04 465,625 $12.19 453,750 12.27
============= ============ ============= ============ ============= ============
During 2004, we issued 99,844 shares of our common stock, net of 40,071 shares
exchanged, upon exercise of options by three management employees, for cash
proceeds of $700,000.
Note 5. Rental Operations
Apartment Properties
We lease our residential apartments under operating leases with monthly payments
due in advance. Terms of the apartment leases are generally one year or less,
with none longer than two years.
Restaurant Properties - Master Lease Agreement
The lease agreement with Boddie-Noell Enterprises ("Enterprises") has a primary
term expiring in December 2007, but grants Enterprises three five-year renewal
options. Enterprises pays annual rent equal to the greater of the specified
minimum rent or 9.875% of food sales from the restaurants. Under certain
conditions as defined in the agreement, both Enterprises and the company have
the right to substitute another restaurant property for a property covered by
the lease. Assuming renewal of the lease, after December 31, 2007, Enterprises
has the right to terminate the lease on up to five restaurant properties per
year by offering to purchase them under specified terms.
In addition, we entered into a separate agreement with Enterprises that, after
December 31, 1997, allowed Enterprises to purchase, under specified terms, up to
seven restaurant properties deemed non-economic. During 2003 we sold two
restaurants to Enterprises, the lessee, under this agreement. We sold five
restaurants in previous years to Enterprises under this clause.
The lease requires Enterprises to pay monthly installments of minimum rent and
quarterly payments calculated based on the percentage rent, subject to an annual
calculation of the greater of minimum or percentage rent. We received the
minimum rent in 2004, 2003, and 2002. We expect annual minimum rent will be $3.8
million in years 2005 through 2007.
Casualty Gains
During 2004, we recorded casualty gains totaling $269,000 related to fires that
resulted in substantial damage to one building each at two of our apartment
communities. We received insurance proceeds totaling $895,000, against which we
identified and wrote off $626,000 net carrying value of assets destroyed.
We are fully insured for these losses, including rent continuation insurance
covering 100% of lost rental income. Through December 31, 2004, we recorded
$131,000 in recovery of lost rents, included in apartment rental income in our
statement of operations.
59
Note 6. Income Taxes
We operate as, and elect to be taxed as, a REIT under the Internal Revenue Code.
To qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we currently distribute at least 90%
of our adjusted taxable income to our common shareholders. We intend to adhere
to these requirements and maintain the company's REIT status. As a REIT, we
generally will not be subject to corporate level federal or state income tax on
taxable income we distribute currently to our shareholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal and state
income taxes at regular corporate rates (including any applicable alternative
minimum tax) and may not be able to qualify as a REIT for four subsequent
taxable years. Even if we qualify for taxation as a REIT, we may be subject to
certain state and local taxes on income and property, and to federal income and
excise taxes on undistributed taxable income. In addition, taxable income from
non-REIT activities managed through taxable REIT subsidiaries would be subject
to federal, state and local income taxes.
The following table reconciles our income as reflected in our financial
statements to REIT taxable income. Taxable income differs from income for
financial statement purposes, primarily due to differences for tax purposes in
the estimated useful lives and methods used to compute depreciation and the
carrying value (basis) of the investment in properties. For federal and state
income tax purposes, we will report real estate investments with a total cost
basis of $390 million and accumulated depreciation of $88 million as of December
31, 2004.
2004 2003 2002
Estimate Actual Actual
----------------- ----------------- -----------------
(000's) (000's) (000's)
Income (loss) subject to income tax -
Operating Partnership $ 1,050 $ (66) $ 1,527
Reconciling items:
Add differences in deductions for depreciation
and disposals of real estate assets 400 129 683
Less one-time deduction allocated to
Wind River Apartments contributor (1,750) - -
Other book/tax differences, net 60 (163) (314)
----------------- ----------------- -----------------
Adjusted taxable (loss) income -
Operating Partnership (240) (100) 1,896
Minority share of taxable income 1,650 124 (367)
----------------- ----------------- -----------------
Taxable income subject to dividend requirement $ 1,410 $ 24 $ 1,529
================= ================= =================
Minimum dividend required (90% of
taxable income) $ 1,270 $ 21 $ 1,376
================= ================= =================
The actual tax deduction for dividends that we take, and the taxability of
dividends to shareholders, is based on a measurement of "earnings and profits"
as defined by the Internal Revenue Code. Earnings and profits differ from
regular taxable income, primarily due to further differences in the estimated
useful lives and methods used to compute depreciation. The following table
reconciles the dividends paid deduction taken by the company (the portion of
dividends paid that are taxable as ordinary income to shareholders) on its tax
returns to cash dividends paid.
60
2004 2003 2002
Estimate Actual Actual
----------------- ----------------- -----------------
(000's) (000's) (000's)
Dividends paid deduction for
Preferred dividends paid $ 1,000 $ 537 $ 200
Common dividends paid 920 - 1,898
----------------- ----------------- -----------------
1,920 537 2,098
Portion of common dividends
designated return of capital 6,630 5,858 5,265
----------------- ----------------- -----------------
Total dividends paid $ 8,550 $ 6,395 $7,363
================= ================= =================
We paid dividend distributions totaling $1.00 per share to common shareholders
in 2004 and 2003, and $1.24 per share to common shareholders in 2002. In early
January following each year end, we must make an estimate of earnings and
profits, and publish an allocation between ordinary dividend income and
non-taxable return of capital to common shareholders. The allocation between
ordinary dividend income and non-taxable return of capital to common
shareholders was as follows:
2004 2003 2002
$ % $ % $ %
----------- ------------ ----------- ----------- ----------- -----------
Ordinary income $0.12 12.0% $0.17 17.0% $0.24 19.4%
Return of capital 0.88 88.0% 0.83 83.0% 1.00 80.6%
----------- ------------ ----------- ----------- ----------- -----------
$1.00 100.0% $1.00 100.0% $1.24 100.0%
=========== ============ =========== =========== =========== ===========
Note 7. Related Party Transactions
In July 2004, we issued 7,695 operating partnership units to acquire Savannah
Shores Apartments from a group of investors to whom we refer as the "Chrysson
Parties." Previously, between 1997 and 2002, we issued 1,496,918 operating
partnership units to acquire eight apartment communities from this group.
