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 September 30, 2004
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
0
Commission file number: 1-9496
BNP RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
301 S. College Street, Suite 3850, Charlotte, NC 28202-6024
(Address of principal executive offices) (Zip Code)
704/944-0100
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
-- -
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 4, 2004 (the latest practicable date).
Common Stock, $.01 par value 8,636,173
---------------------------- -----------------------
(Class) (Number of shares)
Exhibit index: page 28
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
3 Quantitative and Qualitative Disclosures 25
About Market Risk
4 Controls and Procedures 26
PART II - Other Information
6 Exhibits 26
Signatures 27
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
--------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30 December 31
2004 2003
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $387,056,730 $299,661,224
Restaurant properties 37,405,385 37,405,385
------------------ ------------------
424,462,115 337,066,609
Less accumulated depreciation (63,324,361) (56,052,569)
------------------ ------------------
361,137,754 281,014,040
Cash and cash equivalents 1,592,608 564,426
Prepaid expenses and other assets 7,074,664 3,408,127
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,115,088 1,115,088
Deferred financing costs 1,603,426 1,098,025
------------------ ------------------
Total assets $372,523,540 $287,199,706
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $286,803,385 $229,714,263
Accounts payable and accrued expenses 5,021,779 1,408,659
Deferred revenue and security deposits 1,499,175 1,343,999
Deferred credit for defeasance of interest,
net of accumulated amortization - 104,960
------------------ ------------------
Total liabilities 293,324,339 232,571,881
Minority interest in operating partnership 14,850,572 15,894,909
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
909,090 at June 30, 2004, and December 31, 2003 10,000,000 10,000,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
8,576,400 at September 30, 2004,
5,907,133 at December 31, 2003 85,764 59,071
Additional paid-in capital 102,315,047 71,473,473
Dividend distributions in excess of net income (48,052,182) (42,799,628)
------------------ ------------------
Total shareholders' equity 64,348,629 38,732,916
------------------ ------------------
Total liabilities and shareholders' equity $372,523,540 $287,199,706
================== ==================
3
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
----------------- ---------------- ----------------- ----------------
Revenues
Apartment rental income $12,297,657 $ 9,650,103 $32,929,903 $27,488,052
Restaurant rental income 957,446 970,316 2,872,340 2,951,025
Management fee income 176,543 229,141 581,944 679,035
Casualty gains 268,736 - 268,736 -
Interest and other income 25,947 26,528 162,282 180,876
----------------- ---------------- ----------------- ----------------
13,726,329 10,876,088 36,815,205 31,298,988
Expenses
Apartment operations 5,090,831 3,999,767 13,340,773 11,325,654
Apartment administration 563,672 413,681 1,604,094 1,153,851
Corporate administration 497,243 445,267 1,724,156 1,789,607
Depreciation 3,160,927 2,527,557 8,390,482 7,349,954
Amortization of deferred
loan costs 107,877 81,439 263,486 236,222
Interest 3,910,142 3,278,652 10,480,189 9,716,800
Write-off of unamortized loan
costs at refinance 85,341 - 85,341 -
----------------- ---------------- ----------------- ----------------
13,416,033 10,746,363 35,888,521 31,572,088
----------------- ---------------- ----------------- ----------------
Income (loss) before
minority interest 310,296 129,725 926,684 (273,100)
Minority interest in
operating partnership 11,073 (7,372) 37,768 (163,465)
----------------- ---------------- ----------------- ----------------
Net income (loss) 299,223 137,097 888,916 (109,635)
Cumulative preferred dividend 250,000 160,616 750,000 410,616
----------------- ---------------- ----------------- ----------------
Income (loss) available to
common shareholders $ 49,223 $ (23,519) $ 138,916 $ (520,251)
================= ================ ================= ================
Per share amounts:
Basic earnings per share -
Net income (loss) $ 0.03 $ 0.02 $ 0.12 $(0.02)
================= ================ ================= ================
Income (loss) available to
common shareholders $ 0.01 $(0.01) $ 0.02 $(0.09)
================= ================ ================= ================
Diluted earnings per share -
Net income (loss) $ 0.03 $ 0.01 $ 0.10 $(0.04)
================= ================ ================= ================
Income (loss) available to
common shareholders $ 0.01 $(0.01) $ 0.02 $(0.09)
================= ================ ================= ================
Dividends declared $ 0.25 $ 0.25 $ 0.75 $ 0.75
================= ================ ================= ================
Weighted average common
shares outstanding 8,289,144 5,877,060 7,275,170 5,858,082
================= ================ ================= ================
4
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity
(Unaudited)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance December 31, 2003 909,090 $10,000,000 5,907,133 $59,071 $ 71,473,473 $(42,799,628) $38,732,916
Common stock issued - - 1,191,565 11,916 13,233,713 - 13,245,629
Dividends paid - preferred - - - - - (250,000) (250,000)
Dividends paid - common - - - - - (1,476,783) (1,476,783)
Net income - - - - - 373,059 373,059
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2004 909,090 10,000,000 7,098,698 70,987 84,707,186 (44,153,352) 50,624,821
Common stock issued - - 36,733 367 463,081 - 463,448
Costs of stock issues - - - - (56,299) - (56,299)
Dividends paid - preferred - - - - - (250,000) (250,000)
Dividends paid - common - - - - - (1,774,675) (1,774,675)
Net income - - - - - 216,634 216,634
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance June 30, 2004 909,090 10,000,000 7,135,431 71,354 85,113,968 (45,961,393) 49,223,929
Common stock issued - - 1,440,969 14,410 17,201,079 - 17,215,489
Dividends paid - preferred - - - - - (250,000) (250,000)
Dividends paid - common - - - - - (2,140,012) (2,140,012)
Net income - - - - - 299,223 299,223
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance September 30, 2004 909,090 $10,000,000 8,576,400 $85,764 $102,315,047 $(48,052,182) $64,348,629
========= ============ =========== ========== ============= =============== ============
5
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30
2004 2003
----------------- ----------------
Operating activities:
Net income (loss) $ 888,916 $ (109,635)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Casualty gains (268,736) -
Write-off of unamortized loan costs
at refinancing 85,341 -
Minority interest in operating partnership 37,768 (163,465)
Depreciation and amortization of loan costs 8,653,968 7,586,176
Amortization of defeasance credit (104,960) (149,696)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (3,306,169) (2,381,973)
Accounts payable and accrued expenses 3,014,871 2,017,373
