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, 2006
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. X Yes _ No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer:
Large accelerated filer _ Accelerated filer X Non-accelerated filer _
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). _ Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of October 25, 2006 (the latest practicable date).
Common Stock, $.01 par value 10,468,177
(Class) (Number of shares)
Exhibit index: 35
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information (Unaudited)
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
3 Quantitative and Qualitative Disclosures 32
About Market Risk
4 Controls and Procedures 32
PART II - Other Information
6 Exhibits 33
Signatures 34
2
PART I - Financial Information
Item 1. Financial Statements.
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Balance Sheets
(all amounts in thousands except share amounts)
September 30 December 31
2006 2005
------------------ ------------------
(Unaudited)
Assets
Real estate investments at cost:
Apartment properties $ 580,394 $ 559,560
Restaurant properties 37,405 37,405
------------------ ------------------
617,800 596,965
Less accumulated depreciation (100,692) (87,668)
------------------ ------------------
517,108 509,297
Cash and cash equivalents 2,533 3,111
Prepaid expenses and other assets 11,392 8,034
Deferred financing costs, net 2,438 2,380
Intangible assets, net 1,126 1,240
------------------ ------------------
Total assets $ 534,597 $ 524,063
================== ==================
Liabilities and Shareholders' Equity
Deed of trust and other notes payable $ 453,623 $ 436,712
Accounts payable and accrued expenses 5,058 1,419
Accrued interest on notes payable 1,923 1,345
Consideration due for completed acquisitions - 1,000
Deferred revenue and security deposits 2,405 1,950
------------------ ------------------
Total liabilities 463,008 442,426
Minority interest in operating partnership 19,846 21,207
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized; 10,468,177 shares
(205,000 nonvested) issued and outstanding at
September 30, 2006; 10,385,890 shares (200,000 nonvested) issued
and outstanding at December 31, 2005 103 102
Additional paid-in capital 123,644 122,516
Dividend distributions in excess of net income (72,005) (62,189)
------------------ ------------------
Total shareholders' equity 51,742 60,429
------------------ ------------------
Total liabilities and shareholders' equity $ 534,597 $ 524,063
================== ==================
See accompanying notes
3
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Operations - Unaudited
(all amounts in thousands except per share amounts)
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
------------- ------------- --------------- ---------------
Revenues
Apartment rental income $ 20,313 $ 17,701 $ 59,011 $ 48,619
Restaurant rental income 957 957 2,872 2,872
Interest and other income 48 234 285 602
------------- ------------- --------------- ---------------
21,319 18,892 62,168 52,093
Expenses
Apartment operations 7,965 7,079 22,788 19,031
Apartment administration 943 799 2,737 2,210
Corporate administration 730 683 2,557 2,205
Interest 6,732 6,034 19,675 16,211
Penalties paid at debt refinance - - - 519
Depreciation 5,052 4,534 14,560 12,079
Amortization of deferred loan costs 132 112 398 330
Write-off of unamortized
loan costs at debt refinance - - - 223
Deficit distributions to minority partners 90 150 270 7,771
Costs related to merger transaction 1,296 - 1,296 -
------------- ------------- --------------- ---------------
22,941 19,392 64,282 60,580
------------- ------------- --------------- ---------------
(1,622) (500) (2,113) (8,487)
Loss attributed to minority interests
- Consolidated limited partnerships - 191 - 267
- Operating partnership 324 114 421 1,594
------------- ------------- --------------- ---------------
Loss from continuing operations (1,298) (195) (1,692) (6,626)
Discontinued operations:
Income from discontinued operations - 56 - 121
(Income) attributed to minority interests - (12) - (24)
------------- ------------- --------------- ---------------
Income from discontinued operations, net - 45 - 97
------------- ------------- --------------- ---------------
Net loss (1,298) (150) (1,692) (6,529)
Less cumulative preferred dividend - (250) - (750)
------------- ------------- --------------- ---------------
Loss attributed to common shareholders $ (1,298) $ (400) $ (1,692) $ (7,279)
============= ============= =============== ===============
Weighted average
common shares outstanding 10,459 9,384 10,425 9,203
Earnings per common share - basic and diluted:
Loss from
- Continuing operations $ (0.13) $ (0.01) $ (0.17) $ (0.72)
- Discontinued operations - - - 0.01
Net loss (0.13) (0.01) (0.17) (0.71)
Loss attributed to common shareholders (0.13) (0.04) (0.17) (0.79)
Dividends declared per common share $ 0.26 $ 0.25 $ 0.78 $ 0.75
See accompanying notes
4
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statement of Shareholders' Equity - Unaudited
(all amounts in thousands)
Dividend
Additional distributions
Common Stock paid-in in excess of
Shares Amount capital net income Total
------------- ------------ --------------- ----------------- --------------
Balance December 31, 2005 10,386 $ 102 $ 122,516 $ (62,189) $ 60,429
Common stock issued 21 - 268 - 268
Service cost, nonvested common
stock - - 86 - 86
Dividends paid - common - - - (2,701) (2,701)
Net loss, first quarter - - - (214) (214)
------------- ------------ --------------- ----------------- --------------
Balance March 31, 2006 10,407 102 122,869 (65,104) 57,867
Common stock issued 22 - 360 - 360
Service cost, nonvested common
stock - - 86 - 86
Dividends paid - common - - - (2,706) (2,706)
Net loss, second quarter - - - (180) (180)
------------- ------------ --------------- ----------------- --------------
Balance June 30, 2006 10,429 102 123,315 (67,990) 55,427
Common stock issued 39 1 241 - 242
Service cost, nonvested common
stock - - 88 - 88
Dividends paid - common - - - (2,717) (2,717)
Net loss, third quarter - - - (1,298) (1,298)
------------- ------------ --------------- ----------------- --------------
Balance September 30, 2006 10,468 $ 103 $ 123,644 $ (72,005) $ 51,742
============= ============ =============== ================= ==============