Certain current directors of the company were shareholders and officers in the
Chrysson Parties.
In February 1997, we signed a participating loan agreement with The Villages of
Chapel Hill Limited Partnership, the owner of an apartment community that we
manage. We made a loan to The Villages of $2.5 million to fund a substantial
rehabilitation of its apartment community and guaranteed a $1.5 million bank
loan. In exchange, we receive minimum interest on our loan at the greater of
12.5% or the 30-day LIBOR rate plus 6.125% and an annual loan guarantee fee. We
also receive 25% participation in increased rental revenue and 25% participation
in the increase in value of the property. The Villages subsequently reduced the
outstanding principal balance of its note payable to us to $100,000, which has
been outstanding since February 2000. In July 2001, we modified the
participating loan agreement to establish a $950,000 "fixed portion" of our
participation in the increase in value of the property and extend the period for
our 25% participation in increased rental revenue and increase in value of the
property to the earlier of July 2011 or sale or refinance of the property.
Required payment of the fixed portion is subject to cash flow from The Villages
property, as defined in the agreement. Interest on the outstanding fixed portion
accrues at the greater of a prime rate or 8%, payable monthly.
We received interest and participation income of $59,000 in 2004, $59,000 in
2003, and $60,000 in 2002. In addition, we received guarantee fees of $12,000 in
2004, 2003 and 2002. We received $383,000 of the fixed portion during 2002 and
2001. Because the collectibility of the remaining fixed portion is subject to
cash flow and therefore uncertain, we have provided a reserve for collection of
this receivable. At December 31, 2004 and 2003, we have reflected the principal
portion of notes receivable from The Villages of Chapel Hill Limited Partnership
as follows, included in our balance sheets in other assets.
61
Advances receivable $ 100,000
Fixed portion of shared appreciation 567,434
Less reserve for collection of fixed portion (567,434)
----------------
$ 100,000
================
In 1996 through 1999, we made loans totaling $180,000 to certain officers of the
company. These loans are included in our balance sheets in other assets.
Note 8. Profit Sharing Plan
The employees of the company are participants in a profit sharing plan pursuant
to Section 401 of the Internal Revenue Code. We make limited matching
contributions based on the level of employee participation as defined in the
plan. We made contributions to the plan totaling $82,000 in 2004, $57,000 in
2003, and $59,000 in 2002.
Note 9. Commitments and Contingencies
In December 2004, we entered into agreements to acquire a portfolio of four
apartment communities containing a total of 1,086 apartment units. The aggregate
purchase price will be $51.8 million and consists of the assumption or
refinancing of up to $43.2 million of debt on the properties, with the remaining
$8.6 million to be paid in operating partnership units with an imputed value of
$13.50 per unit. We expect to complete these acquisitions by the end of March
2005. We currently manage these apartment communities on a contract basis.
Through December 2004, we spent $385,000, with $705,000 remaining, under a
contract for reconstruction of an apartment building at Latitudes Apartments
that had been significantly damaged by fire. We expect to complete this
reconstruction project by the end of April 2005.
We currently lease 7,800 square feet of office space in downtown Charlotte,
North Carolina, for our corporate and administrative offices. Rent expense
totaled $163,000 in 2004, $163,000 in 2003, and $169,000 in 2002. The lease
provides for monthly rental of $15,000 and expires June 2008.
We have agreements with four of our executive officers that provide for cash
compensation and other benefits if we terminate them without cause or if a
change in control of the company occurs.
The company is a party to a variety of legal proceedings arising in the ordinary
course of its business. We believe that such matters will not have a material
effect on the financial position or results of operations of the company.
Note 10. Quarterly Financial Data (Unaudited)
We present below selected financial data (unaudited) for the years ended
December 31, 2004 and 2003.
Net Income (Loss) Income (Loss)
------------------------------------- Available to
Per Share Common
----------------------- Shareholders-
Revenues Total Basic Diluted Per Share, Diluted
-------------------- ------------- ----------- ----------- -----------------------
(000's) (000's)
2004
First quarter $ 11,231 $ 373 $ 0.06 $ 0.05 $ 0.02
Second quarter 11,858 217 0.03 0.02 (0.01)
62
Net Income (Loss) Income (Loss)
------------------------------------- Available to
Per Share Common
----------------------- Shareholders-
Revenues Total Basic Diluted Per Share, Diluted
-------------------- ------------- ----------- ----------- -----------------------
(000's) (000's)
Third quarter 13,726 299 0.03 0.03 0.01
Fourth quarter 14,050 150 0.02 0.01 (0.01)
-------------------- ------------- ----------- ----------- -----------------------
$ 50,865 $ 1,039 $ 0.14 $ 0.11 $ 0.01
==================== ============= =========== =========== =======================
2003
First quarter $ 10,243 $ 146 $ 0.02 $ 0.02 $ 0.00
Second quarter 10,180 (393) (0.06) (0.07) (0.08)
Third quarter 10,876 137 0.02 0.01 (0.01)
Fourth quarter 11,361 217 0.04 0.03 0.00
-------------------- ------------- ----------- ----------- -----------------------
$ 42,660 $ 107 $ 0.02 $ (0.01) $ (0.09)
==================== ============= =========== =========== =======================
Note 11. Subsequent Events
The Board of Directors declared a regular quarterly dividend of $0.25 per common
share on January 20, 2005, payable on February 15, 2005, to shareholders of
record on February 1, 2005. The Board of Directors also authorized the payment
of dividends totaling $250,000 to the Series B Preferred shareholder.
