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 June 30, 2003
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-9496
BNP RESIDENTIAL PROPERTIES, INC.
--------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
-------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
301 S. College Street, Suite 3850, Charlotte, NC 28202-6024
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
704/944-0100
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of August 5, 2003 (the latest practicable date).
Common Stock, $.01 par value 5,865,392
---------------------------- -----------------------
(Class) (Number of shares)
Exhibit index: page 25
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
3 Quantitative and Qualitative Disclosures 21
About Market Risk
4 Controls and Procedures 21
PART II - Other Information
4 Submission of Matters to a Vote of Security Holders 21
5 Other Information 22
6 Exhibits and Reports on Form 8-K 22
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30 December 31
2003 2002
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $282,566,625 $275,712,863
Restaurant properties 38,335,989 39,158,921
------------------ ------------------
320,902,614 314,871,784
Less accumulated depreciation (53,915,162) (49,448,825)
------------------ ------------------
266,987,452 265,422,959
Cash and cash equivalents 613,075 884,316
Other current assets 4,876,655 3,024,683
Notes receivable, net of reserve 100,000 100,000
Intangible assets, net of accumulated amortization:
Intangible related to acquisition of management operations 1,115,088 1,115,088
Deferred financing costs 1,143,045 1,175,684
------------------ ------------------
Total assets $274,835,315 $271,722,730
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $217,452,876 $211,584,935
Accounts payable and accrued expenses 2,759,640 1,272,451
Deferred revenue and security deposits 1,300,348 1,313,239
Deferred credit for defeasance of interest,
net of accumulated amortization 250,048 333,376
------------------ ------------------
Total liabilities 221,762,912 214,504,001
Minority interest in Operating Partnership 16,866,921 17,947,493
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding shares--
454,545 at June 30, 2003, and December 31, 2002 5,000,000 5,000,000
Common stock, $.01 par value, 100,000,000 shares
authorized; issued and outstanding shares--
5,865,392 at June 30, 2003,
5,831,077 at December 31, 2002 58,654 58,311
Additional paid-in capital 71,076,266 70,724,671
Dividend distributions in excess of net income (39,929,438) (36,511,746)
------------------ ------------------
Total shareholders' equity 36,205,482 39,271,236
------------------ ------------------
Total liabilities and shareholders' equity $274,835,315 $271,722,730
================== ==================
3
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
----------------- ---------------- ----------------- ----------------
(Restated)
Revenues
Apartment rental income $ 8,951,665 $ 7,855,562 $17,837,949 $15,344,858
Restaurant rental income 981,383 1,005,319 1,980,709 2,010,638
Management fee income 222,534 286,606 449,894 580,794
Interest and other income 24,538 68,995 154,348 106,194
----------------- ---------------- ----------------- ----------------
10,180,120 9,216,482 20,422,900 18,042,484
Expenses
Apartment operations 3,851,990 3,043,455 7,325,887 5,735,731
Apartment administration 413,110 293,986 740,170 619,420
Corporate administration 657,275 495,766 1,344,340 1,089,160
Depreciation 2,489,079 2,020,606 4,822,397 3,967,140
Amortization of deferred
loan costs 81,812 50,025 154,783 97,950
Interest 3,242,092 2,657,075 6,438,148 5,162,072
Write-off of unamortized loan
costs at debt refinance - - - 95,032
----------------- ---------------- ----------------- ----------------
10,735,358 8,560,913 20,825,725 16,766,505
----------------- ---------------- ----------------- ----------------
(Loss) Income before
minority interest (555,238) 655,569 (402,825) 1,275,979
Minority interest in
Operating Partnership (162,716) 137,641 (156,093) 265,476
----------------- ---------------- ----------------- ----------------
Net (loss) income (392,522) 517,928 (246,732) 1,010,503
Cumulative preferred dividend 125,000 62,329 250,000 123,973
----------------- ---------------- ----------------- ----------------
(Loss) Income available to
common shareholders $ (517,522) $ 455,599 $ (496,732) $ 886,530
================= ================ ================= ================
Per share amounts:
Basic earnings per share -
Net (loss) income $(0.06) $0.09 $(0.04) $0.18
(Loss) Income available to
common shareholders (0.08) 0.08 (0.08) 0.15
Diluted earnings per share -
Net (loss) income $(0.07) $0.09 $(0.05) $0.17
(Loss) Income available to
common shareholders (0.08) 0.07 (0.08) 0.15
Dividends declared $0.25 $0.31 $0.50 $0.62
Weighted average common
shares outstanding 5,857,298 5,775,895 5,848,435 5,765,464
4
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity
(Unaudited)
Dividend
Additional distributions
Preferred Stock Common Stock paid-in in excess of
Shares Amount Shares Amount capital net income Total
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance December 31, 2002 454,545 $5,000,000 5,831,077 $58,311 $70,724,671 $(36,511,746) $39,271,236
Common stock issued - - 17,575 176 176,996 - 177,172
Dividends paid - preferred - - - - - (126,027) (126,027)
Dividends paid - common - - - - - (1,457,770) (1,457,770)
Net income - - - - - 145,790 145,790
--------- ------------ ----------- ---------- ------------- --------------- ------------
Balance March 31, 2003 454,545 5,000,000 5,848,652 58,487 70,901,667 (37,949,753) 38,010,401
Common stock issued - - 16,740 167 174,599 - 174,766
Dividends paid - preferred - - - - - (125,000) (125,000)
Dividends paid - common - - - - - (1,462,163) (1,462,163)
Net loss - - - - - (392,522) (392,522)
---------------------------- --------- ------------ ----------- ---------- ------------- --------------- ------------
Balance June 30, 2003 454,545 $5,000,000 5,865,392 $58,654 $71,076,266 $(39,929,438) $36,205,482
============================ ========= ============ =========== ========== ============= =============== ============
5
BNP RESIDENTIAL PROPERTIES, INC.