Deferred revenue and security deposits (57,401) (78,362)
----------------- ----------------
Net cash provided by operating activities 8,943,598 6,720,418
Investing activities:
Acquisitions of apartment properties (48,305,072) (23,382,176)
Additions to apartment properties, net (3,027,949) (2,389,560)
Casualty proceeds 895,060 -
Sale of restaurant properties - 1,244,038
----------------- ----------------
Net cash used in investing activities (50,437,961) (24,527,698)
Financing activities:
Net proceeds from issuance of preferred stock - 4,970,299
Net proceeds from issuance of common stock 30,555,679 550,633
Distributions to operating partnership minority unitholders (1,380,062) (1,385,150)
Dividends paid to preferred shareholder (750,000) (376,027)
Dividends paid to common shareholders (5,391,470) (4,386,676)
Proceeds from notes payable 111,905,790 25,985,610
Principal payments on notes payable (91,563,164) (7,537,851)
Payment of deferred financing costs (854,228) (244,174)
----------------- ----------------
Net cash provided by financing activities 42,522,545 17,576,664
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,028,182 (230,616)
Cash and cash equivalents at beginning of period 564,426 884,316
----------------- ----------------
Cash and cash equivalents at end of period $ 1,592,608 $ 653,700
================= ================
6
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - September 30, 2004
(Unaudited)
Note 1. Interim financial statements
Our independent accountants have not audited the accompanying financial
statements of BNP Residential Properties, Inc., except for the balance sheet at
December 31, 2003. We derived the amounts in the balance sheet at December 31,
2003, from the financial statements included in our 2003 Annual Report on Form
10-K. We believe that we have included all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for the periods presented.
We have condensed or omitted certain notes and other information from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
You should read these financial statements in conjunction with our 2003 Annual
Report on Form 10-K.
Note 2. Basis of presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "operating partnership"). The company is the general partner
and owns a majority interest in the operating partnership. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Stock-based compensation
The company has one employee Stock Option and Incentive Plan in place. We
account for this plan using the intrinsic value method, under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. If we had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to 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 nine months ended
September 30, 2004 and 2003, respectively, with no impact on basic and diluted
earnings per share amounts as reported.
Note 3. Apartment property acquisitions
During the third quarter of 2004, we completed the following apartment
acquisitions:
o Savannah Shores Apartments - 198-unit property located in Myrtle Beach,
South Carolina, acquired July 1, 2004, for an initial purchase price of
$12.5 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. We paid the initial purchase price
through issuance of 7,695 operating partnership units with an imputed value
of approximately $0.1 million, assumption of $12.2 million in debt
obligations, and assumption of approximately $0.2 million net operating
liabilities in excess of operating assets acquired. Two members of the
contributor
7
group in this transaction serve on our Board of Directors. Prior to this
transaction, we managed the property under a third-party management
contract.
o Fairington Apartments - 250-unit property located in Charlotte, North
Carolina, acquired August 5, 2004, for a contract price of $18.5 million,
paid in cash.
o Bridges at Southpoint Apartments (formerly named Sterling Park Apartments)
- 192-unit property located in Durham, North Carolina, acquired September
30, 2004, for a contract price of $10.2 million, paid in cash.
During the second quarter of 2004, we completed the following apartment
acquisitions:
o Bridges at Wind River Apartments (formerly named Oakwood Raleigh
Apartments) - 346-unit property located in Durham, North Carolina, acquired
May 12, 2004, for a contract price of $25.0 million, including issuance of
39,270 operating partnership units with an imputed value of approximately
$511,000, assumption of approximately $24.6 million in debt obligations,
and receipt of an estimated $0.2 million net operating assets, including
approximately $200,000 cash.
o Carriage Club Apartments - 268-unit property located in Mooresville, North
Carolina, acquired June 29, 2004, for a contract price of $19.65 million,
paid in cash.
Note 4. Financing transactions
During the third quarter of 2004, we completed the following financing
transactions:
o $9.0 million variable-rate note payable, effective July 1, 2004, secured by
a deed of trust and assignment of rents of Savannah Shores Apartments. The
three-year note provides for interest at 30-day LIBOR plus 1.8%, payable
monthly, and principal due July 2007, subject to an optional 24-month
extension. If the loan is extended, principal payments of approximately
$16,000 will be payable monthly beginning August 2007, with the remaining
principal balance of approximately $8.6 million due July 2009. In
conjunction with this transaction, we paid and recorded deferred loan costs
of approximately $56,000. 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.
o $15.0 million fixed-rate note payable, effective July 13, 2004, secured by
a deed of trust and assignment of rents of The Harrington Apartments. The
note provides for interest at 5.15% payable in monthly installments of
approximately $65,000 through August 2005, then principal and interest
payable in monthly installments of approximately $82,000 September 2005
through July 2009, with a balloon payment of approximately $14.1 million at
maturity in August 2009. We applied the proceeds to retire a $14.4 million
variable-rate note payable. In conjunction with this transaction, we paid
and recorded deferred loan costs of approximately $92,000.
o $13.4 million variable-rate note payable, effective August 5, 2004, secured
by a deed of trust and assignment of rents of Fairington Apartments. The
note 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 approximately $31,000 will
be payable monthly beginning September 2007, with the remaining principal
balance of
8
approximately $12.7 million due August 2009. In conjunction with this
transaction, we paid and recorded deferred loan costs of approximately
$76,000.
o $8.2 million fixed-rate note payable, effective September 27, 2004, secured
by a deed of trust and assignment of rents of Bridges at Southpoint
Apartments. The note provides for interest at a fixed rate of 4.93%,
payable in monthly installments of approximately $34,000 through October
2007, then principal and interest payable in monthly installments of
approximately $44,000 November 2007 through September 2014, with a balloon
payment of approximately $7.3 million at maturity in October 2014. In
conjunction with this transaction, we paid and recorded deferred loan costs
of approximately $61,000.