Effective January 26, 2005, we acquired Boddie Investment Company ("BIC") in
exchange for 508,578 shares of our common stock valued at $8.2 million. As part
of the acquisition, BIC surrendered, and we cancelled, 72,399 shares of our
common stock valued at $1.2 million. As a result of this acquisition, we have
assumed the role of general partner and acquired certain economic interests in
the following limited partnerships: Marina Shores Associates One Limited
Partnership (50% economic interest), The Villages of Chapel Hill Limited
Partnership (1% economic interest) and The Villages of Chapel Hill - Phase 5,
Limited Partnership (1% economic interest). Prior to this acquisition, we
managed, on a fee basis, the properties owned by these partnerships. We will
continue to manage these properties following our acquisition of BIC. We have
not completed our evaluation of this acquisition as to whether consolidation of
these partnerships will be required.
63
Report of Independent Auditors
Board of Directors and Stockholders
BNP Residential Properties, Inc.
We have audited the accompanying statement of revenue and certain operating
expenses of Oakwood Raleigh Apartments for the year ended December 31, 2003.
This statement is the responsibility of Oakwood Raleigh Apartments' management.
Our responsibility is to express an opinion on this statement based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Apartments' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenue and certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of Oakwood Raleigh Apartments' revenue and
expenses.
In our opinion, the statement of revenue and certain operating expenses referred
to above presents fairly, in all material respects, the revenues and certain
operating expenses described in Note 1 of Oakwood Raleigh Apartments for the
year ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Greenville, South Carolina
October 23, 2004
64
Oakwood Raleigh Apartments
Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003 and
For the unaudited period January 1 through May 11, 2004
January 1
Year ended through
December 31, May 11,
2003 2004
--------------------- ---------------------
(Unaudited)
Rental income $3,195,385 $1,057,413
Certain operating expenses:
Property operations expense 1,076,443 433,416
Property insurance 141,580 42,737
Property taxes 377,517 142,627
--------------------- ---------------------
1,595,540 618,780
--------------------- ---------------------
Revenue in excess of certain operating expenses $1,599,845 $ 438,633
===================== =====================
See accompanying notes.
65
Oakwood Raleigh Apartments
Notes to Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003, and
For the unaudited period January 1 through May 11, 2004
1. Summary of Significant Accounting Policies
Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Durham, North Carolina. Oakwood
Raleigh Apartments is not a legal entity; it is an apartment property acquired
by BNP Residential Properties, Inc. in May, 2004, and subsequently renamed
Bridges at Wind River Apartments. The 346-unit apartment property was built in
1998 and 1999, with construction of these units substantially completed in
January 2000.
We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.
Revenue recognition
Oakwood Raleigh Apartments leased its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases were for terms of one year or less. Rental and other revenues were
recorded as earned.
Advertising expense
Oakwood Raleigh Apartments charged advertising costs to property operations
expense as incurred. Advertising expense included in property operations expense
totaled approximately $82,000 for the year ended December 31, 2003, and
approximately $44,000 for the interim period in 2004.
Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.
Interim financial data
The unaudited financial statements for the period January 1 through May 11,
2004, include all adjustments that are, in management's opinion, necessary for a
fair presentation of the revenues and certain operating expenses for this
interim period. Operating results for the period January 1 through May 11, 2004,
are not necessarily indicative of the results to be expected for the entire year
ending December 31, 2004.
2. Environmental Matters
Bridges at Wind River Apartments, formerly named Oakwood Raleigh Apartments, has
been subjected to Phase I environmental reviews. These reviews did not reveal,
nor is management aware of, any environmental liability that management believes
would have a material adverse effect on the accompanying financial statements.
66
Report of Independent Auditors
Board of Directors and Stockholders
BNP Residential Properties, Inc.
We have audited the accompanying statement of revenue and certain operating
expenses of Carriage Club Apartments for the year ended December 31, 2003. This
statement is the responsibility of Carriage Club Apartments' management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Apartments' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenue and certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of Carriage Club Apartments' revenue and expenses.
In our opinion, the statement of revenue and certain operating expenses referred
to above presents fairly, in all material respects, the revenues and certain
operating expenses described in Note 1 of Carriage Club Apartments for the year
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Greenville, South Carolina
October 23, 2004
67
Carriage Club Apartments
Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003, and
For the unaudited period January 1 through June 28, 2004
January 1
Year ended through
December 31, June 28,
2003 2004
--------------------- ---------------------
(Unaudited)
Rental income $2,087,597 $1,058,213
Certain operating expenses:
Property operations expense 555,708 282,555
Property insurance 32,594 17,871
Property taxes 131,771 64,806
--------------------- ---------------------
720,073 365,232
--------------------- ---------------------
Revenue in excess of certain operating expenses $1,367,524 $ 692,981
===================== =====================
See accompanying notes.
68
Carriage Club Apartments
Notes to Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003, and
For the unaudited period January 1 through June 28, 2004
1. Summary of Significant Accounting Policies
Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Mooresville, North Carolina.
Carriage Club Apartments is not a legal entity; it is an apartment property
acquired by BNP Residential Properties, Inc. in June 2004. The 268-unit
apartment property was built in 2000.
We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.
Revenue recognition
Carriage Club Apartments leased its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases were for terms of one year or less. Rental and other revenues were
recorded as earned.
Advertising expense
Carriage Club Apartments charged advertising costs to property operations
expense as incurred. Advertising expense included in property operations expense
totaled approximately $39,000 for the year ended December 31, 2003, and
approximately $19,000 for the interim period in 2004.
Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.