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Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30
2003 2002
----------------- ----------------
(Restated)
Operating activities:
Net (loss) income $ (246,732) $ 1,010,503
Adjustments to reconcile net (loss) income to
net cash provided by operations:
Minority interest in Operating Partnership (156,093) 265,476
Depreciation and amortization of loan costs 4,977,180 4,065,090
Write-off of unamortized loan costs
at debt refinance - 95,032
Amortization of defeasance credit (83,328) (83,328)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,700,938) (1,574,877)
Accounts payable and accrued expenses 1,467,775 841,129
Deferred revenue and security deposits (68,148) (200,283)
----------------- ----------------
Net cash provided by operating activities 4,189,716 4,418,742
Investing activities:
Acquisition of apartment property (5,697,761) (9,989,369)
Additions to apartment properties, net (1,353,253) (1,243,939)
Sale of restaurant property 587,761 -
----------------- ----------------
Net cash used in investing activities (6,463,253) (11,233,308)
Financing activities:
Costs of issuance of preferred stock - (5,313)
Issuance of common stock 351,938 404,001
Distributions to Operating Partnership minority unitholders (924,479) (1,055,931)
Dividends paid to preferred shareholder (251,027) (64,384)
Dividends paid to common shareholders (2,919,933) (3,568,586)
Proceeds from notes payable 7,685,610 24,533,114
Principal payments on notes payable (1,817,669) (14,128,310)
Payment of deferred financing costs (122,144) (313,619)
----------------- ----------------
Net cash provided by financing activities 2,002,296 5,800,972
----------------- ----------------
Net decrease in cash and cash equivalents (271,241) (1,013,594)
Cash and cash equivalents at beginning of period 884,316 1,417,616
----------------- ----------------
Cash and cash equivalents at end of period $ 613,075 $ 404,022
================= ================
6
BNP RESIDENTIAL PROPERTIES, INC.
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Notes to Consolidated Financial Statements - June 30, 2003
(Unaudited)
Note 1. Interim financial statements
Our independent accountants have not audited the accompanying financial
statements of BNP Residential Properties, Inc., except for the balance sheet at
December 31, 2002. We derived the amounts in the balance sheet at December 31,
2002, from the financial statements included in our 2002 Annual Report on Form
10-K. We believe that we have included all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and results of operations for the periods presented.
We have condensed or omitted certain notes and other information from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
You should read these financial statements in conjunction with our 2002 Annual
Report on Form 10-K.
Note 2. Basis of Presentation
The consolidated financial statements include the accounts of BNP Residential
Properties, Inc. (the "company") and BNP Residential Properties Limited
Partnership (the "Operating Partnership"). The company is the general partner
and owns a majority interest in the Operating Partnership. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Stock-Based Compensation
The company has one employee Stock Option and Incentive Plan in place. We
account for this plan using the intrinsic value method, under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. If we had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation, the effect would be to reduce net income as reported by
approximately $240 in 2003 and $5,000 in 2002, with no impact on basic and
diluted earnings per share amounts as reported.
Reclassifications
We adopted Statement of Financial Accounting Standards No. 145, "Rescission of
FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections," effective January 1, 2003. Statement 145 generally
requires gains and losses on extinguishments of debt to be classified as income
or loss from continuing operations, rather than as extraordinary items as
previously required under Statement 4. We have reclassified the extraordinary
item for loss on early extinguishment of debt in the first quarter of 2002 to
conform to Statement 145. While adoption of Statement 145 has no impact on net
income, it reduces income before extraordinary items and eliminates
extraordinary items as previously reported. We have adjusted the 2002
comparative amounts in our consolidated financial statements to conform to the
2003 presentation as follows:
7
2002 as 2002 as
Currently Previously
Presented Adjustments Reported
----------------- ----------------- -----------------
Six months ended June 30, 2002
Revenues $18,042,484 $ - $18,042,484
Expenses 16,766,505 95,032 16,671,473
----------------- ----------------- -----------------
Income before minority interest and
extraordinary item 1,275,979 (95,032) 1,371,011
Minority interest in Operating Partnership 265,476 (21,735) 287,211
----------------- ----------------- -----------------
Income before extraordinary item 1,010,503 (73,297) 1,083,800
Extraordinary item - loss on early
extinguishment of debt - (73,297) 73,297
----------------- ----------------- -----------------
Net income $ 1,010,503 $ - $ 1,010,503
================= ================= =================
Note 3. Apartment property acquisition
Effective March 13, 2003, we acquired The Place Apartments for a contract price
of $5.6 million, paid in cash. Through June 30, 2003, we have incurred and
capitalized other direct costs of this acquisition totaling approximately
$20,000.
