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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-9496
BNP RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
- -------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
301 S. College Street, Suite 3850, Charlotte, NC 28202-6024
(Address of principal executive offices) (Zip Code)
704/944-0100
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
- -
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of May 2, 2005 (the latest practicable date).
Common Stock, $.01 par value 9,232,501
- ---------------------------- -----------------------
(Class) (Number of shares)
Exhibit index: page 33
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information (Unaudited)
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
3 Quantitative and Qualitative Disclosures 30
About Market Risk
4 Controls and Procedures 31
PART II - Other Information
2 Changes in Securities and Use of Proceeds 31
6 Exhibits 31
Signatures 32
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Balance Sheets - Unaudited
(all amounts in thousands)
March 31 December 31
2005 2004
------------------ ------------------
Assets
Real estate investments at cost:
Apartment properties $489,729 $389,119
Restaurant properties 37,405 37,405
------------------ ------------------
527,134 426,525
Less accumulated depreciation (76,155) (66,454)
------------------ ------------------
450,979 360,071
Cash and cash equivalents 2,583 517
Prepaid expenses and other assets 7,513 4,516
Intangible related to acquisition of management operations 1,115 1,115
Deferred financing costs, net of accumulated amortization 2,690 1,545
------------------ ------------------
Total assets $464,880 $367,764
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $373,269 $286,425
Accounts payable and accrued expenses 3,347 897
Accrued interest on notes payable 1,660 1,264
Consideration due for acquisitions 1,000 -
Deferred revenue and security deposits 1,940 1,787
------------------ ------------------
Total liabilities 381,216 290,373
Minority interest in consolidated limited partnerships 288 -
Minority interest in operating partnership 20,258 14,394
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
909,090 at March 31, 2005, and December 31, 2004 10,000 10,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
9,232,501 at March 31, 2005,
8,652,740 at December 31, 2004 92 87
Additional paid-in capital 111,817 103,221
Dividend distributions in excess of net income (58,790) (50,311)
------------------ ------------------
Total shareholders' equity 63,120 62,996
------------------ ------------------
Total liabilities and shareholders' equity $464,880 $367,764
================== ==================
See accompanying notes
3
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Operations - Unaudited
(all amounts in thousands except per share amounts)
Three months ended
March 31
2005 2004
----------------- ----------------
Revenues
Apartment rental income $ 14,092 $ 10,053
Restaurant rental income 957 957
Management fee income 115 198
Interest and other income 225 23
----------------- ----------------
15,390 11,231
Expenses
Apartment operations 5,443 3,862
Apartment administration 673 426
Corporate administration 885 666
Interest 4,574 3,240
Penalties paid at debt refinance 516 -
Depreciation 3,522 2,540
Amortization of
deferred loan costs 107 88
Write-off of unamortized
loan costs at debt refinance 160 -
Deficit distributions to
minority partners 6,821 -
----------------- ----------------
22,701 10,823
----------------- ----------------
(Loss) income before
minority interest (7,311) 408
Minority interest in consolidated
limited partnerships (62) -
Minority interest in
Operating Partnership (1,292) 35
----------------- ----------------
Net (loss) income (5,957) 373
Cumulative preferred dividend 250 250
----------------- ----------------
(Loss) income attributable to common
shareholders $ (6,207) $ 123
================= ================
Earnings per common share - basic:
Net (loss) income $ (0.66) $ 0.06
(Loss) income attributable to
common shareholders (0.69) 0.02
Earnings per common share - diluted:
Net (loss) income $ (0.67) $ 0.05
(Loss) income attributable to
common shareholders (0.69) 0.02
Dividends declared $ 0.25 $ 0.25
Weighted average common shares
outstanding 8,983 6,406
See accompanying notes
4
BNP RESIDENTIAL PROPERTIES, INC.
- --------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity - Unaudited
(all amounts in thousands)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance December 31, 2004 909 $ 10,000 8,653 $ 87 $ 103,221 $ (50,311) $ 62,996
Common stock issued - - 580 6 8,596 - 8,602
Dividends paid - preferred - - - - - (250) (250)
Dividends paid - common - - - - - (2,272) (2,272)
Net loss - - - - - (5,957) (5,957)
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2005 909 $ 10,000 9,233 $ 92 $ 111,817 $ (58,790) $ 63,120
========= ============ =========== ========== ============= =============== ============
See accompanying notes
5
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited
(all amounts in thousands)
Three months ended
March 31
2005 2004
----------------- ----------------
Operating activities:
Apartment rental receipts, net $ 13,984 $ 10,037
Restaurant rental receipts 957 957
Management fee receipts 144 154
Interest and other income receipts 243 28
Operating and administrative expense payments (8,074) (4,438)
Interest payments (4,577) (3,341)
----------------- ----------------
Net cash provided by operating activities 2,677 3,398
Investing activities:
Acquisitions of apartment properties (71) -
Acquisition of Boddie Investment Company, net of cash included in
accounts of consolidated limited partnerships 193 -
Additions to apartment properties, net (1,290) (559)
Deposits for pending investing transactions (648) -
Net release (funding) of lender reserves (31) 47
----------------- ----------------
Net cash used in investing activities (1,847) (511)
Financing activities:
Net proceeds from issuance of common stock 888 13,246
Distributions to minority partners in consolidated limited partnerships (6,821) -
Distributions to operating partnership minority unitholders (466) (460)
Dividends paid to preferred shareholder (250) (250)
Dividends paid to common shareholders (2,272) (1,477)
Proceeds from notes payable 33,900 41
Principal payments on notes payable (22,468) (13,317)
Deposits for pending financing transactions (687) -
Payment of deferred financing costs (587) (41)
----------------- ----------------
Net cash provided by (used in) financing activities 1,236 (2,258)
----------------- ----------------
Net increase in cash and cash equivalents 2,065 628
Cash and cash equivalents at beginning of period 517 564
----------------- ----------------
Cash and cash equivalents at end of period $ 2,583 $ 1,192
================= ================
(continued)
6
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited - continued
(all amounts in thousands)
Three months ended
March 31
2005 2004
----------------- ----------------
Reconciliation of net (loss) income to
net cash provided by operating activities:
Net (loss) income $ (5,957) $ 373
Equity in income of unconsolidated limited partnerships - -
Deficit distributions to minority partners in
consolidated limited partnerships 6,821 -
Write off of loan costs at debt refinancing 160 -
Minority interest in consolidated limited partnerships (62) -
Minority interest in operating partnership (1,292) 35
Depreciation and amortization of deferred loan costs 3,629 2,628
Amortization of deferred interest defeasance (31) (79)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (1,846) (590)
Accounts payable and accrued expenses 1,359 1,078
Deferred revenue, prepaid rent and security deposits (104) (48)
----------------- ----------------
Net cash provided by operating activities $ 2,677 $ 3,398
================= ================
See accompanying notes
7
BNP RESIDENTIAL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - March 31, 2005
(Unaudited)
Note 1. Interim financial statements
We prepared the accompanying condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. These interim financial statements do not include
all information and notes required by generally accepted accounting principles
for complete financial statements. However, except as disclosed herein, there
has been no material change in the information disclosed in the notes to the
consolidated financial statements included in the Annual Report on Form 10-K of
BNP Residential Properties, Inc. for the year ended December 31, 2004. You
should read these financial statements in conjunction with our 2004 Annual
Report on Form 10-K. When we use the terms "company," "we," "us," or "our," we
mean BNP Residential Properties, Inc. and all entities included in our
consolidated financial statements. We believe that we have included all
adjustments (including normal recurring accruals) necessary for a fair
presentation. Operating results for the three month period ending March 31,
2005, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
We have reclassified certain amounts in our prior period consolidated financial
statements and notes to conform to the current period presentation.