See accompanying notes
5
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited
(all amounts in thousands)
Nine months ended
September 30
2006 2005
----------------- ----------------
Operating activities:
Apartment rental receipts, net $ 59,131 $ 49,676
Restaurant rental receipts 2,872 2,872
Interest and other income receipts 172 451
Operating and administrative expense payments (28,236) (24,624)
Interest payments (19,235) (16,497)
Penalties paid at debt refinance - (519)
Payment of costs related to merger transaction (1,296) -
----------------- ----------------
Net cash provided by operating activities 13,409 11,360
Investing activities:
Acquisitions of apartment properties (14,411) (35,576)
Acquisition of Boddie Investment Company, net of cash included in
accounts of consolidated limited partnerships - 368
Additions to apartment properties, net (7,922) (6,086)
Net release (funding) of lender reserves 77 (89)
Casualty proceeds 1,141 533
----------------- ----------------
Net cash used in investing activities (21,115) (40,851)
Financing activities:
Net proceeds from issuance of common stock 918 1,229
Distributions to minority partners in consolidated limited partnerships (270) (7,771)
Distributions to operating partnership minority unitholders (1,989) (1,518)
Dividends paid to preferred shareholder - (750)
Dividends paid to common shareholders (8,123) (6,942)
Proceeds from notes payable 26,925 95,938
Principal payments on notes payable (9,877) (47,552)
Deposits for pending financing transactions - (600)
Payment of deferred financing costs (455) (963)
----------------- ----------------
Net cash provided by financing activities 7,128 31,071
----------------- ----------------
Net (decrease) increase in cash and cash equivalents (578) 1,580
Cash and cash equivalents at beginning of period 3,111 517
----------------- ----------------
Cash and cash equivalents at end of period $ 2,533 $ 2,097
================= ================
(continued)
6
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Consolidated Statements of Cash Flows - Unaudited - continued
(all amounts in thousands)
Nine months ended
September 30
2006 2005
----------------- ----------------
Reconciliation of net loss to
net cash provided by operating activities:
Net loss $ (1,692) $ (6,529)
Amortization of intangible for in-place leases at acquisitions 133 136
Casualty gains (113) (168)
Amortization of debt premium (138) (122)
Depreciation and amortization of deferred loan costs 14,958 12,409
Depreciation and amortization, discontinued operations - 268
Write off of unamortized loan costs at debt refinancing - 223
Deficit distributions to minority partners in
consolidated limited partnerships 270 7,771
Minority interest in consolidated limited partnerships - (267)
Minority interest in operating partnership (421) (1,570)
Service cost related to nonvested common stock 260 -
Changes in operating assets and liabilities:
Prepaid expenses and other assets (3,836) (3,633)
Accounts payable and accrued expenses 4,147 3,202
Deferred revenue, prepaid rent and security deposits (158) (361)
----------------- ----------------
Net cash provided by operating activities $ 13,409 $ 11,360
================= ================
See accompanying notes
7
BNP RESIDENTIAL PROPERTIES, INC.
-------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - September 30, 2006
(Unaudited)
Note 1. Interim financial statements
We prepared the accompanying condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. These interim financial statements do not
include all information and notes required by GAAP for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the consolidated financial
statements included in the Annual Report on Form 10-K of BNP Residential
Properties, Inc. for the year ended December 31, 2005. You should read these
financial statements in conjunction with our 2005 Annual Report on Form 10-K.
When we use the terms "we," "us," or "our," we mean BNP Residential Properties,
Inc. and all entities included in our consolidated financial statements. We
believe that we have included all adjustments (including normal recurring
accruals) necessary for a fair presentation. Operating results for the three and
nine months ended September 30, 2006, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006.
We have reclassified certain amounts in our prior period consolidated financial
statements and notes to conform to the current period presentation.
Note 2. Basis of presentation
These consolidated financial statements include the accounts of BNP Residential
Properties, Inc. ("BNP," or 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.
The consolidated financial statements also include the accounts of three real
estate limited partnerships (the "limited partnerships") in which we have
general partner interests. The assets of consolidated limited partnerships
controlled by the operating partnership generally are not available to pay
creditors of the company or the operating partnership.
Amounts for discontinued operations reflect the operating results for an
apartment property that we sold in the fourth quarter of 2005.
We have eliminated all significant intercompany balances and transactions in the
consolidated financial statements.
Accounting for stock-based compensation
The company has one employee Stock Option and Incentive Plan in place. Prior to
July 1, 2005, we accounted for this plan using the intrinsic value method under
the recognition and measurements principles of APB Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations, as permitted by FASB
Statement 123, "Accounting for Stock-Based Compensation." No stock-based
employee compensation cost was reflected in net income, as all options granted
under this plan had an exercise price equal to the market value of the
underlying
8
common stock on the date of grant. All outstanding options were fully vested
prior to the end of 2004.
Effective July 1, 2005, we adopted the fair value recognition provisions of FASB
Statement 123(R), "Share Based Payment," ("FAS 123(R)") using the
modified-prospective transition method. Under this transition method,
compensation cost includes compensation cost for all share-based payments
granted subsequent to July 1, 2005, based on the grant-date fair value estimated
in accordance with the provisions of FAS 123(R).