We funded this acquisition by the placement of a $4.56 million first deed of
trust loan together with draws of approximately $1.1 million on our existing
line of credit. In conjunction with this acquisition and financing, we funded
repair escrows of approximately $65,000 and paid lender fees and costs totaling
approximately $61,000.
Note 4. Shareholders' Equity
In May 2003, we issued 16,740 shares of our common stock through our Dividend
Reinvestment and Stock Purchase Plan for proceeds of approximately $175,000.
In February 2003, we issued 17,575 shares of our common stock through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of approximately
$177,000.
We calculated basic and diluted earnings per common share using the following
amounts:
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
----------------- ---------------- ----------------- -----------------
(Restated)
Numerators:
Numerator for basic
earnings per share -
Net (loss) income $ (392,522) $ 517,928 $ (246,732) $ 1,010,503
Cumulative preferred dividend (125,000) (62,329) (250,000) (123,973)
----------------- ---------------- ----------------- -----------------
(Loss) Income available to
common shareholders $ (517,522) $ 455,599 $ (496,732) $ 886,530
================= ================ ================= =================
8
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
----------------- ---------------- ----------------- -----------------
(Restated)
Numerator for diluted
earnings per share -
Net (loss) income (1) $ (555,238) $ 655,569 $ (402,825) $ 1,275,979
Cumulative preferred dividend (125,000) (62,329) (250,000) (123,973)
----------------- ---------------- ----------------- -----------------
(loss) Income available to
common shareholders (1) $ (680,238) $ 593,240 $ (652,825) $ 1,152,006
================= ================ ================= =================
Denominators:
Denominator for basic
earnings per share -
weighted average shares
outstanding 5,857,298 5,775,895 5,848,435 5,765,464
Effect of dilutive securities:
Convertible Operating
Partnership units 1,844,264 1,748,785 1,844,264 1,726,507
Stock options (2) 5,360 17,096 4,422 13,274
----------------- ---------------- ----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions 7,706,922 7,541,776 7,697,121 7,505,245
================= ================ ================= =================
(1) Assumes conversion of Operating Partnership units to common shares;
minority interest in Operating Partnership income has been eliminated.
(2) We excluded options to purchase 140,000 shares of common stock at $12.50,
110,000 shares at $12.25, and 120,000 shares at $13.125 from the
calculation of diluted earnings per share for the three and six months
ended June 30, 2003 and 2002. We also excluded additional options to
purchase 60,000 shares of common stock at $11.25 from the calculation of
diluted earnings per share for the three and six months ended June 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 5. Subsequent event
On July 17, 2003, the Board of Directors declared a regular quarterly cash
dividend of $0.25 per share to be paid on August 15, 2003, to common
shareholders of record on August 1, 2003. The Board of Directors also authorized
the payment of dividends totaling $125,000 to the Series B Preferred shareholder
in accordance with the investment agreement for those shares.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report contains forward-looking statements within the
meaning of federal securities law. You can identify such statements by the use
of forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information.
Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that we will achieve our plans, intentions or expectations.
When you consider such forward-looking statements, you should keep in mind the
following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:
o Our markets could suffer unexpected increases in the development of apartment,
other rental or competitive housing alternatives;
o our markets could suffer unexpected declines in economic growth or an increase
in unemployment rates;
o general economic conditions could cause the financial condition of a large
number of our tenants to deteriorate;
o we may not be able to lease or re-lease apartments quickly or on as favorable
terms as under existing leases;
o revenues from our third-party apartment property management activities could
decline, or we could incur unexpected costs in performing these activities;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates could increase our debt service
costs;
o we may not be able to meet our long-term liquidity requirements on favorable
terms; and
o we could lose key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to publicly release
the results of any revision to these forward-looking statements that may be made
to reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
You should read the discussion in conjunction with the financial
statements and notes thereto included in this Quarterly Report and our Annual
Report on Form 10-K.
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust with operations in North Carolina,
South Carolina and Virginia. Our primary activity is the ownership and operation
of apartment communities. We currently own 19 apartment communities containing
4,571 units and provide third-party management services for 9 communities
containing a total of 2,349 units. In addition to our apartment communities, we
own 41 properties that we lease on a triple-net basis to a restaurant operator.
We are structured as an UpREIT, or umbrella partnership real estate
investment trust. The company is the sole general partner and owns a controlling
interest in BNP Residential
10
Properties Limited Partnership, through which we conduct all of our operations.
We refer to this partnership as the Operating Partnership. We refer to the
limited partners of the Operating Partnership as minority unitholders or as the
minority interest.
Our executive offices are located at 301 South College Street, Suite
3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100.