Note 2. Basis of presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "operating partnership"). The company is the general partner
and owns a majority interest in the operating partnership.
Effective January 26, 2005, in connection with an acquisition on that date, the
consolidated financial statements also include the accounts of real estate
limited partnerships (the "limited partnerships") that the operating partnership
controls which are not considered variable interest entities ("VIEs"), as well
as all VIEs for which the operating partnership is the primary beneficiary. The
assets of consolidated limited partnerships controlled by the operating
partnership generally are not available to pay creditors of the company or the
operating partnership.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
Accounting for VIEs
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46, "Consolidation of Variable Interest Entities," ("FIN 46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provided a new
framework for identifying VIEs and determining when a company should include the
assets, liabilities, noncontrolling interests and results of activities of a VIE
in its consolidated financial statements.
8
In general, a VIE is an entity or other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has equity owners that, as a group, are unable to make significant
decisions about its activities, or (3) has equity owners that, as a group, do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a "variable interest
holder") is obligated to absorb a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns (if
no party absorbs a majority of the VIE's losses), or both. A variable interest
holder that consolidates the VIE is called the "primary beneficiary." Upon
consolidation, the primary beneficiary generally must initially record all of
the VIE's assets, liabilities and noncontrolling interests at fair value and
subsequently account for the VIE as if it were consolidated based on majority
voting interest. FIN 46 also requires disclosures about VIEs that the variable
interest holder is not required to consolidate but in which it has a significant
variable interest.
Accounting for general partner interests in limited partnerships
As managing general partner in real estate limited partnerships, we have the
ability to exercise significant influence over operating and financial policies.
This influence is evident in the terms of the respective partnership agreements.
However, we do not "control" the respective limited partnerships if the limited
partners have significant rights, such as the right to replace the general
partner and the right to approve the sale or refinancing of the assets of the
respective partnership in accordance with the partnership agreement. In acting
as the general partner in these limited partnerships, we are committed to
providing additional levels of funding to meet partnership operating deficits as
may be needed.
If we, as general partner, control a partnership which is not a VIE, generally
accepted accounting principles require that we consolidate the partnership in
our financial statements. Upon consolidation, we initially record our prorata
interest in the partnership's assets and liabilities at the lower of our cost or
fair value, and subsequently account for the partnership based on our prorata
interest; the non-controlling interests are reflected in our financial
statements at their historical costs.
Acquisition of interests in limited partnerships
Effective January 26, 2005, we acquired Boddie Investment Company ("BIC") in
exchange for shares of our common stock valued at $8.2 million. As a result of
this acquisition, in addition to other significant assets, we acquired certain
economic interests in the following limited partnerships:
o Marina Shores Associates One Limited Partnership - 50% interest as general
partner
o The Villages of Chapel Hill Limited Partnership - 1% interest as general
partner
o The Villages of Chapel Hill - Phase 5, Limited Partnership - 1% interest as
general partner
Prior to this acquisition, we managed, on a fee basis, the properties owned by
these limited partnerships. Following our acquisition of BIC, the operating
partnership acts as the managing general partner of these limited partnerships
and will continue to manage the properties. These limited partnerships are
primarily funded with financing from third party lenders, which is secured by
first deed of trust loans on the rental properties of the partnerships. The
creditors of the limited partnerships generally do not have recourse to the
operating partnership.
9
We determined that the Marina Shores Associates One Limited Partnership ("Marina
Shores Partnership") is not a VIE. However, under the terms of the partnership
agreement for the Marina Shores Partnership, the general partner controls the
activities of partnership; we have therefore included the accounts of this
partnership in our consolidated financial statements effective January 26, 2005.
The initial inclusion of the Marina Shores Partnership in our consolidated
financial statements resulted in an increase in real estate investments of $26.3
million, an increase in net operating assets of $1.0 million and an increase in
deed of trust notes payable of approximately $21.4 million. Our initial net
investment in this limited partnership was $5.9 million.
We determined that The Villages of Chapel Hill Limited Partnership ("Villages
Partnership") is a VIE, because the limited partnership does not have sufficient
equity to carry out its principal activities without additional subordinated
financial support from the general partner. We also determined that we are the
primary beneficiary of the Villages Partnership. We have therefore included the
accounts of this partnership in our consolidated financial statements effective
January 26, 2005. The initial inclusion of the Villages Partnership in our
consolidated financial statements resulted in an increase in real estate
investments of $14.2 million, an increase in net operating assets of $0.1
million and an increase in deed of trust notes payable of approximately $12.1
million. In addition, we hold approximately $2.0 million in notes and other
receivables from The Villages Partnership which has been eliminated in
consolidation.
We determined that The Villages of Chapel Hill - Phase 5 Limited Partnership
("Villages - Phase 5 Partnership") is not a VIE. Under the terms of the
partnership agreement the Villages - Phase 5 Partnership, the limited partners
have certain voting rights that preclude control by the general partner. We have
therefore accounted for our investment in this partnership by applying the
equity method. Our initial investment in the Villages - Phase 5 Partnership was
approximately $7,000, and we include this investment in "other assets" on our
balance sheet.
We reflect the unaffiliated partners' interests in the Marina Shores Partnership
and The Villages Partnership as minority interest in consolidated limited
partnerships. Minority interest in consolidated limited partnerships represents
the minority partners' share of the underlying net assets of these consolidated
limited partnerships. When these consolidated limited partnerships make cash
distributions to partners in excess of the carrying amount of the minority
interest, we record a charge equal to the amount of such excess distribution,
even though there is no economic effect or cost. We report this charge in the
consolidated statements of operations as deficit distributions to minority
partners. During the first quarter of 2005 we recorded charges for deficit
distributions to the minority partner in the Marina Shores Partnership totaling
$6.8 million.
We allocate proportional income and losses of the consolidated limited
partnerships to minority partners to the extent of the carrying amount of the
minority interest. We record a charge when losses attributable to the limited
partners of a consolidated limited partnership exceed the carrying amount of the
minority interest, even though there is no economic effect or cost. During the
first quarter of 2005 we recorded charges for consolidated limited partnership
losses, resulting primarily from depreciation and costs related to refinance of
the Marina Shores Partnership's first deed of trust loan, of approximately
$621,000 that were not allocated to the minority partner in Marina Shores
Partnership because the losses exceeded the carrying amount of the minority
interest.