If we had applied the fair value recognition provisions of FAS 123 to options
outstanding prior to July 1, 2005, there would have been no impact on net income
as reported for the three or six months ended June 30, 2005, and no impact on
basic and diluted earnings per share amounts as reported.
Nonvested common stock
Effective August 1, 2005, the Board of Directors granted and issued 200,000
restricted shares of the company's common stock to four of our executive
officers. All of the shares were unvested on the grant date, and vest 10% per
year beginning July 1, 2006, and on each July 1 thereafter until fully vested.
Once vested, the shares will be fully transferable without restriction. All
shares carry dividend and voting rights. Because grantees fully participate in
dividends, the fair value of the nonvested shares is equal to the market value
at the grant date, $15.70 per share, or a total of $3,140,000. Because the
grantee group is limited to four key executives, we estimate that 100% of these
shares will vest. We recognize the cost of these awards on a straight-line basis
for each annual vesting period ending June 30 through 2015.
During July and August 2006, the Board of Directors granted and issued 25,000
total additional restricted shares of the company's common stock to three
additional employees. All of these shares were unvested on the grant dates, and
vest 10% per year beginning July 2007. Once vested, these shares will be fully
transferable without restriction. All shares carry dividend and voting rights.
The fair value of these nonvested shares totals $426,000, and we estimate that
100% of these shares will vest. We recognize the cost of these awards on a
straight-line basis for each annual vesting period.
During the three and nine months ended September 30, 2006, we recorded service
cost related to nonvested common stock totaling $89,000 and $260,000,
respectively, included in apartment and corporate administration expenses in our
statement of operations and as an increase to additional paid-in capital. As of
September 30, 2006, unrecognized service cost related to nonvested common stock
totaled $3.2 million.
Stock options
Options have been granted to employees at prices equal to the fair market value
of the stock on the dates the options were granted or repriced. We calculated
the fair value of each option grant on the date of grant using the Black-Scholes
option-pricing model. Options are generally exercisable in four annual
installments beginning one year after the date of grant, and expire ten years
after the date of grant.
During the first quarter of 2006, two employees exercised stock options for a
total of 7,000 shares of common stock. Changes in outstanding stock options
during the nine months ended September 30, 2006, were as follows:
9
Weighted Average
Shares Exercise Price
---------------- -----------------------
Beginning balance 270,000 $ 12.08
Exercised (7,000) 10.11
---------------- -----------------------
Ending balance 263,000 $ 12.14
================ =======================
Exercisable at September 30, 2006 263,000 $ 12.14
================ =======================
Note 3. Agreement and plan of merger
On August 31, 2006, BNP and the operating partnership entered into an agreement
and plan of merger pursuant to which an affiliate of international investment
and advisory firm Babcock & Brown Limited ("Babcock & Brown") will acquire BNP
through the mergers of BNP and the operating partnership with merger
subsidiaries of Babcock & Brown. On October 17, 2006, the parties amended and
restated the original merger agreement primarily to modify provisions relating
to the merger of the operating partnership.
Pursuant to the terms of the merger agreement as amended, each issued and
outstanding share of common stock of BNP will be converted into the right to
receive $24.00 in cash, without interest; common units in the operating
partnership will remain common units in the surviving partnership unless the
holder elects to receive cash or preferred units in the surviving partnership.
The merger agreement generally permits BNP to declare and pay regular quarterly
cash distributions at a rate not to exceed $0.26 per share of common stock
during the pendency of the mergers. In addition, immediately prior to the
mergers, the merger agreement permits BNP to set a record date for and declare
payable a special distribution. The aggregate amount of the special distribution
would equal, for the period from the last day of the last quarter for which BNP
paid a full quarterly dividend to the record date for the special distribution,
net income excluding gains (losses) from sales of property and certain
transaction fees and expenses relating to the mergers, plus depreciation and
amortization, and after adjustments of unconsolidated partnerships and joint
ventures, all as calculated as provided in the merger agreement; provided that
the special distribution may not exceed $0.26 per share prorated for the number
of days covered by the "stub" period.
The mergers and the transactions contemplated by the merger agreement have been
approved by the board of directors of BNP on behalf of BNP, and on behalf of BNP
as the sole general partner of the operating partnership. The mergers are
subject to customary closing conditions, including the approval of the mergers
by the holders of at least a majority of the outstanding common shares. The
merger agreement contains no financing condition.
We intend to complete the mergers as soon as practicable following approval by
our shareholders (for which we expect to schedule a special meeting in December
2006) and receipt of consents to the merger transactions, satisfactory to
Babcock & Brown, from certain of our lenders. Accordingly, any delay in
receiving such consents could result in a delay between the approval of the
mergers and the effective date of the mergers until as late as June 30, 2007.
Upon termination of the merger agreement under certain specified circumstances,
BNP may be required to pay the buyer a break-up fee of $12.5 million.
10
Immediately prior to closing of the mergers, our executive officers will receive
payments from BNP totaling $8.4 million under their pre-existing employment
agreements with BNP. In addition, all outstanding nonvested common stock held by
employees of BNP will vest immediately before the merger and, as a result, all
previously unrecognized service cost related to these shares will be recognized
at that date.
In connection with the mergers, our executive officers have entered into revised
definitive employment agreements, which become effective only if and when the
mergers are effective, and which provide for each of their employment by the
surviving company from the effective time of the mergers.