Results of Operations
The operating results for the quarter ended June 30, 2003, were
disappointing. The second quarter is generally difficult for us and we had
expected that, given the current economic environment, the second quarter of
this year would be especially trying. We did not, however, fully anticipate the
impact that continued weaknesses in our apartment markets would have on
apartment revenue.
We believe the key to improving our operating results lies in
increasing our apartment revenue and improving the efficiency of our operations.
We have put a great deal of effort into controlling expenses, while at the same
time maintaining our properties, and do not believe there are significant
expense savings available to us. Any significant improvement in operating
results will come primarily from improving occupancy at our apartment
communities. To this end we are investing significant time and resources in
attracting and retaining residents while improving our operating systems. We
continue to believe that we will begin to see some signs of strengthening in our
apartment markets late in 2003. However, to a large degree, this is dependent
upon a general improvement in the economy.
Revenues
Total revenues in the second quarter of 2003 were $10.2 million, an
increase of 10.5% compared to the second quarter of 2002. Total revenues through
the first six months of 2003 were $20.4 million, an increase of 13.2% compared
to the first six months of 2002. Apartment related income (apartment rental
income plus income from apartment management and investment activities)
accounted for approximately 90.4% of total revenues in the second quarter of
2003, compared to 89.1% in the second quarter of 2002. Through the first six
months of 2003, apartment related income accounted for approximately 90.3% of
total revenues compared to 88.9% in the first six months of 2002.
Apartment rental income totaled $9.0 million in the second quarter of
2003, an increase of 14.0% compared to the second quarter of 2002. Through the
first six months of 2003, apartment rental income totaled $17.8 million, an
increase of 16.2% compared to the first six months of 2002. These increases are
primarily attributable to the acquisition of three apartment communities in 2002
and one in the first quarter of 2003, which contributed approximately $1.7
million to apartment rental income in the second quarter of 2003 and $3.3
million in the first six months of 2003. For the second quarter of 2003, overall
average economic occupancy declined by 1.8% while average revenue per occupied
unit declined by 2.5%, compared to the second quarter of 2002. For the first six
months of 2003, overall average economic occupancy declined by 1.6% while
average revenue per occupied unit declined by 1.5 %, compared to the first six
months of 2002.
On a "same-units" basis (the 15 apartment communities that we owned
throughout the first six months of both years), apartment rental income
decreased by 3.2% in the second quarter of 2003 compared to the second quarter
of 2002, and by 2.9% for the first six months of 2003
11
compared to the first six months of 2002. This decrease was the result of
declines in both average economic occupancy and average revenue per occupied
unit. For the second quarter of 2003, same-units average economic occupancy
declined by 1.8% while average revenue per occupied unit declined by 1.4%,
compared to the second quarter of 2002. For the first six months of 2003,
same-units average economic occupancy declined by 1.6% while average revenue per
occupied unit declined by 1.2%, compared to the first six months of 2002.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the second quarter and first six months of 2003 follow:
Three months ended Six months ended
June 30 June 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 88.4% $759 89.2% $759
Allerton Place 228 90.0% 741 91.0% 735
Alta Harbour (2) 290 87.4% 726 87.5% 754
Barrington Place (2) 348 93.4% 720 93.3% 742
Brookford Place (2) 108 95.9% 673 94.9% 666
Chason Ridge 252 96.8% 746 96.0% 746
Harris Hill 184 92.6% 662 91.9% 662
Latitudes 448 95.4% 871 95.3% 857
Madison Hall 128 95.2% 567 96.9% 571
Oakbrook 162 93.1% 688 90.3% 722
Oak Hollow 461 86.4% 606 84.0% 613
Paces Commons 336 88.3% 663 89.8% 665
Paces Village 198 94.5% 639 94.9% 641
Pepperstone 108 92.3% 624 93.4% 642
Savannah Place 172 94.0% 680 93.0% 693
Summerlyn Place 140 93.4% 822 92.6% 829
The Place (1) 144 85.1% 561 85.1% 561
Waterford Place 240 90.5% 825 89.9% 841
Woods Edge 264 91.7% 733 91.1% 737
All apartments (1) 4,571
- 2003 91.4% 715 91.1% 723
- 2002 93.2% 733 92.7% 734
Same units (3) 3,681
- 2003 91.5% 721 91.2% 724
- 2002 93.3% 731 92.8% 733
(1) We acquired The Place Apartments effective March 13, 2003.
(2) We acquired Barrington Place and Brookford Place effective May 31, 2002. We
acquired Alta Harbour effective September 18, 2002.
(3) Excludes Alta Harbour, Barrington Place, Brookford Place, and The Place.
We remain committed to our markets and our focus on middle-market
apartment properties. However, we continue to find ourselves in a very difficult
operating environment. Low interest rates continue to fuel near-record levels of
single-family home purchases by
12
individuals who traditionally would have been apartment residents.
Simultaneously, an anemic economy has resulted in extensive job losses. When you
compound these two factors with the continuing uncertainty caused by the threat
of terrorism, American military involvements abroad, expanding deficits at all
government levels, impending property tax increases, and skyrocketing insurance
costs, it is very difficult to form a clear vision of the near-term future.