Interim financial data
The unaudited financial statements for the period January 1 through June 28,
2004, include all adjustments that are, in management's opinion, necessary for a
fair presentation of the revenues and certain operating expenses for this
interim period. Operating results for the period January 1 through June 28,
2004, are not necessarily indicative of the results to be expected for the
entire year ending December 31, 2004.
2. Environmental matters
Carriage Club Apartments has been subjected to Phase I environmental reviews.
These reviews did not reveal, nor is management aware of, any environmental
liability that management believes would have a material adverse effect on the
accompanying financial statements.
69
Report of Independent Auditors
Board of Directors and Stockholders
BNP Residential Properties, Inc.
We have audited the accompanying statements of revenue and certain operating
expenses of Savannah Shores Apartments for the years ended December 31, 2003 and
2002, and for the six-month period ended June 30, 2004. These statements are the
responsibility of Savannah Shores Apartments' management. Our responsibility is
to express an opinion on these statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Apartments' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying statements of revenue and certain operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and are not intended
to be a complete presentation of Savannah Shores Apartments' revenues and
expenses.
In our opinion, the statements of revenue and certain operating expenses
referred to above presents fairly, in all material respects, the revenue and
certain operating expenses described in Note 1 for Savannah Shores Apartments
for the years ended December 31, 2003 and 2002 and for the six-month period
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young, LLP
Greenville, South Carolina
February 23, 2005
70
Savannah Shores Apartments
Statements of Revenue and Certain Operating Expenses
Six Months
Year ended Year ended ended
December 31, December 31, June 30,
2002 2003 2004
-------------------- -------------------- -----------------
Rental income $1,728,847 $1,637,696 $748,787
Certain operating expenses:
Property operations expense 638,702 503,495 330,244
Property insurance 125,658 183,566 62,906
Property taxes 147,739 152,127 91,430
-------------------- -------------------- -----------------
912,099 839,188 484,580
-------------------- -------------------- -----------------
Revenue in excess of certain
operating expenses $ 816,748 $ 798,508 $264,207
==================== ==================== =================
See accompanying notes.
71
Savannah Shores Apartments
Notes to Statements of Revenue and Certain Operating Expenses
Years ended December 31, 2002 and 2003, and
Six months ended June 30, 2004
1. Summary of Significant Accounting Policies
Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Myrtle Beach, South Carolina.
Savannah Shores Apartments is not a legal entity; it is an apartment property
acquired by BNP Residential Properties, Inc. in July 2004. The 198-unit
apartment property was built in 1998.
We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.
Revenue recognition
Savannah Shores Apartments leases its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases are for terms of one year or less. Rental and other revenues are recorded
as earned.
Advertising expense
Savannah Shores Apartments charged advertising costs to property operations
expense as incurred. Advertising expense included in property operations expense
totaled approximately $29,000 in 2002, $23,000 in 2003, and $9,000 during the
six months ended June 30, 2004.
Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.
2. Environmental matters
Savannah Shores Apartments has been subjected to Phase I environmental reviews.
These reviews did not reveal, nor is management aware of, any environmental
liability that management believes would have a material adverse effect on the
accompanying financial statements.
72
Report of Independent Auditors
Board of Directors and Stockholders
BNP Residential Properties, Inc.
We have audited the accompanying statement of revenue and certain operating
expenses of Fairington Apartments for the year ended December 31, 2003. This
statement is the responsibility of Fairington Apartments' management. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Apartments' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying statement of revenue and certain operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of Fairington Apartments' revenue and expenses.
In our opinion, the statement of revenue and certain operating expenses referred
to above presents fairly, in all material respects, the revenues and certain
operating expenses described in Note 1 of Fairington Apartments for the year
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Greenville, South Carolina
December 10, 2004
73
Fairington Apartments
Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003, and
For the unaudited period January 1 through August 4, 2004
January 1
Year ended through
December 31, August 4,
2003 2004
--------------------- ---------------------
(Unaudited)
Rental income $1,917,104 $1,091,523
Certain operating expenses:
Property operations expense 676,204 429,099
Property insurance 62,233 42,125
Property taxes 209,488 120,848
--------------------- ---------------------
947,925 592,072
--------------------- ---------------------
Revenue in excess of certain operating expenses $ 969,179 $ 499,451
===================== =====================
See accompanying notes.
74
Fairington Apartments
Notes to Statements of Revenue and Certain Operating Expenses
For the year ended December 31, 2003, and
For the unaudited period January 1 through August 4, 2004
1. Summary of Significant Accounting Policies
Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Charlotte, North Carolina.
Fairington Apartments is not a legal entity; it is an apartment property
acquired by BNP Residential Properties, Inc. in August 2004. The 250-unit
apartment property was built in 1981.
We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.
Revenue recognition
Fairington Apartments leased its residential apartments under operating leases
with monthly payments due in advance. The majority of the apartment leases were
for terms of one year or less. Rental and other revenues were recorded as
earned.
Advertising expense
Fairington Apartments charged advertising costs to property operations expense
as incurred. Advertising expense included in property operations expense totaled
approximately $27,000 for the year ended December 31, 2003, and approximately
$14,000 for the interim period in 2004.
Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.
Interim financial data
The unaudited financial statements for the period January 1 through August 4,
2004, include all adjustments that are, in management's opinion, necessary for a
fair presentation of the revenues and certain operating expenses for this
interim period. Operating results for the period January 1 through August 4,
2004, are not necessarily indicative of the results to be expected for the
entire year ending December 31, 2004.
2. Environmental matters
Fairington Apartments has been subjected to Phase I environmental reviews. These
reviews did not reveal, nor is management aware of, any environmental liability
that management believes would have a material adverse effect on the
accompanying financial statements.