Note 4. Acquisition and financing transactions
In April 2006, we acquired the Sterling Bluff Apartments, a 144-unit apartment
property located in Carrboro, North Carolina, for a contract purchase price of
$9.4 million, from an unaffiliated third party. We funded this acquisition by a
draw on our existing revolving line of credit. We operate the apartment
community as Bridges at Chapel Hill Apartments.
In May 2006, we issued a $7.3 million fixed-rate note payable, secured by a deed
of trust and assignment of rents of Bridges at Chapel Hill Apartments. The loan
provides for interest at 6.22% (6.3% effective rate), with interest only monthly
payments of $39,000 through June 2012. Beginning July 2012, scheduled monthly
installments including principal and interest will be $45,000, with a balloon
payment of $7.0 million in June 2016. In conjunction with this loan, we paid and
recorded deferred loan costs of $72,000. We applied proceeds of this loan to
reduce our revolving line of credit.
In July 2006, we acquired the Quail Hollow Apartments, a 90-unit apartment
property located in Charlotte, North Carolina, for a contract price of $5.1
million, from an unaffiliated third party. We funded this acquisition by a draw
on our existing revolving line of credit. We operate the apartment community as
Bridges at Quail Hollow Apartments.
Note 5. Shareholders' equity
During 2006, we have issued shares of our common stock as follows:
Three months Nine months
ended ended
September 30 September 30
--------------------- --------------------
Dividend Reinvestment and Stock Purchase Plan 14,423 46,287
Exercise of options by employees - 7,000
Board of Directors compensation (1,000 shares to each of our
non-management Board members) - 4,000
Grants of nonvested common stock 25,000 25,000
--------------------- --------------------
39,423 82,287
===================== ====================
11
We calculated basic and diluted earnings per common share using the following
amounts (in thousands):
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ----------------
(000's) (000's) (000's) (000's)
Numerators:
For per common share amounts -
Net loss $ (1,298) $ (150) $ (1,692) $ (6,529)
Cumulative preferred dividend - (250) - (750)
--------------- --------------- --------------- ----------------
Loss attributed to common shareholders -
basic and diluted $ (1,298) $ (400) $ (1,692) $ (7,279)
=============== =============== =============== ================
Denominators:
For per common share amounts -
Weighted average
common shares outstanding 10,459 9,384 10,425 9,203
Less weighted average nonvested common
shares outstanding (203) (133) (201) (45)
--------------- --------------- --------------- ----------------
Weighted average
common shares - basic 10,256 9,252 10,224 9,159
Effect of potentially dilutive securities:
Convertible operating
partnership units (1) - - - -
Nonvested common shares (2) - - - -
Stock options (3) - - - -
--------------- --------------- --------------- ----------------
For diluted earnings per share amounts - adjusted weighted average shares and
assumed conversions
10,256 9,252 10,224 9,159
=============== =============== =============== ================
(1) Including operating partnership units would serve to reduce the net loss
per share, and they have been excluded from the calculation.
(2) Including nonvested common shares would serve to reduce the net loss per
share, and they have been excluded from the calculation.
(3) We excluded options to purchase 263,000 shares of common stock at prices
ranging from $9.25 to $13.125 from the calculation of diluted earnings per
share for the three and nine months ended September 30, 2006. We also
excluded options to purchase 270,000 shares of common stock at prices
ranging from $9.25 to $13.125 from the calculation of diluted earnings per
share for the three and nine months ended September 30, 2005. Inclusion of
these options would reduce the net loss per share.
12
Note 6. Commitments
In June 2006, we entered into an exchange agreement with Laurel Springs III, LLC
and its members, pursuant to which we will acquire the Laurel Springs Phase 3
Apartments, a 168-unit apartment property that is adjacent to our Laurel Springs
community. The purchase price for the property will be $11.7 million, consisting
of the assumption or refinancing of approximately $10.1 million of debt on the
property and $1.6 million to be paid in operating partnership units with an
imputed value of $16.70 per unit. Under the terms of the exchange agreement, we
will complete the acquisition no later than January 2007, and we will issue half
of the operating partnership units (approximately 47,000 units) in July 2007 and
half in July 2008.
Note 7. Subsequent events
The Board of Directors declared a regular quarterly dividend of $0.26 per common
share on October 16, 2006, payable on November 15, 2006, to shareholders of
record as of November 1, 2006.
13
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 a decline in revenues from, or a sale of, our restaurant properties
could adversely affect our financial condition and results of
operations;
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 revise these
forward-looking statements if future events or circumstances render them
inaccurate.
You should read this discussion in conjunction with the financial
statements and notes thereto included in this Quarterly Report and our Annual
Report on Form 10-K, including the risk factors disclosed in our Annual Report.
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 September 30, 2006, we owned and managed 32
apartment communities containing 8,180 units, and served as general partner of
limited partnerships that owned three properties with 713 units, which we also
managed. In addition to our apartment communities, we own 40 restaurant
properties that we lease on a triple-net basis to a restaurant operator.
14
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 in the operating partnership.
As of September 30, 2006, we had 10,468,177 shares of common stock
outstanding. Our shares are listed on the American Stock Exchange and trade
under the symbol "BNP." The operating partnership had an additional 2,608,693
operating partnership minority common units outstanding.
Our executive offices are located at 301 South College Street, Suite
3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100.
Agreement and Plan of Merger
On August 31, 2006, BNP and the operating partnership entered into an
agreement and plan of merger pursuant to which an affiliate of international
investment and advisory firm Babcock & Brown Limited ("Babcock & Brown") will
acquire BNP through the mergers of BNP and the operating partnership with merger
subsidiaries of Babcock & Brown. On October 17, 2006, the parties amended and
restated the original merger agreement primarily to modify provisions relating
to the merger of the operating partnership.