In this environment, we believe the best way to achieve our long-term
objectives is to focus our attention on the day-to-day operations of our
apartment communities, with the goal of maximizing short-term performance while
maintaining and enhancing the long-term potential of our apartment properties.
We will also continue to seek opportunities to add to and improve the size and
quality of our apartment portfolio.
Restaurant rental income was $1.0 million in the second quarters, and
$2.0 million in the first six months, of both 2003 and 2002. A slight decline in
2003 restaurant rental income, as compared to 2002, was the result of the sale
of one restaurant property late in the first quarter of 2003. Restaurant rental
income for both 2003 and 2002 was the minimum rent. "Same-store" (those
restaurant properties that operated throughout the first six months of both 2003
and 2002) sales at our restaurant properties decreased by 5.4% in the second
quarter and 5.0% in the first six months of 2003 compared to these periods in
2002.
Through June 30, 2003, we have sold six of the original 47 restaurants
to Boddie-Noell Enterprises, Inc. ("Enterprises"), the lessee, under the
non-economic clause of the agreement that allows Enterprises to close up to
seven restaurants and buy them back for no less than net carrying value. Under
our master lease with Enterprises, restaurant rental income payments are the
greater of a specified minimum rent or 9.875% of food sales. The minimum rent is
reduced by approximately $8,000 per month, or $96,000 per year, for each
restaurant that is sold. During the third quarter of 2003, we expect to sell one
additional restaurant to Enterprises at its net book value of approximately
$650,000, and apply the proceeds to reduce our line of credit secured by the
restaurant properties.
Management fee income for the second quarter of 2003 decreased to
$223,000, compared to $287,000 in 2002. For the first six months of 2003,
management fee income decreased to $450,000 from $581,000 for the same period in
2002. This decrease is attributable to our acquisition of two previously managed
properties in May 2002, as well as the termination of management contracts for
several smaller properties in the first quarter of 2003.
Expenses
Effective January 1, 2003, in accordance with current accounting
guidance, we report the loss on extinguishment of debt as an operating expense,
rather than as an extraordinary item as previously required. We have
reclassified the write-off of unamortized loan costs at refinance in the first
quarter of 2002 to conform to the 2003 presentation in our financial statements.
This reclassification has no impact on net income; however, it reduces income
before extraordinary items and eliminates extraordinary items as previously
reported. A more detailed description of the reclassification adjustments is
included in the notes to the financial statements included in this Quarterly
Report.
Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, were $10.8 million in the
second quarter of 2003, an increase of 25.4% compared to the second quarter of
2002. Through the first six months of 2003, total expenses were $20.8 million,
an increase of 24.2% compared to the first six months of 2002.
13
Apartment operations expense (the direct costs of on-site operations at
our apartment communities) in the second quarter of 2003 was $3.9 million, a
26.6% increase compared to the second quarter of 2002. In the first six months
of 2003, apartment operations expense totaled $7.3 million, a 27.7% increase
compared to the first six months of 2002. These increases reflect the addition
of three apartment communities during 2002 and one community in the first
quarter of 2003, as well as significant increases in compensation, utilities,
and property insurance costs. On a same-units basis, apartment operations
expense increased by 2.0% in the second quarter and 4.3% in the first six months
of 2003 as compared to 2002.
Operating expenses for restaurant properties are insignificant because
the triple-net lease arrangement requires the lessee to pay virtually all of the
expenses associated with the restaurant properties.
Apartment administration expense (the costs associated with oversight,
accounting and support of our apartment management activities for both owned and
third party properties) was $413,000 in the second quarter of 2003, a 40.5%
increase compared to the second quarter of 2002. In the first six months of
2003, apartment administration expense totaled $740,000, an increase of 19.5%
compared to the first six months of 2002. These increases are primarily
attributable to increased compensation and costs arising from implementation of
new property management software.
Corporate administration expense was $657,000 in the second quarter of
2003, an increase of 32.6% compared to the second quarter of 2002. In the first
six months of 2003, corporate administration expense totaled $1.3 million, a
23.4% increase compared to the first six months of 2002. This increase was
primarily attributable to increases in compensation and insurance expense. In
January 2003, we added an in-house general counsel position to our executive
team.
Depreciation expense totaled $2.5 million in the second quarter of
2003, a 23.2% increase compared to the second quarter of 2002. In the first six
months of 2003, depreciation expense totaled $4.8 million, a 21.6% increase
compared to the first six months of 2002. This increase is attributable to the
addition of apartment communities, as well as the impact of additions and
replacements at other apartment communities.
Amortization expense (of deferred loan costs) was $81,000 in the second
quarter of 2003, compared to $50,000 in the second quarter of 2002. In the first
six months of 2003, amortization expense totaled $155,000, compared to $98,000
in the first six months of 2002. These increases are primarily attributable to
the impact of loan costs associated with financing transactions in 2002.