During the second quarter of 2004, we completed the following financing
transactions:
o $11.5 million variable-rate note payable, effective April 30, 2004, secured
by a deed of trust and assignment of rents of Chason Ridge Apartments. The
note 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 approximately $27,000 will be
payable monthly beginning June 2007, with the remaining principal balance
of approximately $10.9 million due April 2009. We applied approximately
$9.4 million of these proceeds to retire an existing 8.5% deed of trust
note related to Chason Ridge. In conjunction with this transaction, we paid
and recorded deferred loan costs of approximately $98,000, and we wrote off
unamortized loan costs of approximately $85,000 related to the debt
retired.
o $19.7 million fixed-rate note payable, effective May 12, 2004, secured by a
deed of trust and assignment of rents of Bridges at Wind River Apartments.
The note provides for interest at 5.57% payable in monthly installments of
principal and interest of approximately $113,000, with a balloon payment of
approximately $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. In conjunction with this
transaction, we paid and recorded deferred loan costs of approximately
$160,000.
o $14.9 million fixed-rate note payable, effective June 29, 2004, secured by
a deed of trust and assignment of rents of Carriage Club Apartments. The
note provides for interest at 5.15% payable in monthly installments of
approximately $65,000 through July 2005, then principal and interest
payable in monthly installments of approximately $81,000 August 2005
through June 2009, with a balloon payment of approximately $14.0 million at
maturity in July 2009. In conjunction with this transaction, we paid and
recorded deferred loan costs of approximately $90,000.
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%. In conjunction
with this modification, we paid and recorded deferred loan costs of
approximately $185,000.
During the second and third quarters of 2004, we made draws on this line of
credit totaling $20.2 million in conjunction with apartment acquisitions.
9
Note 5. Casualty Gains
During the third quarter of 2004 we recorded casualty gains of $268,736 related
to fires that occurred at two apartment communities. These gains were the result
of receipts during the third quarter of insurance proceeds of approximately
$895,000, offset by the write off of approximately $626,000 net book value of an
apartment building (containing 20 apartment units) that was approximately 80%
destroyed and a clubhouse building that was approximately 20% destroyed.
Note 6. Shareholders' equity
On July 19, 2004, we issued 1,420,000 shares of common stock at a price of
$12.50 per share, to a number of institutional investors and mutual funds
pursuant to a registered direct placement, for a total purchase price of
approximately $17.75 million. Through September 30, 2004, we incurred costs
totaling approximately $0.8 million related to this placement. We expect to use
the net proceeds to fund future acquisitions, to repay bank debt, and for
general corporate purposes. We immediately applied $17.0 million of the net
proceeds to reduce our revolving line of credit secured by Latitudes Apartments.
On February 23, 2004, we issued 1,175,519 shares of common stock at a price of
$11.75 per share, to a number of institutional investors and mutual funds
pursuant to a private placement, for a total purchase price of approximately
$13,812,000. We incurred costs associated with this placement totaling
approximately $0.8 million. We expect to use the net proceeds to fund future
acquisitions, to repay bank debt, and for general corporate purposes. We
immediately applied $13.0 million of the net proceeds to reduce our revolving
line of credit secured by Latitudes Apartments.
In August 2004, we issued 16,351 shares of our common stock through our Dividend
Reinvestment and Stock Purchase Plan ("DRIP") for proceeds of approximately
$214,000. During the first and second quarters of 2004, we issued a total of
32,779 shares of our common stock through our DRIP for proceeds of approximately
$407,000.
In addition, in May 2004, we issued 20,000 shares of our common stock with an
imputed value of $251,000 in exchange for operating partnership units formerly
held by a minority unitholder; we issued these shares to Paul Chrysson, a member
of our Board of Directors. In July 2004, we issued 4,618 shares of our common
stock in exchange for operating partnership units formerly held by a minority
unitholder.
We calculated basic and diluted earnings per common share using the following
amounts:
10
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
----------------- ---------------- ----------------- -----------------
Numerators:
Numerator for basic
earnings per share -
Net income (loss) $ 299,223 $ 137,097 $ 888,916 $ (109,635)
Cumulative preferred dividend (250,000) (160,616) (750,000) (410,616)
----------------- ---------------- ----------------- -----------------
Income (loss) available to
common shareholders $ 49,223 $ (23,519) $ 138,916 $ (520,251)
================= ================ ================= =================
Numerator for diluted
earnings per share -
Net income (loss) (1) $ 310,296 $ 129,725 $ 926,684 $ (273,100)
Cumulative preferred dividend (250,000) (160,616) (750,000) (410,616)
----------------- ---------------- ----------------- -----------------
Income (loss) available to
common shareholders (1) $ 60,296 $ (30,891) $ 176,684 $ (683,716)
================= ================ ================= =================
Denominators:
Denominator for basic
earnings per share -
weighted average common
shares outstanding 8,289,144 5,877,060 7,275,170 5,858,082
Effect of dilutive securities:
Convertible Operating
Partnership units 1,864,700 1,842,337 1,852,101 1,843,614
Stock options (2) 35,735 6,564 24,538 5,161
----------------- ---------------- ----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 10,189,579 7,725,961 9,151,809 7,706,857
================= ================ ================= =================
(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 120,000 shares at $13.125 from the
calculation of diluted earnings per share for the nine months ended
September 30, 2004. We also excluded additional options to purchase 140,000
shares of common stock at $12.50, 110,000 shares of common stock at $12.25,
and 60,000 shares of common stock at $11.25 from the calculation of diluted
earnings per share for the three and nine months ended September 30, 2003.