75
Sterling Park Apartments
Statements of Revenue and Certain Operating Expenses (Unaudited)
January 1
Year ended through
December 31, September 29,
2003 2004
--------------------- ---------------------
Rental income $1,446,958 $1,059,860
Certain operating expenses:
Property operations expense 538,914 420,814
Property insurance 41,362 28,928
Property taxes 113,748 89,239
--------------------- ---------------------
694,024 538,981
--------------------- ---------------------
Revenue in excess of certain operating expenses $ 752,934 $ 520,879
===================== =====================
See accompanying notes.
76
Sterling Park Apartments
Notes to Statements of Revenue and Certain Operating Expenses (Unaudited)
For the year ended December 31, 2003, and
For the period January 1 through September 29, 2004
1. Summary of Significant Accounting Policies
Basis of presentation
These statements of revenue and certain operating expenses reflect the
operations of an apartment property located in Durham, North Carolina. Sterling
Park Apartments is not a legal entity; it is an apartment property acquired by
BNP Residential Properties, Inc. in September 2004, and subsequently renamed
Bridges at Southpoint Apartments. The 192-unit apartment property was built in
1987.
We prepared these statements in accordance with Rule 3-14 of Regulation S-X.
Accordingly, these statements exclude items such as interest, depreciation and
amortization, and general and administrative expenses that are not comparable to
the anticipated future on-site operations of the apartment property.
Revenue recognition
Sterling Park Apartments leased its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases were for terms of one year or less. Rental and other revenues were
recorded as earned.
Advertising expense
Sterling Park Apartments charged advertising costs to property operations
expense as incurred. Advertising expense included in property operations expense
totaled approximately $42,000 for the year ended December 31, 2003, and
approximately $34,000 for the interim period in 2004.
Use of estimates
We are required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes in order to prepare
them in accordance with generally accepted accounting principles. Actual results
could differ from those amounts.
Interim financial data
The financial statements for the period January 1 through September 29, 2004,
include all adjustments that are, in management's opinion, necessary for a fair
presentation of the revenues and certain operating expenses for this interim
period. Operating results for the period January 1 through September 29, 2004,
are not necessarily indicative of the results to be expected for the entire year
ending December 31, 2004.
2. Environmental Matters
Bridges at Southpoint Apartments, formerly named Sterling Park Apartments, has
been subjected to Phase I environmental reviews. These reviews did not reveal,
nor is management aware of, any environmental liability that management believes
would have a material adverse effect on the accompanying financial statements.
77
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation
Year ended December 31, 2004
Gross Amount at Which
Description Encumb. Initial Costs Costs Carried at Close of Period (2)
----------- ------- ------------- Capitalized ------------------------------
Buildings & Subsequent Buildings &
Land Improvem'ts to Acquisition Land Improvem'ts Total
Apartment Properties:
North Carolina:
Abbington Place, Greensboro $ 15,785,250 $ 2,302,000 $23,598,676 $ 350,728 $ 2,302,000 $ 23,949,404 $ 26,251,404
Allerton Place, Greensboro 10,270,000 1,384,000 14,650,428 234,756 1,384,000 14,885,184 16,269,184
Barrington Place, Charlotte 19,763,051 2,604,000 24,002,687 280,484 2,604,000 24,283,171 26,887,171
Brookford Place, Greensboro 4,743,245 465,000 5,157,507 85,392 465,000 5,242,899 5,707,899
Carriage Club, Mooresville 14,900,000 1,984,000 17,714,261 44,494 1,984,000 17,758,755 19,742,755
Chason Ridge, Fayetteville 11,500,000 624,000 11,790,472 954,828 994,606 12,374,694 13,369,300
Fairington, Charlotte 13,400,000 4,257,200 14,322,231 196,129 4,257,200 14,518,360 18,775,560
Harrington, Charlotte 15,000,000 1,790,000 16,113,942 416,233 1,790,000 16,530,175 18,320,175
Harris Hill, Charlotte 5,527,259 1,003,298 7,867,857 1,252,325 1,003,298 9,120,182 10,123,480
Madison Hall, Clemmons 4,245,000 303,000 6,054,307 258,653 303,000 6,312,959 6,615,959
Marina Sh. Waterfront, Corneli15,485,060 4,144,000 15,062,322 1,003,097 4,144,000 16,065,419 20,209,419
Oak Hollow, Cary 8,385,000 1,480,000 10,808,689 1,732,090 1,480,000 12,540,779 14,020,779
Oak Hollow - Phase 2, Cary 10,453,470 1,914,000 10,485,239 2,070,839 1,914,000 12,556,078 14,470,078
Oakbrook, Charlotte 7,650,608 848,835 8,523,384 1,148,120 848,835 9,671,504 10,520,339
Paces Commons, Charlotte 15,906,778 1,430,158 12,871,424 1,688,557 1,448,184 14,541,955 15,990,139
Paces Village, Greensboro 7,000,000 1,250,000 9,416,580 663,255 1,250,000 10,079,835 11,329,835