Interest expense totaled $3.2 million in the second quarter of 2003, a
22.0% increase compared to the second quarter of 2002. In the first six months
of 2003, interest expense totaled $6.4 million, a 24.7% increase compared to the
first six months of 2002. This increase reflects the impact of approximately $55
million in new debt related to apartment acquisitions in the second and third
quarters of 2002 and the first quarter of 2003, reduced by the effect of lower
interest rates on our lines of credit. Overall, weighted average interest rates
were 6.0% for the second quarter and first six months of 2003, compared to 6.2%
for the second quarter and first six months of 2002.
14
During the first quarter of 2002, we refinanced long-term debt related
to Oakbrook Apartments. In conjunction with this transaction, we wrote off
unamortized loan costs of $95,000. As discussed above, we have reclassified the
write-off of unamortized loan costs at the date of the refinance in the first
quarter of 2002 to conform to the 2003 presentation in our financial statements.
We previously reflected this write-off, net of minority interests' share, with a
charge of $73,000 as an extraordinary item in the financial statements.
In late December 2001, we issued 227,273 shares of Series B Cumulative
Convertible Preferred Stock. In September 2002, we issued an additional 227,272
shares of this preferred stock. Because preferred shareholders have priority
over common shareholders for receipt of dividends, we deduct the amount of net
income that will be paid to preferred shareholders in calculating net income
available to common shareholders. The dividend on the Series B shares is $1.10
per share per year. The cumulative preferred dividend totaled $125,000 for the
second quarter and $250,000 for the first six months of 2003, compared to
approximately $62,000 for the second quarter, and $124,000 for the first six
months, of 2002.
Net income/loss
The net loss (before the cumulative preferred dividend) for the second
quarter of 2003 was $393,000, compared to net income of $518,000 for the second
quarter of 2002. For the first six months of 2003, the net loss was $247,000,
compared to $1.0 million net income for the first six months of 2002. These
comparisons reflect the impact of decline in apartments operating results.
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.
We calculate funds available for distribution as FFO plus non-cash
expense for amortization and write-off of unamortized loan costs, less recurring
capital expenditures. We believe that, together with net income and cash flows,
funds available for distribution provides investors with an additional measure
to evaluate the ability of the Operating Partnership to incur and service debt,
to fund acquisitions and other capital expenditures, as well as to fund
distributions to shareholders and minority unitholders.
15
Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. You should not consider funds from operations or
funds available for distribution:
o to be alternatives to net income as reliable measures of the company's
operating performance, or
o to be alternatives to cash flows as measures of liquidity.
Funds from operations and funds available for distribution do not
measure whether cash flow is sufficient to fund all of our cash needs, including
principal amortization, capital improvements and distributions to shareholders.
Funds from operations and funds available for distribution do not represent cash
flows from operating, investing or financing activities as defined by generally
accepted accounting principles. Further, funds from operations and funds
available for distribution as disclosed by other REITs might not be comparable
to our calculation of funds from operations or funds available for distribution.
Funds from operations of the Operating Partnership totaled $1.8 million
in the second quarter of 2003, a 30.8% decrease compared to the second quarter
of 2002. For the first six months of 2003, funds from operations totaled $4.2
million, an 18.5% decrease compared to the first six months of 2002. This
comparison reflects the impact of decline in apartment operating results and the
increased cumulative preferred dividend.
We calculated funds from operations of the Operating Partnership as
follows (all amounts in thousands, except per share amounts):
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Restated)
(Loss) Income before
minority interest $ (555) $ 656 $ (403) $ 1,276
Cumulative preferred dividend (125) (62) (250) (124)
Depreciation 2,489 2,021 4,822 3,967
--------------- --------------- --------------- ---------------
Funds from operations -
Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119
=============== =============== =============== ===============
Per share amounts - diluted*:
Net (loss) income $ (0.07) $ 0.09 $ (0.05) $ 0.17
(Loss) Income available to
common shareholders (0.08) 0.07 (0.08) 0.15
Funds from operations 0.23 0.34 0.54 0.68
* assumes conversion of Operating Partnership units to common shares; minority
interest in the Operating Partnership has been eliminated. Preferred stock is
antidilutive for all periods.