Pursuant to the terms of the merger agreement as amended, each issued
and outstanding share of common stock of BNP will be converted into the right to
receive $24.00 in cash, without interest; common units in the operating
partnership will remain common units in the surviving partnership unless the
holder elects to receive cash or preferred units in the surviving partnership.
The merger agreement generally permits BNP to declare and pay regular
quarterly cash distributions at a rate not to exceed $0.26 per share of common
stock during the pendency of the mergers. In addition, immediately prior to the
mergers, the merger agreement permits BNP to set a record date for and declare
payable a special distribution. The aggregate amount of the special distribution
would equal, for the period from the last day of the last quarter for which BNP
paid a full quarterly dividend to the record date for the special distribution,
net income excluding gains (losses) from sales of property and certain
transaction fees and expenses relating to the mergers, plus depreciation and
amortization, and after adjustments of unconsolidated partnerships and joint
ventures, all as calculated as provided in the merger agreement; provided that
the special distribution may not exceed $0.26 per share prorated for the number
of days covered by the "stub" period.
The mergers and the transactions contemplated by the merger agreement
have been approved by the board of directors of BNP on behalf of BNP, and on
behalf of BNP as the sole general partner of the operating partnership. The
mergers are subject to customary closing conditions, including the approval of
the mergers by the holders of at least a majority of the outstanding common
shares. The merger agreement contains no financing condition.
We intend to complete the mergers as soon as practicable following
approval by our shareholders (for which we expect to schedule a special meeting
in December 2006) and receipt of consents to the merger transactions,
satisfactory to Babcock & Brown, from certain of our lenders. Accordingly, any
delay in receiving such consents could result in a delay between the approval of
the mergers and the effective date of the mergers until as late as June 30,
2007.
15
Upon termination of the merger agreement under certain specified
circumstances, BNP may be required to pay the buyer a break-up fee of $12.5
million.
Immediately prior to closing of the mergers, our executive officers
will receive payments from BNP totaling $8.4 million under their pre-existing
employment agreements with BNP. In addition, all outstanding nonvested common
stock held by employees of BNP will vest immediately before the merger and, as a
result, all previously unrecognized service cost related to these shares will be
recognized at that date.
In connection with the mergers, our executive officers have entered
into revised definitive employment agreements, which become effective only if
and when the mergers are effective, and which provide for each of their
employment by the surviving company from the effective time of the mergers.
Results of Operations
Summary
We were pleased with the results of the third quarter of 2006. The
operating results reflect the growth in our apartment portfolio and continued
improvement in our apartment operations and apartment markets. Demand for our
apartments remained strong, and we saw increases in both occupancy and revenue
per apartment unit. Meanwhile, apartment expenses have been consistent with our
expectations.
We provide the following unaudited supplemental consolidating
information, in response to requests from members of the investment community,
for use in comparing our operating results for 2006 and 2005:
16
2006 2005
----------------------------------------------------- -------------
Consolidated Owned Owned
Consolidated Elim LPs Properties Properties
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Operating Results - three months ended September 30:
Revenues:
Apartment rental income $ 20,313 $ - $ 2,022 $ 18,292 $ 15,776
Restaurant rental income 957 - - 957 957
Management fee income 11 (101) - 112 101
Casualty gains - - - - 168
Interest and other income 37 (44) 2 80 85
------------- ----------- ------------- ------------- -------------
21,319 (145) 2,024 19,441 17,087
Expenses:
Apartment operations 7,965 (101) 921 7,145 6,277
Apartment administration 943 - - 943 799
Corporate administration 730 - - 730 683
Interest 6,732 (44) 681 6,096 5,389
Penalties paid at debt refinance - - - - -
Depreciation 5,052 - 518 4,534 4,122
Amortization, loan costs 132 - 15 117 93
Write-off of unamortized loan costs
at debt refinance - - - - -
Deficit distributions to minority
partners of consolidated limited
partnerships(1) 90 - 90 - -
Costs of merger transaction 1,296 - - 1,296 -
------------- ----------- ------------- ------------- -------------
22,941 (145) 2,225 20,861 17,363
------------- ----------- ------------- ------------- -------------
Loss from continuing operations (1,622) - (201) (1,420) (275)
Income from
discontinued operations - - - - 56
------------- ----------- ------------- ------------- -------------
Loss before minority interests (1,622) $ - $ (201) $ (1,420) $ (219)
=========== ============= ============= =============
Minority interests -
- Consolidated limited partnerships
-
- Operating partnership 324
-------------
Net loss $ (1,298)
=============
Loss before minority interests $ (1,622) $ - $ (201) $ (1,420) $ (219)
Casualty gains - - - - (168)
Cumulative preferred dividend - - - - (250)
Amortization, lease intangible 23 - - 23 62
Depreciation 5,052 - 518 4,534 4,122
Depreciation related to
discontinued operations - - - - 84
Deficit distributions to minority
partners of consolidated limited
partnerships(1) 90 - 90 - -
------------- ----------- ------------- ------------- -------------
3,543 - 406 3,136 3,631
Minority interest in FFO of
consolidated limited partnerships
(130) - (130) - -
------------- ----------- ------------- ------------- -------------
Funds from operations(2) $ 3,412 $ - $ 276 $ 3,136 $ 3,631
============= =========== ============= ============= =============
17
2006 2005
----------------------------------------------------- -------------
Consolidated Owned Owned
Consolidated Elim LPs Properties Properties