Stock-based compensation
The company has one employee Stock Option and Incentive Plan in place. As
allowed by FAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," and FAS 123
10
"Accounting for Stock-Based Compensation," we account for this plan using the
intrinsic value method under the recognition and measurement principles of APB
Opinion 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. All
outstanding options were fully vested prior to the end of 2004. If we had
applied the fair value recognition provisions of FAS 123 to this significant
estimate for stock-based employee compensation, the effect would have been to
reduce net income as reported by less than $200 for the three months ended March
31, 2004, with no impact on net income as reported for the three months ended
March 31, 2005, and no impact on basic and diluted earnings per share amounts as
reported.
In December 2004 the Financial Accounting Standards Board issued FAS 123
(revised 2004), "Share Based Payment," ("FAS 123(R)") which is a revision of FAS
123. FAS 123(R) supersedes APB Opinion 25, and amends FAS 95, "Statement of Cash
Flows." Generally, the approach in FAS 123(R) is similar to the approach
described in FAS 123. However, FAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. Pro forma disclosure is no
longer an alternative. FAS 123(R) must be adopted no later than January 1, 2006,
and we expect to adopt FAS 123(R) as of that date.
Note 3. Apartment property acquisitions
During the first quarter of 2005, we completed the acquisition of a portfolio of
four apartment properties from entities associated with Grover F. Shugart, Jr.
and/or Brian D. Shugart, which we call the "Shugart Parties." The four apartment
communities contain an aggregate of 1,086 apartment units. The aggregate
purchase price for the properties totaled $52.1million (including approximately
$0.3 million in net operating assets acquired), paid by the assumption or
refinancing of $42.8 million of debt on the properties and issuance of $9.3
million in operating partnership units with an imputed value of $13.50 per unit.
Under the terms of the exchange agreements, we issued 689,000 operating
partnership units at closing, and will issue an additional 74,000 deferred units
in March 2006. The preliminary allocation of the purchase price includes the
following significant components (all amounts in thousands):
Value of
Apt. Operating
Property Units Contract Price Debt Assumed Partnership Units
- ------------------------------------- --------- ------------------- -------------------- -------------------
Canterbury Apartments 630 $ 25,750 $ 22,992 $ 3,070
Laurel Springs Apartments 240 14,610 11,320 3,329
Laurel Springs II Apartments 96 7,090 5,850 1,209
Salem Ridge Apartments 120 4,360 2,610 1,706
We will operate Laurel Springs and Laurel Springs II Apartments as one
community.
Note 4. Financing transactions
In conjunction with the acquisition of the four apartment properties from the
Shugart Parties, we assumed the following long-term debt:
11
o $21.5 million balance, fixed-rate note payable, secured by a deed of
trust and assignment of rents of Canterbury Apartments. This loan
provides for interest at 5.4% (5.48% effective rate), payable in
monthly installments of principal and interest of $124,000 through July
2013, with a balloon payment of $18.4 million at maturity in August
2013.
o $1.5 million variable rate unsecured note related to Canterbury
Apartments, which we immediately retired.
o $11.3 million balance, fixed-rate note payable, secured by a deed of
trust and assignment of rents of Laurel Springs Apartments. This loan
provides for interest at 4.91% (4.98% effective rate), payable in
monthly installments of principal and interest of $62,000 through June
2013, with a balloon payment of $9.6 million at maturity in July 2013.
o $5.9 million variable rate note payable, secured by a deed of trust and
assignment of rents of Laurel Springs II Apartments. This loan provides
for interest at 30-day LIBOR plus 1.9%, payable monthly. Beginning in
June 2005, principal payments of $7,000 will be due monthly in addition
to interest, with a balloon payment of $5.8 million at maturity in June
2006. At our option, we may extend the loan maturity to June 2008.
o $2.6 million fixed-rate note payable, secured by a deed of trust and
assignment of rents of Salem Ridge Apartments. This loan provides for
interest at 6.76%, payable in monthly installments of $15,000 through
September 2008, with principal due in full at that date.
Shortly after we acquired BIC (see Note 2 above), we completed the refinancing
of debt related to the Marina Shores Partnership. The Marina Shores Partnership
issued a $33.9 million fixed-rate note payable, secured by a deed of trust and
assignment of rents of Marina Shores Apartments. This loan provides for interest
at 5.075% (5.145% effective rate), payable in monthly installments of principal
and interest of $184,000 through January 2015, with a balloon payment of $28.2
million in February 2015. The Partnership first applied proceeds of this loan to
retire the existing $20.7 million deed of trust loan balance along with $1.2
million interest and prepayment penalties, then distributed $6.8 million to the
minority limited partner and $3.7 million to us.
Note 5. Shareholders' equity
In January 2005, we issued 508,578 shares of our common stock, valued at $8.2
million, in conjunction with the BIC acquisition (see Note 2 above). As part of
the acquisition, BIC surrendered, and we cancelled, 72,399 shares of our common
stock, valued at $1.2 million.
In February 2005, we issued 12,748 shares of our common stock through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of $0.2 million.
In March 2005, we issued 57,500 shares of our common stock upon exercise of
options by two employees for proceeds of $0.7 million.
Also in March 2005, we redeemed operating partnership units from a minority
unitholder by issuing 73,333 shares of our common stock on a one-for-one basis.
We calculated basic and diluted earnings per common share using the following
amounts (in thousands):
12
Three months ended
March 31
2005 2004
----------------- -----------------
Numerators:
Numerator for basic
earnings per share -
Net (loss) income $ (5,957) $ 373
Cumulative preferred dividend (250) (250)
----------------- -----------------
(Loss) income attributable to
common shareholders $ (6,207) $ 123
================= =================
Numerator for diluted
earnings per share -
Net (loss) income (1) $ (7,249) $ 408
Cumulative preferred dividend (250) (250)
----------------- -----------------
(Loss) income attributable to
common shareholders (1) $ (7,499) $ 158
================= =================
Denominators:
Denominator for basic
earnings per share -
weighted average common
shares outstanding 8,983 6,406
Effect of dilutive securities:
Convertible Operating
Partnership units 1,870 1,841
Stock options (2) - 15
----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 10,853 8,262
================= =================
(1) Assumes conversion of operating partnership units to common shares;
minority interest in operating partnership income has been eliminated.
(2) We excluded options to purchase 60,000 shares of common stock at $12.25,
120,000 shares of common stock at $13.125, 60,000 shares of common stock at
$11.25, and 30,000 shares of common stock at $9.25 from the calculation of
diluted earnings per share for the three months ended March 31, 2005
because inclusion of these options would serve to reduce the net loss per
share. We excluded options to purchase 140,000 shares of common stock at
$12.50 and 120,000 shares of common stock at $13.125 from the calculation
of diluted earnings per share for the three months ended March 31, 2004;
the exercise price of these options was greater than the average market
price of the common shares for those periods, and the effect would be
anti-dilutive.