16
A reconciliation of funds from operations to funds available for
distribution of the Operating Partnership follows (all amounts in thousands):
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Restated)
Funds from operations -
Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119
Amortization of loan costs 82 50 155 98
Write-off of unamortized
loan costs at refinance - - - 95
Recurring capital expenditures (408) (452) (690) (735)
--------------- --------------- --------------- ---------------
Funds available for distribution -
Operating Partnership $ 1,483 $ 2,212 $ 3,635 $ 4,577
=============== =============== =============== ===============
A further reconciliation of funds from operations of the Operating
Partnership to funds from operations available to common shareholders follows
(all amounts in thousands):
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Restated)
Funds from operations -
Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119
Minority interest in
funds from operations (433) (608) (1,000) (1,180)
--------------- --------------- --------------- ---------------
Funds from operations available
to common shareholders $ 1,376 $ 2,006 $ 3,170 $ 3,939
=============== =============== =============== ===============
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net cash provided by (used in):
Operating activities $ 1,971 $ 2,338 $ 4,190 $ 4,419
Investing activities (600) (10,689) (6,463) (11,233)
Financing activities (1,171) 8,207 2,002 5,801
Dividends and distributions paid to:
Preferred shareholders $ 125 $ 62 $ 251 $ 64
Common shareholders 1,462 1,788 2,920 3,569
Minority unitholders in
Operating Partnership 462 527 924 1,056
Scheduled debt principal payments $ 285 $ 72 $ 559 $ 120
Non-recurring capital expenditures 193 247 664 509
17
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Weighted average shares outstanding
Preferred shares 455 227 455 227
Common shares 5,857 5,776 5,848 5,765
Weighted average Operating
Partnership minority units
outstanding 1,844 1,749 1,844 1,727
Capital Resources and Liquidity
Capital Resources
On March 13, 2003, we acquired The Place Apartments for approximately
$5.6 million in cash. We financed this acquisition through issuance of a first
deed of trust note in the amount of $4.56 million together with draws of
approximately $1.1 million on our line of credit secured by Latitudes
Apartments. The fixed-rate deed of trust loan provides for interest at 5.06% and
monthly payments including principal and interest of approximately $33,000, with
maturity in 2013. In conjunction with this acquisition and financing, we funded
repair escrows of approximately $65,000 and paid lender fees and costs totaling
approximately $61,000. Through June 30, 2003, we have incurred and capitalized
other direct costs of this acquisition totaling approximately $20,000.
Effective February 21, 2003, we sold one restaurant property to the
lessee for its net carrying value of approximately $588,000. We applied the
proceeds from this sale to reduce our line of credit secured by the restaurant
properties. We expect to complete the sale of one additional restaurant property
with a net carrying value of approximately $650,000 to the lessee during the
third quarter, again at net carrying value, and apply the proceeds to reduce our
line of credit secured by the restaurant properties.
Through the first six months of 2003, we have made draws on our
variable-rate lines of credit totaling approximately $1.7 million to fund
acquisition activities and capital replacements and improvements.
As of June 30, 2003, total long-term debt was $217.5 million, including
$168.8 million of notes payable at fixed interest rates ranging from 5.06% to
8.55%, and $48.7 million at variable rates indexed on 30-day LIBOR rates. The
weighted average interest rate on debt outstanding was 5.9% at June 30, 2003,
down from 6.1% at December 31, 2002. At our current level of variable-rate debt,
a 1% fluctuation in variable interest rates would increase or decrease our
annual interest expense by approximately $494,000.
During the second quarter of 2003, we issued approximately 16,700
shares of our common stock through our Dividend Reinvestment and Stock Purchase
Plan for proceeds of approximately $175,000. During the first quarter of 2003,
we issued approximately 17,600 shares of our common stock through this plan for
proceeds of approximately $177,000.
18
Cash flows and liquidity
Net cash flows from operating activities were $2.0 million in the
second quarter of 2003, compared to $2.3 million in the second quarter of 2002.
Through the first six months of 2003, net cash flows from operating activities
were $4.2 million, compared to $4.4 million in the first six months of 2002.
Investing and financing activities, other than those described under "Capital
Resources" above, consisted of capital expenditures at apartment communities,
along with payment of dividends and distributions.
We have announced that the company will pay a regular quarterly
dividend of $0.25 per share on August 15, 2003, to shareholders of record of our
common stock on August 1, 2003.
In January 2003, we announced we were reducing our quarterly dividend
to $0.25 per share from the $0.31 per share per quarter that had been paid for a
number of years. While this was not pleasant, we felt that, given the current
operating environment and the uncertain near-term outlook, a reduction in
dividend was necessary. You should not view this decision as a sign that we have
changed our philosophy concerning the dividend, for we remain committed to
paying the highest dividend that is reasonably prudent. While we are not
philosophically opposed to paying dividends that temporarily exceed current cash
flow after operating expenses, this would occur only when we were confident that
we would see significant improvement in operations in a relatively short period
of time.
We generally expect to meet our short-term liquidity requirements
through net cash provided by operations and utilization of credit facilities. We
believe that net cash provided by operations is, and will continue to be,
adequate to meet our operating requirements for both the short term and the long
term. We anticipate funding our future acquisition activities primarily by using
short-term credit facilities as an interim measure, to be replaced by funds from
equity offerings, long-term debt or joint venture investments. We expect to meet
our long-term liquidity requirements, such as scheduled debt maturities and
repayment of short-term financing of possible property acquisitions, through
long-term secured and unsecured borrowings and the issuance of debt securities
or additional equity securities. We believe we have sufficient resources to meet
our short-term liquidity requirements.
Critical Accounting Policies - Capital expenditures and depreciation
Our critical accounting policies are identified and discussed in our
Annual Report on Form 10-K under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies."
Our policy and practice regarding capital expenditures and depreciation, which
may be of particular interest to readers of this Quarterly Report, are further
discussed below.