The exercise price of these options was greater than the average market
price of the common shares for those periods, and the effect would be
anti-dilutive.
Note 7. Subsequent events
On October 22, 2004, the Board of Directors declared a regular quarterly cash
dividend of $0.25 per share to be paid on November 15, 2004, to common
shareholders of record on November 1, 2004. The Board of Directors also
authorized the payment of dividends totaling $250,000 to the Series B Preferred
shareholder in accordance with the company's charter provisions governing those
shares.
11
In early October 2004, we issued an additional 2,482 operating partnership units
with an imputed value of approximately $32,000 in final settlement of net
operating assets received in the acquisition of Bridges at Wind River
Apartments.
Also in October 2004, we issued 59,773 shares of our common stock for exercise
of options by three of our employees. In conjunction with this issue, we
received cash proceeds of approximately $700,000.
12
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 November 4, 2004, we currently own 25 apartment
communities containing 6,113 units and provide third-party management services
for seven communities containing a total of 1,799 units. In addition to our
apartment communities, we own 40 properties that we lease on a triple-net basis
to a restaurant operator.
13
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
From an operational point of view, we were pleased with the third
quarter of 2004. During the quarter we acquired three apartment communities,
raised $17.75 million in new equity, and saw continued improvement in apartment
operations and restaurant sales. We were, however, somewhat disappointed with
our results for the quarter. A number of factors combined to reduce our reported
results for the quarter below what we had hoped to achieve.
o In July 2004, we raised approximately $17.75 million of new equity
through the issuance of 1.4 million shares of common stock. While the
purpose of this transaction was to provide capital to allow us to
acquire additional apartment properties, we temporarily used the
proceeds of this offering to pay down our operating line of credit. The
net effect of this was to dilute our earnings and funds from operations
for the third quarter by approximately $0.03 per share.
o The Sarbanes-Oxley Act requires us to document, test and certify our
internal controls as of the end of this year. Like many public
companies, we engaged a consulting firm to assist with this
undertaking. In the third quarter, we spent in excess of $75,000 on
this project. While we expect that we will incur ongoing expenses
associated with Sarbanes-Oxley requirements in the future, we do not
expect that the cost of this initial internal controls documentation
project will be repeated.
o During the third quarter, we decided to lock down long-term, fixed-rate
financing on a property that had been acquired using a variable-rate
loan. This resulted in the one-time write off of approximately $85,000
of unamortized loan costs incurred when the acquisition loan was put in
place in 2003.
o During the third quarter we recorded certain expenses, primarily
related to payroll, that on a comparable basis were reported in the
fourth quarter of 2003. As a result of this variance in timing,
approximately $150,000 in expense was recorded in the third quarter of
2004 which, on a comparable basis, would have been reported in the
fourth quarter.
We are pleased with the progress we have made over the past several
quarters. So far this year, we have added five apartment communities, raised
more than $31 million in new capital in two equity placements, significantly
expanded our institutional investor base, completed one apartment property
rehabilitation, and begun rehabilitation projects on two additional apartment
properties. We believe we are well positioned to take advantage of any
improvement in our markets.
14
However, our long-term optimism is tempered somewhat by concern that
the current economic recovery, particularly for people in the income ranges
typical of our residents, is quite fragile. It is important to remember that,
with the notable exception of 2003, it is normal for us to see a drop off in
occupancy in our apartment properties in the winter months. Our concern is that
the current economic climate will exacerbate this trend. With this in view, our
primary objective through the winter months will be to maintain occupancy at
acceptable levels, with the goal of putting ourselves in position to begin
working to raise rental rates in the spring of 2005.
Revenues
Total revenues in the third quarter of 2004 were $13.7 million, an
increase of 26.2% compared to the third quarter of 2003. Total revenues through
the first nine months of 2004 were $36.8 million, a 17.6% increase compared to
the first nine months of 2003.
Apartment rental income totaled $12.3 million in the third quarter of
2004, an increase of 27.4% compared to the third quarter of 2003. Through the
first nine months of 2004, apartment rental income totaled $32.9 million, a
19.8% increase compared to the first nine months of 2003. These increases are
primarily attributable to seven apartment acquisitions in 2003 and 2004. These
new apartment properties contributed approximately $2.9 million in revenue in
the third quarter of 2004 and approximately $5.0 million in revenue through the
first nine months of 2004.
On a "same-units" basis (the 18 apartment communities that we owned
through the first nine months of both 2004 and 2003), apartment rental income
increased by 2.3% in the third quarter of 2004 compared to the third quarter of
2003, and by 4.4% for the first nine months of 2004 compared to the first nine
months of 2003. This increase was the result of improvements in occupancy as
well as revenue per occupied unit. On a same-units basis, average economic
occupancy was 95.2% for the third quarter of 2004, compared to 93.8% for the
third quarter of 2003; and 95.2% for the first nine months of 2004, compared to
92.1% for the first nine months of 2003. On a same-units basis, average revenue
per occupied unit was $743 for the third quarter of 2004, compared to $737 for
the third quarter of 2003; and $737 for the first nine months of 2004, compared
to $729 for the first nine months of 2003.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the third quarter and first nine months of 2004 follow:
Three months ended Nine months ended
September 30 September 30
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ----------- ----------- ----------- -----------
Abbington Place 360 95.0% $762 93.7% $759
Allerton Place 228 95.2% 810 94.6% 785
Barrington Place 348 95.5% 741 95.0% 751
Brookford Place 108 98.8% 686 97.9% 679
Carriage Club(2) 268 94.0% 741 94.0% 741
Chason Ridge 252 95.3% 811 97.2% 797
Fairington(2) 250 93.2% 693 93.2% 693
The Harrington(1) 288 95.8% 749 93.4% 745
Harris Hill 184 96.1% 630 95.7% 641
Latitudes 448 97.6% 937 97.2% 916
15
Three months ended Nine months ended
September 30 September 30
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ----------- ----------- ----------- -----------
Madison Hall 128 94.4% 607 94.6% 600
Marina Shores Waterfront 290 96.5% 782 95.0% 765
Oakbrook 162 92.5% 695 94.9% 693
Oak Hollow 461 91.4% 617 93.1% 611
Paces Commons 336 95.6% 630 96.2% 631
Paces Village 198 96.0% 670 94.2% 673
Pepperstone 108 97.5% 660 97.2% 664
Savannah Place 172 93.7% 715 93.5% 708
Savannah Shores(2) 198 94.5% 817 94.5% 817
Bridges at Southpoint(3) 192
Summerlyn Place 140 95.3% 826 94.7% 833
The Place(1) 144 93.9% 551 96.3% 557
Waterford Place 240 97.3% 882 95.6% 877
Woods Edge 264 92.7% 704 94.7% 705
Bridges at Wind River(2) 346 86.3% 818 87.4% 825
All apartments(3)
- 2004 5,921 94.5% 745 94.8% 735
- 2003 4,859 93.7% 733 92.0% 727
Same units(1,2,3) 4,427
- 2004 95.2% 743 95.2% 737
- 2003 93.8% 737 92.1% 729
(1) We acquired The Place in March 2003 and The Harrington in August 2003. We
have excluded these communities from same-units calculations as of
September 30.