Note 6. Subsequent events
The Board of Directors declared a regular quarterly dividend of $0.25 per common
share on April 21, 2005, payable on May 16, 2005, to shareholders of record as
of May 2, 2005. The Board of
13
Directors also authorized the payment of dividends totaling $250,000 to the
Series B Preferred shareholder.
Effective April 21, 2005, we acquired Waverly Place Apartments, located in North
Charleston, South Carolina, for a contract price of $13.1 million, paid in cash.
In conjunction with this acquisition, we issued a $10.2 million note payable at
a fixed rate of 5.31% for a 10-year term. The remainder was funded by a draw on
our line of credit.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report contains forward-looking statements within the
meaning of federal securities law. You can identify such statements by the use
of forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information.
Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that we will achieve our plans, intentions or expectations.
When you consider such forward-looking statements, you should keep in mind the
following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:
o Our markets could suffer unexpected increases in the development of apartment,
other rental or competitive housing alternatives;
o our markets could suffer unexpected declines in economic growth or an increase
in unemployment rates;
o general economic conditions could cause the financial condition of a large
number of our tenants to deteriorate;
o we may not be able to lease or re-lease apartments quickly or on as favorable
terms as under existing leases;
o revenues from our third-party apartment property management activities could
decline, or we could incur unexpected costs in performing these activities;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates could cause our debt service costs to
exceed expectations;
o we may not be able to meet our long-term liquidity requirements on favorable
terms; and
o we could lose the services of key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to disclose the
results of any revision to these forward-looking statements we may make to
reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
You should read the discussion in conjunction with the financial
statements and notes thereto included in this Quarterly Report and our Annual
Report on Form 10-K.
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust with operations in North Carolina,
South Carolina and Virginia. Our primary activity is the ownership and operation
of apartment communities. As of March 31, 2005, we owned and managed 31
apartment communities containing 7,912 units, including three communities
containing 713 units for which we are the general partner. In addition to our
apartment communities, we own 40 properties that we lease on a triple-net basis
to a restaurant operator.
15
We are structured as an UpREIT, or umbrella partnership real estate
investment trust. The company is the sole general partner and owns a controlling
interest in BNP Residential Properties Limited Partnership, through which we
conduct all of our operations. We refer to this partnership as the operating
partnership. We refer to the limited partners of the operating partnership as
minority unitholders or as the minority interest.
Our executive offices are located at 301 South College Street, Suite
3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100.
Results of Operations
Summary
In January 2005, we acquired the general partner interest in three
limited partnerships. The activities of two of these limited partnerships (and
the apartment properties owned by those partnerships) are now included in our
consolidated financial statements. We describe this acquisition in more detail
under the heading "Capital Resources" as well as in the notes to our financial
statements included in this Current Report on Form 10-Q.
Effective March 31, 2005, we acquired a portfolio of four apartment
communities. The activities of these owned properties will be included in our
consolidated financial statements going forward; however, our operating results
for the first quarter of 2005 do not include any apartment revenues or
operations expense for these properties.
Overall, apartment property operating results for the first quarter
were in line with our expectations. During the first quarter apartment property
operations continued to show improvement with a 1.9% increase in same-unit
apartment revenue resulting from a 2.2% increase in average monthly revenue per
occupied unit offset by a slight decline in average occupancy. At the same time,
property operations expenses for these same units increased by only 0.9%. As we
enter the second quarter, we believe are well positioned to take advantage of
what we deem to be improving apartment markets.
We believe the BIC acquisition (the acquisition of the general partner
interest in three limited partnerships in January 2005) was a good transaction
that will provide substantial economic benefit to us. However, the accounting
for this transaction is very complex, and generally accepted accounting
principles ("GAAP") require certain entries that make it extremely difficult to
understand the accounting for the transaction and its impact on the company's
financial statements. Primarily as a result of a $6.8 million charge for a
deficit distribution to a minority partner (which had no economic effect or cost
to us) we are reporting a net loss attributable to common shareholders for the
first quarter of $6.2 million or $0.69 per share as compared to net income of
$123,000 or $0.02 per share for the first quarter of 2004.
Funds from operations totaled $3.3 million in the first quarter of
2005, a 23.0% increase compared to the first quarter of 2004. This comparison
reflects the positive impact of apartment additions and the improvement in
apartment operating results.
Revenues
Total revenues in the first quarter of 2005 were $15.4 million, an
increase of 37.0% compared to the first quarter of 2004. This increase is
primarily attributable to increases in apartment rental income.
16
Apartment rental income totaled $14.1 million in the first quarter of
2005, an increase of $4.0 million, or 40.2%, compared to the first quarter of
2004. This increase is attributable to five apartment acquisitions in 2004,
which contributed $2.7 million to our first quarter apartment rental income in
2005. In addition, two apartment communities that we consolidate effective
January 26, 2005, contributed $1.2 million to this increase.
On a "same-units" basis (the 20 apartment communities that we owned as
of January 1, 2004), apartment rental income increased by 1.9% in the first
quarter of 2005 compared to 2004. This increase reflects a 2.2% increase in
average revenue per occupied unit, somewhat offset by a slight decline in
average occupancy. For these apartment communities, average economic occupancy
was 94.6% for the first quarter of 2005, compared to 94.9% for the first quarter
of 2004. Average revenue per occupied unit was $743 for the first quarter of
2005, compared to $727 for the first quarter of 2004.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the first quarter of 2005 follow:
Three months ended
March 31, 2005
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Owned apartment communities:
Abbington Place 360 93.0% $ 786
Allerton Place 228 94.7% 794
Barrington Place 348 92.3% 763
Brookford Place 108 97.6% 682
Canterbury(2) 630 - -
Carriage Club(1) 268 94.5% 741
Chason Ridge 252 92.4% 782
Fairington(1) 250 96.6% 715
The Harrington 288 95.0% 752
Harris Hill 184 96.8% 634
Latitudes 448 96.9% 964
Laurel Springs(2) 336 - -
Madison Hall 128 94.4% 602
Marina Shores Waterfront 290 94.0% 794
Oakbrook 162 94.2% 719
Oak Hollow 461 95.3% 608
Paces Commons 336 96.1% 649
Paces Village 198 95.4% 671
Pepperstone 108 98.3% 684
Salem Ridge(2) 120 - -
Savannah Place 172 95.4% 723
Savannah Shores(1) 198 92.2% 795
Bridges at Southpoint(1) 192 96.0% 699
Summerlyn Place 140 92.5% 809
The Place 144 94.9% 570
Waterford Place 240 91.4% 916
Woods Edge 264 94.1% 679
17
Three months ended
March 31, 2005
Average
monthly
Number revenue
of Average per
apartment economic occupied
units occupancy unit
----------- ----------- -----------
Bridges at Wind River(1) 346 90.7% 787
All apartments(2)
- 2005 6,113 94.4% 745
- 2004 4,859 94.9% 727
Same units(1,2) 4,859
- 2005 94.6% 743
- 2004 94.9% 727
Consolidated limited partnerships:
Marina Shores(3) 392 94.1% 1,142
Villages of Chapel Hill(3) 264 95.9% 683
Unconsolidated limited partnerships:
Villages - Phase 5(4) 57 98.3% 782
(1) We acquired Bridges at Wind River in May 2004, Carriage Club in late June
2004, Savannah Shores in July 2004, Fairington in August 2004 and Bridges
at Southpoint in September 2004. We have excluded these communities from
same-units calculations for 2005.