Pepperstone, Greensboro 3,883,750 552,000 5,015,153 333,135 552,000 5,348,288 5,900,288
Savannah Place, Winston-Salem 7,312,500 790,000 10,032,721 436,376 790,000 10,469,097 11,259,097
Southpoint, Durham 8,200,000 1,610,500 8,620,734 68,990 1,610,500 8,689,724 10,300,224
Summerlyn Place, Burlington 6,645,000 837,000 9,559,115 170,729 837,000 9,729,845 10,566,845
Waterford Place, Greensboro 11,089,000 1,686,000 16,745,972 13,973 1,686,000 16,759,945 18,445,945
Wind River, Morrisville 19,594,972 3,170,000 21,922,771 380,079 3,170,000 22,302,850 25,472,850
Woods Edge, Durham 9,750,000 994,000 13,061,195 1,712,553 994,000 14,773,748 15,767,748
Computer and support equipment - - - 1,040,593 - 1,040,593 1,040,593
----------------------------------------------------------------------------------------------
246,489,943 37,422,991 293,397,666 16,536,409 37,811,623 309,545,443 347,357,066
South Carolina:
The Place, Greenville 4,453,780 630,000 4,991,397 295,446 630,000 5,286,843 5,916,843
Savannah Shores, Myrtle Beach 9,000,000 1,881,890 10,664,750 114,865 1,881,890 10,779,615 12,661,505
----------------------------------------------------------------------------------------------
13,453,780 2,511,890 15,656,147 410,311 2,511,890 16,066,458 18,578,348
Virginia:
Latitudes, Virginia Beach 10,165,870 3,360,000 18,606,667 1,217,059 3,360,000 19,823,726 23,183,726
----------------------------------------------------------------------------------------------
Total Apartment Properties 270,109,593 43,294,881 327,660,480 18,163,778 43,683,513 345,435,627 389,119,140
Description
-----------
Accumulated Date of Date Life
Depreciation Constr. Acquired (Years)
Apartment Properties:
North Carolina:
Abbington Place, Greensboro $ 5,997,264 1997 Dec-97 40
Allerton Place, Greensboro 3,134,690 1998 Sep-98 40
Barrington Place, Charlotte 1,811,678 1999 May-02 60
Brookford Place, Greensboro 461,459 1998 May-02 60
Carriage Club, Mooresville 308,753 2000 Jun-04 60
Chason Ridge, Fayetteville 2,319,737 1994 Jan-99 40
Fairington, Charlotte 250,688 1981 Aug-04 40
Harrington, Charlotte 595,516 1997 Aug-03 60
Harris Hill, Charlotte 2,615,565 1988 Dec-94 40
Madison Hall, Clemmons 1,269,153 1997 Aug-98 40
Marina Sh. Waterfront, Corne 1,167,862 1994 Sep-02 60
Oak Hollow, Cary 2,273,262 1983 Jul-98 40
Oak Hollow - Phase 2, Cary 1,876,129 1986 Dec-00 40
Oakbrook, Charlotte 2,792,681 1985 Jun-94 40
Paces Commons, Charlotte 4,628,879 1988 Jun-93 40
Paces Village, Greensboro 2,664,117 1988 Apr-96 40
Pepperstone, Greensboro 1,302,933 1992 Dec-97 40
Savannah Place, Winston-Sale 2,526,716 1991 Dec-97 40
Southpoint, Durham 91,885 1987 Sep-04 43
Summerlyn Place, Burlington 1,856,284 1998 Sep-98 40
Waterford Place, Greensboro 4,133,178 1997 Dec-97 40
Wind River, Morrisville 468,707 2000 May-04 60
Woods Edge, Durham 2,973,137 1985 Jun-98 40
Computer and support equipment 665,681
---------------
48,185,953
South Carolina:
The Place, Greenville 404,954 1985 Mar-03 45
Savannah Shores, Myrtle Beach 169,562 1998 Jul-04 60
---------------
574,516
Virginia:
Latitudes, Virginia Beach 5,753,482 1989 Oct-94 38
---------------
Total Apartment Properties 54,513,951
78
Gross Amount at Which
Description Encumb. Initial Costs Costs Carried at Close of Period (2)
----------- ------- ------------- Capitalized ------------------------------
Buildings & Subsequent Buildings &
Land Improvem'ts to Acquisition Land Improvem'ts Total
Restaurant Properties:
North Carolina:
Burlington (1) 162,411 417,629 - 162,411 417,629 580,040
Denver (1) 275,484 708,387 - 275,484 708,387 983,871
Eden (1) 253,282 651,296 - 253,282 651,296 904,578
Fayetteville (Ramsey) (1) 260,135 668,919 - 260,135 668,919 929,054
Fayetteville (N.Eastern) (1) 308,271 792,696 - 308,271 792,696 1,100,967
Hillsborough (1) 290,868 747,948 - 290,868 747,948 1,038,816
Kinston (W. Vernon) (1) 237,135 609,777 - 237,135 609,777 846,912
Kinston (Richlands) (1) 231,678 595,743 - 231,678 595,743 827,421
Newton (1) 223,453 574,594 - 223,453 574,594 798,047
Siler City (1) 268,312 689,945 - 268,312 689,945 958,257
Spring Lake (1) 218,925 562,949 - 218,925 562,949 781,874
Thomasville (E. Main) (1) 253,716 652,411 - 253,716 652,411 906,127
Thomasville (Randolph) (1) 327,727 842,726 - 327,727 842,726 1,170,453
---------------------------------------------------------------------------------
3,311,397 8,515,020 - 3,311,397 8,515,020 11,826,417
Virginia:
Ashland (1) 296,509 762,452 - 296,509 762,452 1,058,961
Blackstone (1) 275,565 708,596 - 275,565 708,596 984,161
Bluefield (1) 205,700 528,947 - 205,700 528,947 734,647
Chester (1) 300,165 771,852 - 300,165 771,852 1,072,017
Clarksville (1) 211,545 543,972 - 211,545 543,972 755,517
Clintwood (1) 222,673 572,588 - 222,673 572,588 795,261
Dublin (1) 364,065 936,168 - 364,065 936,168 1,300,233
Franklin (1) 287,867 740,230 - 287,867 740,230 1,028,097
Galax (1) 309,578 796,057 - 309,578 796,057 1,105,635
Hopewell (1) 263,939 678,701 - 263,939 678,701 942,640
Lebanon (1) 266,340 684,876 - 266,340 684,876 951,216
Lynchburg (Langhorne) (1) 249,865 642,509 - 249,865 642,509 892,374