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Operating Results - nine months ended September 30:
Revenues:
Apartment rental income $ 59,011 $ - $ 5,995 $ 53,016 $ 43,467
Restaurant rental income 2,872 - - 2,872 2,872
Management fee income 28 (301) - 329 378
Casualty gains 113 - - 113 168
Interest and other income 144 (129) 6 268 387
------------- ----------- ------------- ------------- -------------
62,168 (431) 6,001 56,598 47,273
Expenses:
Apartment operations 22,788 (301) 2,569 20,520 17,065
Apartment administration 2,737 - - 2,737 2,210
Corporate administration 2,557 - - 2,557 2,205
Interest 19,675 (129) 2,032 17,773 14,505
Penalties paid at debt refinance - - - - -
Depreciation 14,560 - 1,306 13,254 11,086
Amortization, loan costs 398 - 44 353 279
Write-off of unamortized loan costs
at debt refinance - - - - 63
Deficit distributions to minority
partners of consolidated limited
partnerships(1) 270 - 270 - -
Costs of merger transaction 1,296 - - 1,296 -
------------- ----------- ------------- ------------- -------------
64,281 (431) 6,221 58,491 47,414
------------- ----------- ------------- ------------- -------------
Loss from continuing operations (2113) - (220) (1,893) (141)
Income from
discontinued operations - - - - 121
------------- ----------- ------------- ------------- -------------
Loss before minority interests (2113) $ - $ (220) $ (1,893) $ (20)
=========== ============= ============= =============
Minority interests -
- Consolidated limited partnerships
-
- Operating partnership 421
-------------
Net loss $ (1,692)
=============
Loss before minority interests $ (2,113) $ - $ (220) $ (1,893) $
(20)
Casualty gains (113) - - (113) (168)
Cumulative preferred dividend - - - - (750)
Amortization, lease intangible 133 - - 133 136
Depreciation 14,560 - 1,306 13,254 11,086
Depreciation related to
discontinued operations - - - - 255
Deficit distributions to minority
partners of consolidated limited
partnerships(1) 270 - 270 - -
------------- ----------- ------------- ------------- -------------
12,736 - 1,355 11,381 10,538
Minority interest in FFO of
consolidated limited partnerships
(565) - (565) - -
------------- ----------- ------------- ------------- -------------
Funds from operations(2) $ 12,171 $ - $ 790 $ 11,381 $ 10,538
============= =========== ============= ============= =============
18
2006 2005
----------------------------------------------------- -------------
Consolidated Owned Owned
Consolidated Elim LPs Properties Properties
------------- ----------- ------------- ------------- -------------
(000's) (000's) (000's) (000's) (000's)
Balance Sheet at September 30, 2006, compared to December 31, 2005:
Real estate investments $ 517,108 $ - $ 41,479 $ 475,629 $ 467,253
Cash and cash equivalents 2,533 - 747 1,786 2,306
Prepaid expenses and
other assets 11,392 4,352 974 6,066 2,938
Deferred financing costs, net 2,438 - 406 2,032 1,930
Intangible assets, net 1,126 - - 1,126 1,240
$ 534,597 $ 4,352 $ 43,606 $ 486,638 $ 475,668
============= =========== ============= ============= =============
Notes payable $ 453,623 $(2,612) $ 50,142 $ 406,093 $ 388,576
Accounts payable and
accrued expenses 5,058 (58) 460 4,656 1,332
Accrued interest 1,923 - 204 1,719 1,141
Consideration due for acquisitions - - - - 1,000
Deferred revenue and
security deposits 2,405 - 43 2,361 1,982
------------- ----------- ------------- ------------- -------------
463,008 (2,670) 50,849 414,829 394,031
Minority interests -
- Consolidated limited partnerships - - - - -
- Operating partnership 19,846 - - 19,846 21,207
Shareholders' equity 51,742 7,022 (7,243) 51,962 60,429
------------- ----------- ------------- ------------- -------------
$ 534,597 $ 4,352 $ 43,606 $ 486,638 $ 475,668
============= =========== ============= ============= =============
(1) In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our statement of operations when cash is distributed
to a non-controlling partner in a consolidated limited partnership in
excess of the positive balance in such partner's capital account (which is
classified as minority interest in our consolidated balance sheet). We are
required to record these charges for GAAP purposes even though there is no
economic effect or cost to the company or the operating partnership.
(2) See discussion of funds from operations under the caption "Funds from
Operations" below in this Item 2.
Discontinued operations
We sold an apartment community in October 2005, and we present the
results of operations of this apartment community as discontinued operations in
our comparative statement of operations for 2005. Unless noted otherwise, the
following discussion of operating results relates to our continuing operations.
Revenues
Total revenues in the third quarter of 2006 were $21.3 million,
compared to $18.9 million in the third quarter of 2005. Total revenues in the
first nine months of 2006 were $62.2 million, compared to $52.1 million in the
first nine months of 2005. These increases are primarily attributable to
increases in apartment rental income.
19
Apartment rental income totaled $20.3 million in the third quarter of
2006, an increase of $2.6 million, or 14.8%, compared to the third quarter of
2005. Apartment rental income in the first nine months of 2006 totaled $59.0
million, an increase of $10.4 million, or 21.4%, compared to the first nine
months of 2005. These increases are attributable to:
o Apartment acquisitions - New communities contributed $4.8 million in
the third quarter and $13.4 million in the first nine months of 2006,
compared to $3.1 million in the third quarter and $5.7 million in the
first nine months of 2005. During 2005 we acquired eight new
properties, which we operate as seven apartment communities. We have
acquired two new properties in 2006.
o Apartment communities that we consolidated effective late January 2005
- These three partial-interest communities generated $2.0 million in
the third quarter and $6.0 million in the first nine months of 2006,
compared to $1.9 million in the third quarter and $5.2 million in
February through September 2005.
o Revenue increases at "same-units" communities - These communities
generated $13.5 million in the third quarter and $39.6 million in the
first nine months of 2006, compared to $12.7 million in the third
quarter and $37.8 million in the first nine months of 2005.