(2) We acquired Canterbury, Laurel Springs, and Salem Ridge effective March 31,
2005. We have excluded these communities from calculations of occupancy and
revenue per occupied unit for the first quarter of 2005.
(3) We include the activities of these communities in our consolidated
financial statements effective January 26, 2005.
(4) We acquired a 1% interest as general partner in this partnership effective
January 26, 2005.
We continued to see revenue improvement at our apartments in the first
quarter of 2005. Generally the first quarter is our weakest quarter in terms of
apartment performance, primarily due to weak demand. In our markets the cycle
seems to be that demand for apartments is at its lowest in the first quarter,
strengthens through the second and third quarters, and then ebbs in the fourth
quarter. Our objective for the first quarter of 2005 was to maintain occupancy
at relatively high levels through the end of the quarter so that we would be in
good position entering the second quarter. We were pleased that we were not only
able to maintain occupancy but, on a same-units basis, were able to report
improved apartment revenue as a result of improving rental rates. With occupancy
at current levels, future increases in apartment revenue will have to come from
increases in rental rates. We are reasonably confident in our ability to raise
rates over both the near and longer term.
Restaurant rental income was $1.0 million in the first quarters of both
2005 and 2004. We received the minimum rent specified in the lease agreement for
both quarters. 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.
18
Management fee income totaled $115,000 in the first quarter of 2005,
compared to $198,000 in the first quarter of 2004. This decrease is primarily
attributable to the elimination of management fees for Marina Shores and
Villages of Chapel Hill with consolidation of these properties effective January
26, 2005. Going forward, management fees will be insignificant following our
acquisition of four managed properties effective March 31, 2005.
Expenses
Total expenses were $22.7 million in the first quarter of 2005, an
increase of $11.9 million compared to $10.8 million in the first quarter of
2004. This increase is primarily attributable to increases in non-cash charges
for depreciation and a $6.8 million charge for deficit distributions to a
minority partner.
We reflect the unaffiliated partners' interests in Marina Shores
Associates One Limited Partnership ("Marina Shores Partnership") and The
Villages of Chapel Hill Limited Partnership ("Villages Partnership") as minority
interest in consolidated limited partnerships. Minority interest in consolidated
limited partnerships represents the minority partners' share of the underlying
net assets of these consolidated limited partnerships. When these consolidated
limited partnerships make cash distributions to partners in excess of the
carrying amount of the minority interest, we record a charge equal to the amount
of such excess distributions, even though there is no economic effect or cost.
We report this charge in our consolidated statements of operations as deficit
distributions to minority partners. During the first quarter of 2005 we recorded
charges for deficit distributions to the minority partner in the Marina Shores
Partnership totaling $6.8 million.
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) in the first quarter of 2005 totaled $5.4 million, an
increase of $1.6 million, or 40.9%, compared to the first quarter of 2004. This
increase is primarily attributable to five apartment acquisitions in 2004, which
contributed $1.1 million to apartment operations expense in the first quarter of
2005. In addition, two apartment communities that we consolidate effective
January 26, 2005, contributed $0.4 million to this increase. On a same-units
basis, apartment operations expense increased only 0.9% in the first quarter of
2005 compared to the first quarter of 2004.
Operating expenses for restaurant properties are insignificant because
the triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.
Apartment administration (the costs associated with oversight,
accounting and support of our apartment management activities for both owned and
managed properties) totaled $0.7 million in the first quarter of 2005, a 57.9%
increase compared to the first quarter of 2004. Corporate administration expense
totaled $0.9 million in the first quarter of 2005, a 32.9% increase compared to
the first quarter of 2004. These increases are primarily attributable to a
$110,000 increase in audit fees associated with requirements of Section 404 of
the Sarbanes-Oxley Act of 2002, along with additional corporate support staff.
Depreciation expense totaled $3.5 million in the first quarter of 2005,
an increase of $1.0 million, or 38.7%, compared to the first quarter of 2004.
This increase is primarily attributable to acquisitions of five apartment
communities in 2004 ($0.7 million), along with depreciation expense for the two
apartment communities that we consolidate effective January 26, 2005, which
totaled $0.3 million.
19
Interest expense totaled $4.6 million in the first quarter of 2005, an
increase of $1.3 million, or 41.2%, compared to the first quarter of 2004. This
increase is primarily attributable to approximately $65 million in new debt
issued in conjunction with acquisitions of apartment properties during 2004,
along with the impact of consolidating Marina Shores and Villages of Chapel Hill
during February and March of 2005. Overall, weighted average interest rates were
5.8% for the first quarter of 2005, compared to 5.7% for the first quarter of
2004, reflecting the increase in variable interest rates over the last 12
months.
Net Income
Consolidated earnings before non-cash charges (for depreciation,
amortization and write-off of unamortized loan costs at refinance) and before
the $6.8 million charge for deficit distributions to a minority partner (which
has no economic effect or cost to the operating partnership) totaled $3.3
million in the first quarter of 2005, an 8.6% increase compared to $3.0 million
for the first quarter of 2004. This increase is attributable to the positive
impact of new apartment communities and improvements in apartment revenues,
offset by a $0.5 million charge for penalties paid at loan refinance by a
consolidated limited partnership.
On a consolidated basis before minority interests in the consolidated
limited partnerships and the minority interest in the operating partnership, the
net loss for the first quarter of 2005 totaled $7.3 million, compared to $0.4
million in income before minority interests in the first quarter of 2004. This
loss again reflects the impact of the $6.8 million charge for deficit
distributions to a minority partner and a $0.5 million charge for penalties paid
at loan refinance by a consolidated limited partnership, along with an
additional $0.2 million charge to write off unamortized loan costs at refinance
by a consolidated limited partnership.
We allocate proportional income and losses of the consolidated limited
partnerships to minority partners to the extent of the carrying amount of the
minority interest. We record a charge when losses attributable to the
consolidated limited partners of a consolidated limited partnership exceed the
carrying amount of the minority interest, even though there is no economic
effect or cost. During the first quarter of 2005 we recorded charges for
consolidated limited partnership losses, resulting primarily from depreciation
and costs related to refinance of the Partnership's first deed of trust loan, of
approximately $621,000 that were not allocated to the minority partner in Marina
Shores Partnership because the losses exceeded the carrying amount of the
minority interest.
Minority interests in the Villages Partnership and the operating
partnership absorbed $1.4 million of the consolidated losses for the quarter
ended March 31, 2005. After allocating those losses to minority interests, the
net loss for the first quarter of 2005 was $6.0 million, compared to $373,000
net income for the first quarter of 2004.