(2) We acquired Bridges at Wind River in May 2004, Carriage Club in late June
2004, Savannah Shores in July 2004, and Fairington in August 2004. We have
excluded these communities from same-units calculations as of September 30.
Amounts included above reflect calculations of occupancy and revenue per
occupied unit since dates of acquisition.
(3) We acquired Bridges at Southpoint on September 30, 2004. We have excluded
this community from calculations of occupancy and revenue per occupied
unit.
Restaurant rental income was $1.0 million in the third quarters of both
2004 and 2003. Through the first nine months of 2004, restaurant rental income
was $2.9 million, compared to $3.0 million through the first nine months of
2003. A slight decline in 2004 restaurant rental income as compared to 2003 is
attributable to the sale of two restaurant properties during 2003. "Same-store"
(those 40 restaurant properties that operated through the first nine months of
both 2004 and 2003) sales at our restaurant properties increased by 6.4%
compared to the third quarter of 2003, and by 12.4% compared to the first nine
months of 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; on a year-to-date basis, sales have just passed
the threshold for percentage rent. Under the master lease for these 40
restaurant properties, annual rent is the greater of $3,829,787 or 9.875% of
food sales.
16
Management fee income totaled $177,000 in the third quarter of 2004,
compared to $229,000 in the third quarter of 2003. Through the first nine months
of 2004, management fee income totaled $582,000, compared to $679,000 through
the first nine months of 2003. This decrease is attributable to the termination
of management contracts for several properties in 2003; along with the July 2004
acquisition of Savannah Shores, which we previously managed, and termination of
the management contract for another property in June 2004. Management fees for
these two properties totaled approximately $65,000 through the first six months
of 2004.
During the third quarter of 2004, we recorded casualty gains of
approximately $269,000 related to fires that occurred at two apartment
communities, as follows:
o In September 2003, approximately 20% of the clubhouse at Oakbrook
Apartments was damaged by fire. In September 2004, we received final
settlement from the insurance carrier. Insurance proceeds totaled
approximately $114,000, including approximately $18,000 for out-of-pocket
costs related to securing the damaged area and approximately $96,000 for
assets destroyed in the fire. We identified and wrote off assets destroyed
with a net book value of approximately $72,000, including building net book
value of approximately $67,000 and furniture and equipment with net book
value of approximately $5,000. We recorded a casualty gain of approximately
$24,000 related to this settlement. We have spent approximately $111,000 to
replace the damaged portion of the building and contents.
o In April 2004, approximately 80% of one apartment building (which contained
20 apartment units) at Latitudes Apartments, a 448-unit apartment
community, was damaged by fire. Through September 2004, we have received
preliminary settlement from the insurance carrier totaling approximately
$917,000, including approximately $118,000 for out-of-pocket costs related
to securing the damaged area and approximately $799,000 for assets
destroyed in the fire. We identified and wrote off assets destroyed with a
net book value of approximately $554,000, including building net book value
of approximately $531,000 and furniture and equipment with net book value
of approximately $23,000. We recorded a casualty gain of approximately
$245,000 related to this preliminary settlement. Reconstruction of the
building has recently begun, and we expect to complete the reconstruction
in early 2005. In the meantime, we have recorded (and included in rental
income) approximately $82,000 in additional agreed-to proceeds for rental
interruption on the apartment units. We are insured for the loss, including
rent continuation insurance which covers 100% of lost rental income.
Generally accepted accounting principles require us to recognize this
gain on the insurance proceeds for assets destroyed. However, the economic
reality is that we have or will invest all of the insurance proceeds to replace
the assets that were destroyed.
Expenses
Total expenses, including non-cash charges for depreciation,
amortization, and write-off of unamortized loan costs at refinance, were $13.4
million in the third quarter of 2004, an increase of 24.8% compared to the third
quarter of 2003. Through the first nine months of 2004, total expenses were
$35.9 million, an increase of 13.7% compared to the first nine months of 2003.
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) in the third quarter of 2004 totaled $5.1 million, a
27.3% increase compared to the
17
third quarter of 2003. Through the first nine months of 2004, apartment
operations expense totaled $13.3 million, a 17.8% increase compared to the first
nine months of 2003. These increases are primarily attributable to apartment
acquisitions in 2003 and 2004; these communities generated apartment operations
expense of $1.3 million in the third quarter and $2.2 million through the first
nine months of 2004. On a same-units basis, apartment operations expense
decreased by 0.5% for the third quarter, and increased 1.1% through the first
nine months, of 2004 as compared to 2003.
Operating expenses for restaurant properties are insignificant because
the triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.