On a "same-units" basis (the 23 apartment communities that we owned as
of both January 1, 2005 and 2006), apartment rental income increased by 6.1% in
the third quarter of 2006, and 4.9% in the first nine months of 2006, compared
to the same periods in 2005. These increases are attributable to improvements in
both occupancy and rental rates.
On a same-units basis, apartment NOI (apartment rental income less
apartment operating expenses) for the third quarter of 2006 increased by 7.1%
compared to the third quarter of 2005. Same-units apartment NOI for the first
nine months of 2006 increased by 5.7% compared to the first nine months of 2005.
Summary amounts for our apartment communities' occupancy and revenue
per occupied unit for the third quarter and first nine months of 2006 follow:
Three months ended Nine months ended
September 30, 2006 September 30, 2006
----------------------- -----------------------
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ------------ ---------- --- ----------- -----------
Owned apartment communities:
Same-units communities:
Abbington Place 360 94.6% $821 93.5% $799
Allerton Place 228 96.3% 887 96.1% 857
Barrington Place 348 96.0% 795 94.7% 800
Brookford Place 108 95.2% 719 96.1% 707
Carriage Club 268 97.1% 814 96.6% 801
Chason Ridge 252 95.1% 786 96.6% 779
Fairington 250 95.4% 796 95.0% 783
Latitudes 448 96.6% 1,028 95.4% 1,016
Madison Hall 128 93.0% 662 92.8% 643
20
Three months ended Nine months ended
September 30, 2006 September 30, 2006
----------------------- -----------------------
Average Average
monthly monthly
Number revenue revenue
of Average per Average per
apartment economic occupied economic occupied
units occupancy unit occupancy unit
----------- ------------ ---------- --- ----------- -----------
Mallard Creek 1 184 93.8% 688 93.5% 670
Mallard Creek 2 288 95.4% 862 94.9% 839
Marina Shores Waterfront 290 96.3% 923 95.0% 884
Oakbrook 162 95.8% 766 95.9% 744
Oak Hollow 1 222 97.0% 654 97.2% 637
Oak Hollow 2 240 94.1% 625 94.0% 620
Paces Commons 336 96.5% 692 95.5% 690
Paces Village 198 96.7% 731 95.3% 715
Pelham 144 94.7% 611 95.7% 614
Pepperstone 108 93.3% 721 94.3% 713
Savannah Place 172 96.1% 737 96.3% 732
Southpoint 192 93.2% 719 94.5% 710
Summerlyn Place 140 95.3% 895 95.3% 883
Waterford Place 240 96.9% 933 95.4% 922
Woods Edge 264 95.7% 699 95.4% 703
Wind River 346 96.6% 864 95.6% 849
Acquired in 2005:
Canterbury 630 96.8% 691 97.0% 666
Hamptons 232 97.4% 783 96.2% 766
Laurel Springs 1 240 92.8% 632 92.1% 626
Laurel Springs 2 96 88.6% 792 85.9% 814
Paces Watch 232 97.7% 918 97.5% 891
Salem Ridge 120 92.9% 567 94.4% 554
Timbers 240 93.3% 879 92.2% 895
Waverly Place 240 95.6% 711 95.4% 701
Acquired in 2006:
Chapel Hill 144 92.0% 765 90.9% 760
Quail Hollow 90 99.9% 726 99.9% 726
All apartments
- 2006 8,180 95.6% 783 95.1% 770
- 2005 7,474 95.0% 744 94.9% 722
Same units 5,916
- 2006 95.7% 797 95.3% 784
- 2005 94.7% 759 94.8% 751
Consolidated limited partnerships:
Marina Shores 392 97.4% 1,250 95.9% 1,223
Villages of Chapel Hill 264 87.2% 661 94.0% 669
Villages - Phase 5 57 92.5% 774 96.3% 778
Restaurant rental income was $957,000 in the third quarters of both
2006 and 2005, and $2.9 million in the first nine months of both 2006 and 2005.
We received the minimum rent specified in the lease agreement in all periods. We
currently hold 40 restaurant properties under this lease, and minimum rent is
currently set at $319,000 per month, or $3.8 million per year.
21
Expenses
Total expenses were $22.9 million in the third quarter of 2006,
compared to $19.4 million in the third quarter of 2005. Total expenses were
$64.3 million in the first nine months of 2006, compared to $60.6 million in the
first nine months of 2005. In addition to significant increases in both
operating and financing expenses attributable to growth in the size our
apartment operations, the 2006 amounts include $1.3 million in costs related to
the pending merger transaction. However, 2005 amounts include charges recorded
by a consolidated limited partnership related to loan refinance transactions as
well as one-time distributions to a minority partner from refinance proceeds.