Because the preferred shareholder has priority over common shareholders
for receipt of dividends, we deduct the amount of net income that will be paid
to the preferred shareholder in calculating net income available to common
shareholders. After deducting $250,000 for the cumulative preferred dividend,
the net loss for the first quarter of 2005 was $6.2 million, compared to net
income of $123,000 in 2004.
Funds from Operations
Funds from operations is frequently referred to as "FFO." FFO is
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
as "net income (computed in
20
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. Nor do FFO or FAD measure whether cash flow is
sufficient to fund all of our cash needs, including principal amortization,
capital improvements and distributions to shareholders and unitholders. You
should not consider FFO or FAD to be alternatives to net income as reliable
measures of the company's operating performance; nor should you consider FFO or
FAD to be alternatives to cash flows from operating, investing or financing
activities (as defined by generally accepted accounting principals) as measures
of liquidity. Further, FFO and FAD as disclosed by other REITs might not be
comparable to our calculation of FFO or FAD.
Funds from operations totaled $3.3 million in the first quarter of
2005, a 23.0% increase compared to the first quarter of 2004. This comparison
reflects the positive impact of apartment additions and the improvement in
apartment operating results.
We calculated FFO of the operating partnership as follows (all amounts
in thousands):
Three months ended
March 31
2005 2004
--------------- ---------------
(Loss) income before
minority interest $ (7,311) $ 408
Cumulative preferred dividend (250) (250)
Depreciation 3,522 2,540
Deficit distributions to minority partners
of consolidated limited partnerships(1)
6,821 -
21
Three months ended
March 31
2005 2004
--------------- ---------------
Minority interest in FFO of consolidated
limited partnerships 538 -
--------------- ---------------
Funds from operations $ 3,320 $ 2,698
=============== ===============
(1) In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our statement of operations when cash is distributed
to a non-controlling partner in a consolidated limited partnership in
excess of the positive balance in such partner's capital account (which is
classified as minority interest in our consolidated balance sheet). We are
required to record these charges for GAAP purposes even though there is no
economic effect or cost.
Deficit distributions to minority partners may occur when the fair value of
the underlying real estate exceeds its depreciated net book value because
the underlying real estate has appreciated or maintained its value. As a
result, deficit distributions to minority partners represent, in substance,
either our recognition of depreciation previously allocated to the
non-controlling partner or a cost related to the non-controlling partner's
share of real estate appreciation. Based on NAREIT guidance that requires
that real estate depreciation and gains be excluded from FFO, we add back
deficit distributions and subtract related recoveries in our reconciliation
of net income to FFO.
A reconciliation of FFO to FAD follows (all amounts in thousands):
Three months ended
March 31
2005 2004
--------------- ---------------
Funds from operations $ 3,320 $ 2,698
Amortization of loan costs 107 88
Write-off of unamortized
loan costs at refinance 160 -
Recurring capital expenditures (458) (275)
Minority interest in consolidated limited
partnerships' share of reconciling items
(155) -
--------------- ---------------
Funds available for distribution $ 2,974 $ 2,511
=============== ===============
22
A further reconciliation of FAD to net cash provided by operating activities
follows (all amounts in thousands):
Three months ended
March 31
2005 2004
--------------- ---------------
Funds available for distribution $2,974 $2,511
Cumulative preferred dividend (1) 250 250
Minority interest in FFO of consolidated
limited partnerships(1)
(538) -
Recurring capital expenditures(2) 458 275
Minority interest in consolidated limited
partnerships' share of reconciling
items(2) 155 -
Amortization of deferred
interest defeasance (31) (79)
Changes in operating
assets and liabilities (591) 440
--------------- ---------------
Net cash provided by
operating activities $2,677 $3,398
=============== ===============
(1) These adjustments serve to reverse the effect of reconciling items in the
above reconciliation of (loss) income before minority interest to funds
from operations.
(2) These adjustments serve to reverse the effect of reconciling items in the
above reconciliation of FFO to FAD.
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended
March 31
2005 2004
--------------- ---------------
Net cash provided by (used in):
Operating activities $2,677 $3,398
Investing activities (1,847) (511)
Financing activities 1,236 (2,258)
Dividends and distributions paid to:
Preferred shareholders $ 250 $ 250
Common shareholders 2,272 1,477
Minority partners in consolidated
limited partnerships 6,821 -
Minority unitholders in operating
partnership 466 460
Scheduled debt principal payments $ 443 $ 317
Non-recurring capital expenditures 832 283
23
Three months ended
March 31
2005 2004
--------------- ---------------
Weighted average shares outstanding
Preferred shares 909 909
Common shares 8,983 6,406
Weighted average operating partnership
minority units outstanding
1,870 1,841
Capital Resources and Liquidity
Capital Resources
We completed several significant investing and financing transactions
during the first quarter of 2005.
Acquisition of Boddie Investment Company
In January 2005, we acquired Boddie Investment Company ("BIC") through
a merger. We issued 508,578 shares of our common stock, and cancelled 72,399
shares of common stock that BIC held immediately before the merger. The value of
this transaction was $8.2 million. Direct costs (out-of-pocket cash costs)
related to this acquisition were approximately $150,000. As a result of this
acquisition, we assumed the role of general partner and acquired certain
economic interests in three limited partnerships. Prior to this acquisition, we
managed the apartment communities owned by these partnerships on a contract
basis; we will continue to manage these partnerships.
A summary of assets acquired in the BIC acquisition, along with our
preliminary allocation of costs assigned to those assets, follows (amounts in
thousands):
Investments in limited partnerships:
Marina Shores Associates One Limited Partnership $5,940
The Villages of Chapel Hill Limited Partnership 2
The Villages of Chapel Hill - Phase 5 Limited Partnership 7
BNP common stock held by BIC (which we immediately retired) 1,166
Receivables from The Villages Limited Partnership for general partners'
advances and accrued interest thereon 1,220
-------------------
$8,335
===================
Although the amounts related to this acquisition seem relatively
insignificant at first glance, the accounting for the investments in limited
partnerships is complex, and the impact on presentation of our consolidated
financial statements is rather significant. We have included a detailed
discussion of our accounting treatment for each of the investments in limited
partnerships in Note 2 of our financial statements included in this Current
Report on Form 10-Q. A summary of that discussion for each limited partnership
follows:
24
BIC Acquisition - Marina Shores Partnership
We acquired a 50% general partner interest in the Marina Shores
Partnership. Under the terms of the partnership agreement for the Marina Shores
Partnership, the general partner controls the activities of the partnership. We
have therefore included the accounts of this partnership in our consolidated
financial statements effective January 26, 2005. In our preliminary accounting
for the BIC acquisition, the initial inclusion of the Marina Shores Partnership
in our consolidated financial statements resulted in (amounts in thousands):
Increase in real estate investments - 392 apartment units $26,254
Increase in cash and cash equivalents 252
Increase in other assets 1,251
----------------
27,757
Increase in long-term debt 20,745
Increase in other liabilities 1,072
----------------
21,817
----------------
Increase in net assets $ 5,940
================
Very shortly after our acquisition of BIC, the Marina Shores
Partnership completed a refinancing of its long-term debt. The Marina Shores
Partnership issued a $33.9 million fixed-rate note payable. This 10-year loan
provides for interest at an effective rate of 5.1%. The Marina Shores
Partnership first applied proceeds of this loan to retire the existing $20.7
million deed of trust loan balance along with $1.2 million interest and
prepayment penalties, then distributed $6.8 million to the limited partner and
$3.7 million to us.