Apartment administration (the costs associated with oversight,
accounting and support of our apartment management activities for both owned and
third-party properties) and corporate administration expense totaled $1.1
million in the third quarter of 2004, a 23.5% increase compared to the third
quarter of 2003. Through the first nine months of 2004, administrative expenses
totaled $3.3 million, a 13.1% increase compared to the first nine months of
2004. These increases are attributable to additional corporate support staff,
software and insurance costs, as well as approximately $75,000 spent in the
third quarter of 2004 for development of compliance documentation required by
the Sarbanes-Oxley Act.
Depreciation expense totaled $3.2 million in the third quarter of 2004,
a 25.1% increase compared to the third quarter of 2003. Through the first nine
months of 2004, depreciation expense totaled $8.4 million, a 14.2% increase
compared to the first nine months of 2003. These increases are primarily
attributable to the addition of apartment communities.
Interest expense totaled $3.9 million in the third quarter of 2004, an
increase of 19.3% compared to the third quarter of 2003. Through the first nine
months of 2004, interest expense totaled $10.5 million, an increase of 7.9%
compared to the first nine months of 2003. These increases are primarily
attributable to new debt issued in conjunction with acquisitions of apartment
properties, offset somewhat by declines in weighted average interest rates.
Overall, weighted average interest rates were 5.7% for the third quarter and
first nine months of 2004, compared to 5.9% for the third quarter and 6.0% for
the first nine months of 2003. (See further discussion in "Capital Resources and
Liquidity - Capital Resources" below.)
Net Income
Operating partnership earnings before non-cash charges for
depreciation, amortization and write-off of unamortized loan costs at refinance
totaled $3.7 million for the third quarter of 2004, a 33.8% increase compared to
$2.7 million for the third quarter of 2003. Through the first nine months of
2004, operating partnership earnings before non-cash charges for depreciation,
amortization and write-off of unamortized loan costs at refinance totaled $9.7
million, a 32.2% increase compared to $7.3 million through the first nine months
of 2003. These increases are attributable to casualty gains recorded in the
third quarter of 2004, the positive impact of new apartment communities, and
improvements in apartment revenues.
Income before minority interest (operating partnership income, after
deducting depreciation, amortization, and the July 2004 $85,000 charge for
write-off of unamortized loan costs at refinance, and before deductions for the
minority interest in the operating partnership and the cumulative preferred
dividend) was $310,000 for the third quarter of 2004, compared to $130,000 for
the third quarter of 2003. Through the first nine months of 2004, income before
18
minority interest totaled $927,000, compared to a loss of $273,000 through the
first nine months of 2003. Net income (after deduction for the minority
interest, but before the cumulative preferred dividend) was $299,000 for the
third quarter of 2004, compared to $137,000 for the third quarter of 2003.
Through the first nine months of 2004, net income was $889,000, compared to a
loss of $110,000 through the first nine months of 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 $750,000 through the first three quarters
of 2004, compared to $411,000 through the first three quarters of 2003.
Funds from Operations
Funds from operations is frequently referred to as "FFO." FFO is
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
as "net income (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from sales of property, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures." Our calculation of FFO is consistent with FFO as defined by
NAREIT. Because we hold all of our assets in and conduct all of our operations
through the operating partnership, we measure FFO at the operating partnership
level (i.e., before minority interest).
Historical cost accounting for real estate assets implicitly assumes
that the value of real estate assets diminishes predictably over time. In fact,
real estate values have historically risen or fallen with market conditions. FFO
is intended to be a standard supplemental measure of operating performance that
excludes historical cost depreciation from - or "adds it back" to - GAAP net
income. We consider FFO to be useful in evaluating potential property
acquisitions and measuring operating performance.
Funds available for distribution is frequently referred to as "FAD." We
calculate FAD as FFO plus non-cash expense for amortization and write-off of
unamortized loan costs, less recurring capital expenditures. We believe that,
together with net income and cash flows from operating activities, FAD provides
investors with an additional measure to evaluate the ability of the operating
partnership to incur and service debt, to fund acquisitions and other capital
expenditures, and to fund distributions to shareholders and minority
unitholders.
Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. 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 $3.0 million in the third quarter of
2004, an 18.3% increase compared to the third quarter of 2003. Through the first
nine months of 2004, FFO
19
totaled $8.3 million, a 24.5% increase compared to the first nine months of
2003. This comparison reflects the improvement in apartment operating results.
We calculated funds from operations as follows (all amounts in
thousands):
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Income (loss) before
minority interest $ 310 $ 130 $ 927 $ (273)
Less casualty gains (269) - (269) -
Cumulative preferred dividend (250) (161) (750) (411)
Depreciation 3,161 2,528 8,390 7,350
--------------- --------------- --------------- ---------------
Funds from operations $2,952 $2,497 $8,298 $6,666
=============== =============== =============== ===============
A reconciliation of FFO to FAD follows (all amounts in thousands):
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Funds from operations $2,952 $2,497 $8,298 $6,666
Amortization of loan costs 108 81 263 236
Write-off of unamortized loan
costs at refinance 85 - 85 -
Recurring capital expenditures (438) (662) (1,339) (1,352)
--------------- --------------- --------------- ---------------
Funds available for distribution $2,708 $1,916 $7,308 $5,550
=============== =============== =============== ===============
A further reconciliation of FAD to net cash provided by operating activities
follows (all amounts in thousands):
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Funds available for distribution $2,708 $1,916 $7,308 $5,550
Cumulative preferred dividend 250 161 750 411
Recurring capital expenditures 438 662 1,339 1,352
Amortization of deferred
interest defeasance - (66) (105) (150)
Changes in operating
assets and liabilities (210) (142) (349) (443)
--------------- --------------- --------------- ---------------
Net cash provided by
operating activities $3,186 $2,531 $8,944 $6,720
=============== =============== =============== ===============
20
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended Nine months ended
September 30 September 30
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net cash provided by (used in):
Operating activities $ 3,186 $ 2,531 $ 8,944 $ 6,720
Investing activities (29,382) (18,064) (50,438) (24,527)
Financing activities 22,793 15,574 42,522 17,577
Dividends and distributions paid to:
Preferred shareholders $ 250 $ 125 $ 750 $ 376
Common shareholders 2,140 1,467 5,391 4,387
Minority unitholders in
operating partnership 460 461 1,380 1,385
Scheduled debt principal payments $ 386 $ 295 $ 1,000 $ 854
Non-recurring capital expenditures 1,046 374 1,689 1,038
Weighted average shares outstanding
Preferred shares 909 583 909 498
Common shares 8,289 5,877 7,275 5,858
Weighted average Operating
Partnership minority units
outstanding 1,865 1,842 1,852 1,844
Capital Resources and Liquidity
Capital Resources
We completed a number of significant investing and financing
transactions during the second and third quarters of 2004. We completed the
following apartment community acquisitions:
o Bridges at Wind River Apartments, effective May 12, 2004 - We acquired this
346-unit property located in Durham, North Carolina, for a contract price
of $25.0 million, including issuance of 39,270 operating partnership units
at an imputed value of $13.00 per unit, or approximately $511,000,
assumption of approximately $24.6 million debt, and receipt of
approximately $0.2 million net operating assets, including approximately
$200,000 cash.