Lynchburg (Timberlake) (1) 276,153 710,107 - 276,153 710,107 986,260
Norfolk (1) 325,822 837,829 - 325,822 837,829 1,163,651
Orange (1) 244,883 629,699 - 244,883 629,699 874,582
Petersburg (1) 357,984 920,531 - 357,984 920,531 1,278,515
Richmond (Forest Hill) (1) 196,084 504,216 - 196,084 504,216 700,300
Richmond (Midlothian) (1) 270,736 696,179 - 270,736 696,179 966,915
Richmond (Myers) (1) 321,946 827,861 - 321,946 827,861 1,149,807
Description
-----------
Accumulated Date of Date Life
Depreciation Constr. Acquired (Years)
Restaurant Properties:
North Carolina:
Burlington 184,951 Oct-85 Apr-87 40
Denver 313,717 Jul-83 Apr-87 40
Eden 288,433 Jun-73 Apr-87 40
Fayetteville (Ramsey) 296,239 Oct-73 Apr-87 40
Fayetteville (N.Eastern) 351,054 Sep-83 Apr-87 40
Hillsborough 331,237 Mar-78 Apr-87 40
Kinston (W. Vernon) 270,046 Jul-62 Apr-87 40
Kinston (Richlands) 263,831 Dec-81 Apr-87 40
Newton 254,466 Mar-76 Apr-87 40
Siler City 305,550 May-79 Apr-87 40
Spring Lake 249,308 Mar-76 Apr-87 40
Thomasville (E. Main) 288,928 Feb-66 Apr-87 40
Thomasville (Randolph) 373,210 Apr-74 Apr-87 40
---------------
3,770,971
Virginia:
Ashland 337,661 Apr-87 Apr-87 40
Blackstone 313,810 Sep-79 Apr-87 40
Bluefield 234,250 Feb-85 Apr-87 40
Chester 341,823 May-73 Apr-87 40
Clarksville 240,904 Oct-85 Apr-87 40
Clintwood 253,577 Jan-81 Apr-87 40
Dublin 414,593 Jul-83 Apr-87 40
Franklin 327,819 Feb-75 Apr-87 40
Galax 352,542 Jun-74 Apr-87 40
Hopewell 300,571 Jun-78 Apr-87 40
Lebanon 303,305 Jun-83 Apr-87 40
Lynchburg (Langhorne) 284,542 Sep-82 Apr-87 40
Lynchburg (Timberlake) 314,479 Aug-83 Apr-87 40
Norfolk 371,042 Aug-84 Apr-87 40
Orange 278,869 Aug-74 Apr-87 40
Petersburg 407,668 Mar-74 Apr-87 40
Richmond (Forest Hill) 223,298 Nov-74 Apr-87 40
Richmond (Midlothian) 308,310 Jan-74 Apr-87 40
Richmond (Myers) 366,628 Apr-83 Apr-87 40
79
Gross Amount at Which
Description Encumb. Initial Costs Costs Carried at Close of Period (2)
----------- ------- ------------- Capitalized ------------------------------
Buildings & Subsequent Buildings &
Land Improvem'ts to Acquisition Land Improvem'ts Total
Roanoke (Hollins) (1) 257,863 663,076 - 257,863 663,076 920,939
Roanoke (Abenham) (1) 235,864 606,507 - 235,864 606,507 842,371
Rocky Mount (1) 248,434 638,829 - 248,434 638,829 887,263
Smithfield (1) 223,070 573,608 - 223,070 573,608 796,678
Verona (1) 191,631 492,765 - 191,631 492,765 684,396
Virginia Beach (Lynnhaven) (1) 271,570 698,322 - 231,731 698,322 930,053
Virginia Beach (Holland) (1) 277,943 714,710 - 277,943 714,710 992,653
Wise (1) 219,471 564,355 - 219,471 564,355 783,826
-----------------------------------------------------------------------------------------------
7,173,265 18,445,542 - 7,133,426 18,445,542 25,578,968
-----------------------------------------------------------------------------------------------
Total Restaurant Properties 16,315,857 10,484,662 26,960,562 - 10,444,823 26,960,562 37,405,385
-----------------------------------------------------------------------------------------------
Total Real Estate $ 286,425,450 $53,779,543 $ 354,621,042 $18,163,778 $ 54,128,336 $ 372,396,189 $ 426,524,525
===============================================================================================
Description
-----------
Accumulated Date of Date Life
Depreciation Constr. Acquired (Years)
Roanoke (Hollins) 293,651 Feb-73 Apr-87 40
Roanoke (Abenham) 268,599 Nov-82 Apr-87 40
Rocky Mount 282,912 May-80 Apr-87 40
Smithfield 254,029 Apr-77 Apr-87 40
Verona 218,226 Jan-85 Apr-87 40
Virginia Beach (Lynnhaven) 309,260 Jun-80 Apr-87 40
Virginia Beach (Holland) 316,517 Aug-83 Apr-87 40
Wise 249,930 Jun-80 Apr-87 40
--------------
8,168,810
--------------
Total Restaurant Properties 11,939,781
--------------
Total Real Estate $ 66,453,731
==============
(1) Indicates the restaurants encumbered by a line of credit with a bank for up
to $16,315,857 outstanding at 12/31/04.
(2) Aggregate cost basis at December 31, 2004, for federal income tax purposes
was approximately $390 million.
80
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation
2004 2003 2002
------------------- ------------------- --------------------
Real estate investments:
Balance at beginning of year $ 337,066,609 $ 314,871,784 $ 260,748,391
Additions during year
Acquisitions 86,148,336 23,525,339 51,435,516
Improvements, etc. 5,231,775 3,350,919 2,785,303
Deductions during year (1,922,195) (4,681,433) (97,426)
------------------- ------------------- --------------------
Balance at close of year $ 426,524,525 $ 337,066,609 $ 314,871,784
=================== =================== ====================
Accumulated depreciation:
Balance at beginning of year $ 56,052,569 $ 49,448,825 $ 40,751,890
Provision for depreciation 11,660,219 10,039,615 8,794,361
Deductions during year (1,259,057) (3,435,871) (97,426)
------------------- ------------------- --------------------
Balance at close of year $ 66,453,731 $ 56,052,569 $ 49,448,825
=================== =================== ====================
81
INDEX TO EXHIBITS
Exhibit No.