Prior to consolidation in our financial statements, the fair value of
the real estate held by the Marina Shores Partnership significantly exceeded its
depreciated net book value because the underlying real estate had appreciated
significantly since the Partnership's original formation in the late 1980s. In
our initial consolidation of this partnership, we reset the noncontrolling
limited partner's capital account to $-0-. Distributions to the limited partner
subsequent to inclusion of the Partnership in our consolidated financial
statements are, and will generally be, reflected in our consolidated financial
statements as "deficit distributions to minority partners."
In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our income statement when cash is distributed to a
non-controlling partner in a consolidated limited partnership in excess of the
positive balance in such partner's capital account (which is classified as
minority interest in our consolidated balance sheet). Deficit distributions to
minority partners represent, in substance, either (a) our recognition of
depreciation previously allocated to the non-controlling partner or (b) a cost
related to the non-controlling partner's share of real estate appreciation. We
record these charges for GAAP purposes even though there is no economic effect
or cost.
BIC Acquisition - The Villages Partnership
We acquired a 1% general partner interest in the Villages Partnership.
We determined that, in accordance with GAAP, the Villages Partnership is a
"variable interest entity" ("VIE") because it does not have sufficient equity to
carry out its principal activities without additional subordinated financial
support, and that we are the "primary beneficiary" of the Partnership. We have
therefore included the accounts of this partnership in our consolidated
financial statements
25
effective January 26, 2005. In our preliminary accounting for the BIC
acquisition, the initial inclusion of the Villages Partnership in our
consolidated financial statements resulted in (amounts in thousands):
Increase in real estate investments - 264 apartment units $14,188
Increase in cash and cash equivalents 87
Increase in other assets 318
-----------------
14,594
Increase in long-term debt - first deed of trust 12,094
Increase in subordinated long-term debt to BNP* 1,888
Increase in other liabilities 260
Minority interest in consolidated limited partnerships 350
-----------------
14,592
-----------------
Increase in net assets $ 2
=================
*The subordinated long-term debt to BNP is eliminated in consolidation
against related receivable balances.
BIC Acquisition - The Villages of Chapel Hill - Phase 5 Limited Partnership
We acquired a 1% general partner interest in The Villages of Chapel
Hill - Phase 5 Limited Partnership ("Villages - Phase 5 Partnership"). Under the
terms of the partnership agreement for the Villages - Phase 5 Partnership, the
limited partners have certain voting rights that preclude control by the general
partner. We have therefore accounted for our investment in this partnership by
applying the equity method. Our initial investment in the Villages - Phase 5
Partnership was $7,000, and we include this amount in "other assets" on our
consolidated balance sheet.
Acquisition of Shugart Properties
On March 31, 2005, we completed the acquisition of a portfolio of four
apartment properties from entities that we call the "Shugart Parties." The
aggregate purchase price for the properties totaled $52.1 million, including
approximately $0.3 million in net operating assets, paid through assumption or
refinancing of $42.8 million of debt on the properties and $9.3 million paid in
operating partnership units with an imputed value of $13.50 per unit. Under the
terms of the exchange agreements, we issued 689,000 operating partnership units
at closing, and will issue an additional 74,000 deferred units in March 2006.
The preliminary allocation of the purchase price includes the following
significant components (all amounts in thousands):
Value of
Apt. Operating
Property Units Contract Price Debt Assumed Partnership Units
- ------------------------------------- --------- ------------------- -------------------- -------------------
Canterbury Apartments 630 $ 25,750 $ 22,992 $ 3,070
Laurel Springs Apartments 240 14,610 11,320 3,329
Laurel Springs II Apartments 96 7,090 5,850 1,209
Salem Ridge Apartments 120 4,360 2,610 1,706
26
We will operate Laurel Springs and Laurel Springs II Apartments as one
community. The assets and liabilities of these apartment communities are
included in our consolidated financial statements as of March 31, 2005. However,
no operating results for these communities are reflected in our consolidated
statement of operations for the first quarter of 2005.
Immediately upon completion of this acquisition, we retired a $1.5
million variable rate note related to Canterbury Apartments. The remaining
assumed debt includes three fixed-rate notes totaling $35.4 million at interest
rates ranging from 5.0% to 6.8% and a $5.9 million variable-rate note with
interest at 30-day LIBOR plus 1.9%. A more detailed description of these notes
payable is included in Note 2 of our financial statements in this Current Report
on Form 10-Q.
Other Equity Transactions
During the first quarter of 2005, we also
o Issued 12,748 shares of our common stock through our Dividend Reinvestment and
Stock Purchase Plan for proceeds of $0.2 million;
o Issued 57,500 shares of our common stock upon exercise of options by two
employees for proceeds of $0.7 million; and
o Issued 73,333 shares of our common stock to redeem the name number of
operating partnership units from a minority unitholder.
At March 31, 2005, we had 9.2 million common shares and 0.9 million
preferred shares outstanding. In addition, there were 2.4 million operating
partnership minority common units outstanding.
Cash Flows and Liquidity
Net cash flows from operating activities were $2.7 million in the first
quarter of 2005, compared to $3.4 million in the first quarter of 2004. The
decline compared to 2004 is attributable to the $0.5 million impact of
prepayment penalties paid by Marina Shores Partnership in conjunction with
refinance of its long-term debt, along with timing of cash receipts and
disbursements.
Investing and financing activities, other than those described under
"Capital Resources" above, focused on capital expenditures at apartment
communities, along with payment of dividends and distributions.
We have announced that the company will pay a regular quarterly
dividend of $0.25 per share (approximately $2.3 million) on May 16, 2005, to
shareholders of record of our common stock as of May 2, 2005, as well as
$250,000 of dividends to the preferred shareholder.
We generally expect to meet our short-term liquidity requirements
through net cash provided by operations and utilization of credit facilities. We
believe that net cash provided by operations is, and will continue to be,
adequate to meet the REIT operating requirements in both the short term and the
long term. We anticipate funding our future acquisition activities primarily 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
27
possible property acquisitions, through long-term secured and unsecured
borrowings and the issuance of debt securities or additional equity securities.
We believe we have sufficient resources to meet our short-term liquidity
requirements.
Critical Accounting Policies
We identify and discuss our significant accounting policies in the
notes to our financial statements included in our Annual Report on Form 10-K.