o Carriage Club Apartments, effective June 29, 2004 - We acquired this
268-unit property located in Mooresville, North Carolina, for a contract
price of $19.65 million, paid in cash.
o Savannah Shores Apartments, effective July 1, 2004 - We acquired this
198-unit property located in Myrtle Beach, South Carolina, for an initial
purchase price of $12.5 million. The acquisition agreement provides for
potential earn-out of additional purchase price of up to $1.7 million
within a three-year period, which would be funded through the
21
issuance of up to 130,769 operating partnership units at an imputed value
of $13.00 per unit to the contributors. Prior to this acquisition, we
managed this property under a third-party management contract. In
conjunction with this acquisition, we issued 7,695 operating partnership
units at an imputed value of $13.00 per unit, or approximately $100,000,
assumed approximately $12.2 million in debt obligations; and assumed
approximately $0.2 million net operating liabilities in excess of operating
assets acquired.
o Fairington Apartments, effective August 5, 2004 - We acquired this 250-unit
property located in Charlotte, North Carolina, for a contract price of
$18.5 million, paid in cash.
o Bridges at Southpoint Apartments, effective September 30, 2004 - We
acquired this 192-unit property located in Durham, North Carolina, for a
contract price of $10.2 million, paid in cash.
During this same period, we completed the following financing transactions:
o $11.5 million variable-rate loan, effective April 30, 2004, proceeds
applied to retire the $9.4 million balance on the existing deed of trust
note at 8.5% related to Chason Ridge Apartments. The three-year note
payable is secured by a deed of trust and assignment of rents of Chason
Ridge, and provides for interest at 30-day LIBOR plus 1.75%, payable
monthly, with the principal balance due May 2007, subject to an optional
24-month extension.
o $19.7 million fixed-rate loan, effective May 12, 2004, proceeds applied to
retire the existing $24.6 million loan obligation related to Bridges at
Wind River Apartments. The ten-year note payable is secured by a deed of
trust and assignment of rents of Bridges at Wind River, and provides for
interest at 5.57% payable in monthly installments of principal and interest
of approximately $113,000 per month through May 2014, with a balloon
payment of approximately $16.5 million at maturity in June 2014.
o $14.9 million fixed-rate loan, effective June 29, 2004, secured by a deed
of trust and assignment of rents of Carriage Club Apartments. The five-year
note provides for interest at 5.15% payable in monthly installments of
approximately $65,000 through July 2005, then principal and interest
installments of approximately $81,000 per month through June 2009, with a
balloon payment of approximately $14.0 million at maturity in July 2009.
o $9.0 million variable-rate loan, effective July 1, 2004, proceeds applied
to retire the existing $12.2 million loan obligation related to Savannah
Shores Apartments. The three-year note is secured by a deed of trust and
assignment of rents of Savannah Shores Apartments, and provides for
interest at 30-day LIBOR plus 1.8% payable monthly, with the principal
balance due July 2007, subject to an optional 24-month extension.
o $15.0 million fixed-rate note payable, effective July 13, 2004, proceeds
applied to retire the existing variable-rate $14.4 million deed of trust
note related to The Harrington Apartments. The five-year note is secured by
a deed of trust and assignment of rents of The Harrington, and provides for
interest at 5.15% payable in monthly installments of approximately $65,000
through August 2005, then principal and interest payable in monthly
installments of approximately $82,000 September 2005 through July 2009,
with
22
a balloon payment of approximately $14.1 million at maturity in August
2009.
o $13.4 million variable-rate note payable, effective August 5, 2004, secured
by a deed of trust and assignment of rents of Fairington Apartments. The
three-year note provides for interest at 30-day LIBOR plus 1.75% payable
monthly, with the principal balance due August 2007, subject to an optional
24-month extension.
o $8.2 million fixed-rate note payable, effective September 27, 2004, secured
by a deed of trust and assignment of rents of Bridges at Southpoint
Apartments. The ten-year note provides for interest at 4.93% payable in
monthly installments of approximately $34,000 through October 2007, then
principal and interest payable in monthly installments of approximately
$44,000 November 2007 through September 2014, with a balloon payment of
approximately $7.3 million at maturity in October 2014.
o In conjunction with the financing transactions related to acquisitions, we
made draws of $20.2 million on our line of credit secured by Latitudes
Apartments.
In May 2004 we issued 20,000 shares of our common stock with an imputed
value of $251,000 in exchange for operating partnership units formerly held by a
minority unitholder. We issued these shares to Paul Chrysson, a member of our
Board of Directors. In July 2004 we issued 4,618 shares of our common stock in
exchange for operating partnership units formerly held by a minority unitholder.