In general, for acquired apartment properties, we compute depreciation
using the straight-line method over composite estimated useful lives of the
related assets, generally 40 years for buildings, 20 years for land
improvements, 10 years for fixtures and equipment, and five years for floor
coverings.
For the acquisitions of Barrington Place, Brookford Place and Alta
Harbour Apartments in 2002, we performed detailed analyses of components of the
real estate assets acquired. For these properties, we assigned estimated useful
lives as follows: land improvements, 7-20 years; short-lived building
components, 5-20 years; base building structure, 60 years; and fixtures,
19
equipment and floor coverings, 5-10 years. We expect to complete a detailed
analysis of components for The Place Apartments in the near future.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition. We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize recurring capital expenditures for exterior
painting, roofing, and other major maintenance projects that substantially
extend the useful life of existing assets. For financial reporting purposes, we
depreciate these additions and replacements on a straight-line basis over
estimated useful lives of 5-20 years. We retire replaced assets with a charge to
depreciation for any remaining carrying value. We capitalize all floor covering,
appliance and HVAC replacements, and depreciate them using a straight-line,
group method over estimated useful lives of 5-10 years.
Capital expenditures at our apartment communities during the second
quarter of 2003 totaled approximately $600,000, including $109,000 for
acquisition improvements, $83,000 for additions and betterments, and $408,000
for recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during the
second quarter of 2003 totaled approximately $1.4 million. Through the first six
months of 2003, repairs and maintenance at our apartment communities totaled
$2.6 million, including $1.0 million in compensation of service staff and $1.6
million in payments for materials and contracted services.
A summary of capital expenditures at our apartment communities through
June 30, 2003, in aggregate and per apartment unit, follows:
Total Per unit
-------------------- -----------------
(000's)
Recurring capital expenditures:
Floor coverings $331 $ 74
Appliances/HVAC 99 22
Exterior paint 16 4
Computer/support equipment 9 2
Other 235 52
-------------------- -----------------
$690 $153
==================== =================
Non-recurring capital expenditures:
Acquisition improvements $314
Additions and betterments 337
Computer/support equipment 12
--------------------
$664
====================
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information that would be
provided under Item 305 of Regulation S-K since December 31, 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity" above for a discussion of our
exposure to interest rate risks.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our annual and periodic
reports filed with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. These disclosure
controls and procedures are further designed to ensure that this information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosures.
Based on our most recent evaluation, which was completed as of the end
of the second quarter of 2003, our chief executive officer and chief financial
officer believe that our disclosure controls and procedures are effective. There
have been no significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the
completion of this evaluation.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on May 28, 2003. Of the
5,848,652 shares of common stock issued, outstanding, and entitled to vote at
this meeting, 5,453,132, or 93.2%, were present in person or by proxy. The
following proposal was approved:
Withheld/ Broker
For Against Abstained Non-votes
-------------- --------------- -------------- --------------
Election of directors to serve until the 2006 annual meeting:
B. Mayo Boddie 5,382,242 -0- 70,890 -0-
W. Michael Gilley 5,383,942 -0- 69,190 -0-
Election of a Series B director to serve until
the 2004 annual meeting:
Peter J. Weidhorn (elected by the holders
of Series B Cumulative Preferred Stock)
454,545 -0- -0- -0-
21
Other directors, whose terms of office as directors continue after the
meeting, are as follows:
Serving until the 2004 annual meeting:
Stephen R. Blank
Philip S. Payne
Serving until the 2005 annual meeting:
D. Scott Wilkerson
Paul G. Chrysson
Item 5. Other Information
Re-appointment of officers
The Company has announced the re-appointment of the following officers:
D. Scott Wilkerson President and Chief Executive Officer
Philip S. Payne Executive Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary
Pamela B. Bruno Vice President, Chief Accounting Officer, and
Assistant Secretary
Eric S. Rohm Vice President, General Counsel
Douglas E. Anderson Vice President and Secretary
Teresa Sandman Vice President - Property Management
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
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
b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on May 6, 2003, to furnish under
Items 9 and 12 a press release announcing the results of operations and
financial condition of the company as of and for the quarter ended March 31,
2003.
We filed a Current Report on Form 8-K on May 14, 2003, to furnish under
Items 9 and 12 a report to shareholders announcing the results of operations and
financial condition of the company as of and for the quarter ended March 31,
2003.
22
We filed a Current Report on Form 8-K on June 27, 2003, to respond
under Item 5 to a question from the Securities and Exchange Commission regarding
our Registration Statement on Form S-3 (333-106090) dated June 13, 2003.
23
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)
August 12, 2003 /s/ Philip S. Payne
---------------------------------------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
(Duly authorized officer)
August 12, 2003 /s/ Pamela B. Bruno
---------------------------------------------------
Pamela B. Bruno
Vice President, Controller and
Chief Accounting Officer
24
INDEX TO EXHIBITS
Exhibit No.
Page
31.1 Section 302 Certification by Chief Executive Officer 26
31.2 Section 302 Certification by Chief Financial Officer 27
32.1 Section 906 Certification by Chief Executive Officer 28
32.2 Section 906 Certification by Chief Financial Officer 29
25