Our policies and practice regarding our accounting for our general partner
interests in limited partnerships and for capital expenditures and depreciation,
which may be of particular interest to readers of this Quarterly Report, are
further discussed below.
Accounting for VIEs
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation 46, "Consolidation of Variable Interest Entities,"
("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical
corrections and address certain implementation issues that had arisen. FIN 46
provided a new framework for identifying VIEs and determining when a company
should include the assets, liabilities, noncontrolling interests and results of
activities of a VIE in its consolidated financial statements.
In general, a VIE is an entity or other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has equity owners that, as a group, are unable to make significant
decisions about its activities, or (3) has equity owners that, as a group, do
not have the obligation to absorb losses or the right to receive returns
generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a "variable interest
holder") is obligated to absorb a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns (if
no party absorbs a majority of the VIE's losses), or both. A variable interest
holder that consolidates the VIE is called the "primary beneficiary." Upon
consolidation, the primary beneficiary generally must initially record all of
the VIE's assets, liabilities and noncontrolling interests at fair value and
subsequently account for the VIE as if it were consolidated based on majority
voting interest. FIN 46 also requires disclosures about VIEs that the variable
interest holder is not required to consolidate but in which it has a significant
variable interest.
We determined that the Villages Partnership is a VIE, because the
limited partnership does not have sufficient equity to carry out its principal
activities without additional subordinated financial support from the general
partner. We also determined that we are the primary beneficiary of the Villages
Partnership. We have therefore included the accounts of this partnership in our
consolidated financial statements effective January 26, 2005.
Accounting for general partner interests in limited partnerships
As managing general partner in real estate limited partnerships, we
have the ability to exercise significant influence over operating and financial
policies. This influence is evident in the terms of the respective partnership
agreements. However, we do not "control" the respective limited partnerships if
the limited partners have significant rights, such as the right to replace the
general partner and the right to approve the sale or refinancing of the assets
of the respective
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partnership in accordance with the partnership agreement. In acting as the
general partner in these limited partnerships, we are committed to providing
additional levels of funding to meet partnership operating deficits as may be
needed.
If we, as general partner, control a partnership which is not
considered a VIE, generally accepted accounting principles require that the
partnership be consolidated in our financial statements. Upon consolidation, we
initially record our interest in the partnership's assets and liabilities at the
lower of our cost or fair value, and subsequently account for the partnership
based on our percentage interest; the non-controlling interests are reflected in
our financial statements at their historical costs.
We determined that the Marina Shores Partnership is not a VIE. However,
under the terms of the partnership agreement for the Marina Shores Partnership,
the general partner controls the activities of partnership; we have therefore
included the accounts of this partnership in our consolidated financial
statements effective January 26, 2005.
We determined that the Villages - Phase 5 Partnership is not a VIE.
Under the terms of the partnership agreement for the Villages - Phase 5
Partnership, the limited partners have certain voting rights that preclude
control by the general partner. We have therefore accounted for our investment
in this partnership by applying the equity method.
Capital expenditures and depreciation
In general, for the 15 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.
For apartment properties acquired in 2002 and later, we have or will
perform analyses of components of the real estate assets acquired. For these
properties, we assign estimated useful lives as follows: base building
structure, 43-60 years; land improvements, 7-20 years; short-lived building
components, 5-20 years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition. We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize recurring capital expenditures for exterior
painting, roofing, and other major maintenance projects that substantially
extend the useful life of existing assets. For financial reporting purposes, we
depreciate these additions and replacements on a straight-line basis over
estimated useful lives of 5-20 years. We retire replaced assets with a charge to
depreciation for any remaining carrying value. We capitalize all floor covering,
appliance and HVAC replacements, and depreciate them using a straight-line,
group method over estimated useful lives of 5-10 years.
Capital expenditures at our owned apartment communities during the
first three months of 2005 totaled $1.2 million, including $0.3 million for
acquisition improvements, $0.5 million for additions and betterments, and $0.4
million for recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our owned apartment communities during
the first three months of 2005
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totaled $1.8 million, including $0.7 million in compensation of service staff
and $1.1 million in payments and materials and contracted services.
A summary of capital expenditures at our owned apartment communities
through March 31, 2005, in aggregate and per apartment unit, follows:
Total Per unit
--------------------- --------------------
(000's)
Recurring capital expenditures:
Floor coverings $ 282 $ 46
Appliances/HVAC 65 11
Exterior paint - -
Computer/support equipment 5 1
Other 85 14
--------------------- --------------------
$ 437 $ 72
===================== ====================
Non-recurring capital expenditures:
Acquisition improvements at apartment properties $ 288
Casualty replacements -
Additions and betterments at apartment properties 509
Computer/support equipment 14
---------------------
$ 811
=====================
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We completed a number of significant acquisition and financing
transactions during the first quarter of 2005.
As of March 31, 2005, total long-term debt, on a consolidated basis,
totaled $373.3 million, including $296.7 million of notes payable at fixed rates
ranging from 5.0% to 8.55%, and $76.6 million at variable rates indexed on
30-day LIBOR rates. The weighted average interest rate on debt outstanding was
5.8% at March 31, 2005, compared to 5.9% at December 31, 2004. A 1% fluctuation
in variable interest rates would increase or decrease our annual interest
expense by approximately $780,000.
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.
The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on instruments in place as of March 31, 2005 (all amounts
in thousands).
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Expected maturity dates
2005 2006 2007 2008 2009 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 7,388 $ 2,884 $ 50,890 $ 42,472 $ 31,484 $161,522 $296,641
Average interest rate 7.7% 5.3% 6.9% 6.5% 5.2% 5.9% 6.1%
Variable rate notes $ 243 $ 21,547 $ 21,279 $ 774 $ 32,784 - $ 76,628
Average interest rate 4.6% 4.6% 4.5% 4.5% 4.5% - 4.5%
Item 4. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information disclosed in our annual and periodic reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. In addition, we designed these disclosure controls and procedures to
ensure that this information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosures.
Based on our most recent evaluation, which was completed as of the end
of the first quarter of 2005, our chief executive officer and chief financial
officer believe that our disclosure controls and procedures are effective. There
have been no significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the
completion of this evaluation.
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
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.
Item 6. Exhibits
The Registrant agrees to furnish a copy of all agreements related to
long-term debt upon request of the Commission.
Exhibit No.
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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BNP RESIDENTIAL PROPERTIES, INC.
(Registrant)
May 9, 2005 /s/ Philip S. Payne
---------------------------------------------------
Philip S. Payne
Chairman and Chief Financial Officer
(Duly authorized officer)
May 9, 2005 /s/ Pamela B. Bruno
---------------------------------------------------
Pamela B. Bruno
Vice President, Treasurer and
Chief Accounting Officer
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INDEX TO EXHIBITS
Exhibit No.
Page
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer 34
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer 35
32.1 Section 1350 Certification by Chief Executive Officer 36
32.2 Section 1350 Certification by Chief Financial Officer 37
33