Page
2.1* Master Agreement of Merger and Acquisition by and among BNP Residential Properties, -
Inc., BNP Residential Properties Limited Partnership, Paul G. Chrysson, James G.
Chrysson, W. Michael Gilley, Matthew G. Gallins, James D. Yopp, and the partnerships
and limited liability companies listed therein, dated September 22, 1997 (filed as
Exhibit 2.1 to Registration Statement No. 333-39803 on Form S-2, December 16, 1997,
and incorporated herein by reference)
2.2* Amendment to Master Agreement of Merger and Acquisition dated September 22, 1997, by -
and among BNP Residential Properties, Inc., BNP Residential Properties Limited
Partnership, Paul G. Chrysson, James G. Chrysson, W. Michael Gilley, Matthew G.
Gallins, James D. Yopp, and the partnerships and limited liability companies listed
therein, dated November 3, 1997 (filed as Exhibit 2.3 to BNP Residential Properties,
Inc. Current Report on Form 8-K dated December 1, 1997, and incorporated herein by
reference)
3.1* Articles of Incorporation (filed as Exhibit 3.1 to BNP Residential Properties, Inc., -
Current Report on Form 8-K dated March 17, 1999, and incorporated herein by
reference)
3.2* Articles Supplementary, Classifying and Designating 909,090 Shares of Series B -
Cumulative Convertible Preferred Stock, dated December 28, 2001 (filed as Exhibit
3.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated December
28, 2001, and incorporated herein by reference)
3.3* Amended and Restated By-Laws adopted May 20, 2004 (filed as Exhibit 3.1 to BNP -
Residential Properties, Inc., Current Report on Form 8-K dated July 14, 2004, and
incorporated herein by reference)
4.1* Rights Agreement, dated March 18, 1999, between the Company and First Union National -
Bank (filed as Exhibit 4 to BNP Residential Properties, Inc. Current Report on Form
8-K dated March 17, 1999, and incorporated herein by reference)
4.2* Registration Rights Agreement By and Among BNP Residential Properties, Inc. and -
Preferred Investment I, LLC, dated December 28, 2001 (filed as Exhibit 4 to BNP
Residential Properties, Inc. Current Report on Form 8-K dated December 28, 2001, and
incorporated herein by reference)
10.1* Second Amended and Restated Agreement of Limited Partnership of BNP Residential -
Properties Limited Partnership dated as of March 17, 1999 (filed as Exhibit 10.1 to
the company's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference)
10.2* Amendment to Second Amended and Restated Agreement of Limited Partnership of BNP -
Residential Properties Limited Partnership, dated December 28, 2001 (filed as
Exhibit 10.1 to BNP Residential Properties, Inc. Current Report on Form 8-K dated
December 28, 2001, and incorporated herein by reference)
10.3* Investment Agreement By and Between BNP Residential Properties, Inc. and Preferred -
Investment I, LLC, dated December 28, 2001 (filed as Exhibit 10.2 to BNP Residential
Properties, Inc. Current Report on Form 8-K dated December 28, 2001, and
incorporated herein by reference)
10.4* Amended and Restated Master Lease Agreement dated December 21, 1995, between BNP -
Residential Properties, Inc. and Boddie-Noell Enterprises, Inc. (filed as Exhibit
10.1 to BNP Residential Properties, Inc. Annual Report on Form 10-K dated December
31, 1995, and incorporated herein by reference)
10.5* Amended and Restated 1994 Stock Option and Incentive Plan (filed as Exhibit 10.8 to -
BNP Residential Properties, Inc. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, and incorporated by reference herein)
82
Exhibit No.
Page
10.6* Form and description of Employment Agreements dated July 15, 1997, and December 1, -
2002, between BNP Residential Properties, Inc. and certain officers (filed as
Exhibit 10 to BNP Residential Properties, Inc. Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997; and as Exhibit 10.7 to BNP Residential Properties,
Inc. Annual Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference)
10.7* 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 BNP Residential Properties, Inc. Current Report on Form 8-K dated February
23, 2004, and incorporated herein by reference)
10.8* Purchase Agreement by and among BNP Residential Properties, Inc. and Purchasers for -
1,420,000 shares of common stock, dated as of July 14, 2004 (filed as Exhibit 10.1
to BNP Residential Properties, Inc. Current Report on Form 8-K dated July 14, 2004,
and incorporated herein by reference)
10.9 Exchange Agreement among BNP Residential Properties, Inc., BNP Residential 84
Properties Limited Partnership, and Beach Investment Properties, LLC and members
thereof, dated as of December 7, 2004
10.10 Exchange Agreement among BNP Residential Properties, Inc., BNP Residential 125
Properties Limited Partnership, and Timberline Ventures, LLC and members thereof,
dated as of December 7, 2004
10.11 Exchange Agreement among BNP Residential Properties, Inc., BNP Residential 167
Properties Limited Partnership, and Laurel Springs II, LLC and members thereof,
dated as December 7, 2004
10.12 Exchange Agreement among BNP Residential Properties, Inc., BNP Residential 206
Properties Limited Partnership, and Salem Ridge/Shugart, LLC and members thereof,
dated as of December 7, 2004
21 Subsidiaries of the Registrant 243
23 Consent of Ernst & Young LLP 244
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer 245
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer 246
32.1 Section 1350 Certification by Chief Executive Officer 247
32.2 Section 1350 Certification by Chief Financial Officer 248
* Incorporated herein by reference
83