Effective July 19, 2004, we completed the placement of 1.42 million
shares of common stock at a price of $12.50 per share to a number of
institutional investors and mutual funds pursuant to a registered direct
placement, for net proceeds of approximately $16.9 million. We expect to use the
net proceeds to fund future acquisitions, repay bank debt, and for general
corporate purposes. We immediately applied proceeds of the stock issue to reduce
our revolving line of credit secured by Latitudes Apartments by $17.0 million.
During the first quarter of 2004, we issued 1.18 million shares of
common stock at a price of $11.75 per share to a number of institutional
investors and mutual funds pursuant to a private placement, for net proceeds of
approximately $13.0 million. We immediately applied $13.0 million of the net
proceeds to reduce our revolving line of credit secured by Latitudes Apartments.
As of September 30, 2004, total long-term debt was $286.8 million,
including $215.9 million of notes payable at fixed interest rates ranging from
5.00% to 8.55%, and $70.9 million at variable rates indexed on 30-day LIBOR
rates. The weighted average interest rate on debt outstanding was 5.7% at
September 30, 2004, compared to 5.5% at June 30, 2004, and 5.8% at December 31,
2003. A 1% fluctuation in variable interest rates would increase or decrease our
annual interest expense by approximately $720,000.
Cash Flows and Liquidity
Net cash flows from operating activities were $3.2 million in the third
quarter of 2004, compared to $2.5 million in the third quarter of 2003. Through
the first nine months of 2004, net cash flows from operating activities were
$8.9 million, compared to $6.7 million through the first nine months of 2003.
Improvements in operating results (including as a result of apartment
acquisitions) produced approximately $725,000 of the increase in third quarter
comparisons and
23
$2.1 million of the increase in nine month comparisons; remaining differences
are attributable to timing of cash receipts and disbursements.
Investing and financing activities, other than those described under
"Capital Resources" above, focused on capital expenditures at apartment
communities, along with payment of dividends and distributions.
We have announced that the company will pay a regular quarterly
dividend of $0.25 per share (approximately $2.2 million) on November 15, 2004,
to shareholders of record of our common stock as of November 1, 2004, 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 possible property
acquisitions, through long-term secured and unsecured borrowings and the
issuance of debt securities or additional equity securities. We believe we have
sufficient resources to meet our short-term liquidity requirements.
Critical Accounting Policies - Capital expenditures and depreciation
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 policy and practice regarding capital expenditures and depreciation, which
may be of particular interest to readers of this Quarterly Report, are further
discussed below.
In general, for 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, 45-60 years; land improvements, 7-20 years; short-lived building
components, 5-20 years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition. We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize recurring capital expenditures for exterior
painting, roofing, and other major maintenance projects that substantially
extend the useful life of existing assets. For financial reporting purposes, we
depreciate these additions and replacements on a straight-line basis over
estimated useful lives of 5-20 years. We retire replaced assets with a charge to
depreciation for any remaining carrying value. We capitalize all floor covering,
appliance and HVAC replacements, and depreciate them using a straight-line,
group method over estimated useful lives of 5-10 years.
24
Capital expenditures at our apartment communities during the first nine
months of 2004 totaled approximately $3.0 million, including $0.5 million for
acquisition improvements, $0.1 million for casualty replacements, $1.0 million
for additions and betterments, and $1.3 million for recurring capital
expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during the
first nine months of 2004 totaled approximately $4.8 million, including $1.9
million in compensation of service staff and $2.9 million in payments for
materials and contracted service.
A summary of capital expenditures at our apartment communities through
September 30, 2004, in aggregate and per apartment unit, follows:
Total Per unit
--------------------- --------------------
(000's)
Recurring capital expenditures:
Floor coverings $ 539 $ 104
Appliances/HVAC 270 52
Exterior paint - -
Computer/support equipment 4 1
Other 526 101
--------------------- --------------------
$ 1,339 $ 258
===================== ====================
Non-recurring capital expenditures:
Acquisition improvements at apartment properties $ 518
Casualty replacements 111
Additions and betterments at apartment properties 1,023
Computer/support equipment 36
---------------------
$ 1,689
=====================
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 second and third quarters of 2004.
As of September 30, 2004, total long-term debt was $286.8 million,
including $215.9 million of notes payable at fixed interest rates ranging from
5.00% to 8.55%, and $70.9 million at variable rates indexed on 30-day LIBOR
rates. The weighted average interest rate on debt outstanding was 5.7% at
September 30, 2004, compared to 5.5% at June 30, 2004, and 5.8% at December 31,
2003. A 1% fluctuation in variable interest rates would increase or decrease our
annual interest expense by approximately $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 instruments in place as of September 30, 2004 (all
amounts in thousands).
25
Expected maturity dates
2004 2005 2006 2007 2008 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 304 $ 6,791 $ 1,599 $49,537 $38,454 $119,209 $215,894
Average interest rate 6.54% 8.12% 6.06% 6.93% 6.55% 6.03% 6.39%
Variable rate notes $ 10,528 $ 833 $15,483 $30,791 $ 375 $ 12,900 $ 70,909
Average interest rate 3.50% 3.43% 3.43% 3.42% 3.42% 3.42% 3.44%
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 third quarter of 2004, our chief executive officer and chief financial
officer believe that our disclosure controls and procedures are effective. There
have been no significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the
completion of this evaluation.
Part II - Other Information
Item 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 Section 302 Certification by Chief Executive Officer
31.2 Section 302 Certification by Chief Financial Officer
32.1 Section 906 Certification by Chief Executive Officer
32.2 Section 906 Certification by Chief Financial Officer
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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)
November 8, 2004 /s/ Philip S. Payne
--------------------------------------------
Philip S. Payne
Chairman and
Chief Financial Officer
(Duly authorized officer)
November 8, 2004 /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 Section 302 Certification by Chief Executive Officer 29
31.2 Section 302 Certification by Chief Financial Officer 30
32.1 Section 906 Certification by Chief Executive Officer 31
32.2 Section 906 Certification by Chief Financial Officer 32
28