Apartment operations expense (the direct costs of on-site operations at
owned and consolidated apartment communities) totaled $8.0 million in the third
quarter of 2006, an increase of $0.9 million, or 12.5%, compared to the third
quarter of 2005. Apartment operations expense in the first nine months of 2006
totaled $22.8 million, an increase of $3.8 million, or 19.7%, compared to the
first nine months of 2005. These increases are primarily attributable to:
o Apartment acquisitions - Costs at new communities totaled $2.0 million
in the third quarter and $5.3 million in the first nine months of 2006,
compared to $1.2 million in the third quarter and $2.2 million in the
first nine months of 2005.
o Apartment communities that we consolidated effective late January 2005
- Costs at these three partial-interest communities totaled $0.8
million in the third quarter and $2.3 million in the first nine months
of 2006, compared to $0.8 million in the third quarter and $2.0 million
in February through September 2005.
o Apartment operations expense increases at "same-units" communities -
Costs at these 23 apartment communities totaled $5.2 million in the
third quarter and $15.4 million in the first nine months, compared to
$5.0 million in the third quarter and $14.8 million in the first nine
months of 2005.
On a same-units basis, apartment operations expense increased by 4.5%
in the third quarter of 2006, and 3.8% in the first nine months of 2006,
compared to the same periods in 2005, due to expected increases in various
operating costs.
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) totaled $0.9
million in the third quarter of 2006, an 18.1% increase compared to the third
quarter of 2005. Apartment administration expense in the first nine months of
2006 totaled $2.7 million, a 23.8% increase compared to the first nine months of
2005. These increases are primarily attributable to additional corporate support
and operations staff and computer system expenses.
Corporate administration expense totaled $0.7 million in the third
quarter of 2006, a 6.9% increase compared to the third quarter of 2005.
Corporate administration expense in the first nine months of 2006 totaled $2.6
million, a 16.0% increase compared to the first nine months of 2005. This
increase is primarily attributable to executive compensation costs, including
$250,000 in
22
charges during the first nine months of 2006 for service cost related to
nonvested common stock issued in August 2005, compared to $57,000 in such
charges for the period August through September 2005.
Interest expense totaled $6.7 million in the third quarter of 2006, an
increase of $0.7 million, or 11.6%, compared to the third quarter of 2005.
Interest expense in the first nine months of 2006 totaled $19.7 million, an
increase of $3.5 million, or 21.4%, compared to the first nine months of 2005.
These increases are primarily attributable to new debt issued in conjunction
with apartment acquisitions, along with the impact of consolidating three
limited partnerships for nine full months in 2006 (compared to eight months in
2005). Overall, weighted average interest rates were 6.0% for the third quarters
of both 2006 and 2005, and 5.9% for the first nine months of both 2006 and 2005.
Depreciation expense totaled $5.1 million in the third quarter of 2006,
an increase of $0.5 million, or 11.4%, compared to the third quarter of 2005.
Depreciation expense in the first nine months of 2006 totaled $14.6 million, an
increase of $2.5 million, or 20.5%, compared to the first nine months of 2005.
These increases are primarily attributable to apartment acquisitions in 2005 and
2006.
We reflect the unaffiliated partners' interests in Marina Shores
Associates One, Limited Partnership ("Marina Shores Partnership"), The Villages
of Chapel Hill Limited Partnership ("Villages Partnership"), and The Villages of
Chapel Hill - Phase 5 Limited Partnership ("Villages Phase 5 Partnership") as
minority interest in consolidated limited partnerships. Minority interest in
consolidated limited partnerships represents the minority partners' share of the
underlying net assets of these consolidated limited partnerships. When these
consolidated limited partnerships make cash distributions to partners in excess
of the carrying amount of the minority interest, we record a charge equal to the
amount of such excess distributions, even though there is no economic effect or
cost to the operating partnership. We report this charge in our consolidated
statements of operations as deficit distributions to minority partners. We
recorded charges for deficit distributions to the minority partner in the Marina
Shores Partnership totaling $90,000 in the third quarter of 2006, compared to
$150,000 in the third quarter of 2005. We recorded such charges for deficit
distributions in the first nine months of 2006 totaling $270,000, compared to
$7.8 million in the first nine months of 2005. We currently expect that the
Marina Shores Partnership will continue to make regular distributions of
approximately $360,000 per year each to the limited partner and our operating
partnership.
Net Income
Consolidated earnings from continuing operations before non-cash
charges (for depreciation, amortization and write-off of unamortized loan costs
at refinance), before the charge for deficit distributions to a minority
partner, and before the $1.3 million charge for costs related to the pending
merger transaction, totaled $4.9 million in the third quarter of 2006, an
increase of $0.7 million, or 15.1%, compared to the third quarter of 2005.
Consolidated earnings from continuing operations before non-cash charges,
charges for deficit distributions to a minority partner and charges for costs
related to the merger transaction totaled $14.4 million in the first nine months
of 2006, an increase of $2.5 million, or 20.9%, compared to the first nine
months of 2005. These increases reflect the impact of new apartment communities
and improvements in apartment revenues. In addition, the comparable amounts for
2005 include a first quarter charge of $0.5 million for penalties paid in
conjunction with a refinance transaction for one of the consolidated limited
partnerships.
23
The net loss from continuing operations, before allocation to minority
interests, was $1.6 million in the third quarter of 2006 and $2.1 million in the
first nine months of 2006, compared to net loss from continuing operations of
$0.5 million in the third quarter of 2005 and $8.5 million in the first nine
months of 2005.
Under most circumstances, we would measure and allocate proportional
income and losses of the consolidated limited partnerships to minority partners.
However, because those partners' capital accounts have previously been reduced
to $-0- as a result of loss allocations or distributions in 2005, during 2006 we
have absorbed 100% of the income and losses of those consolidated limited
partnerships.
After allocating a portion of losses from continuing operations to
minority interests in the operating partnership, the net loss from continuing
operations was $1.3 million in the third quarter and $1.7 million in the first
nine months of 2006, compared to $0.2 million in the third quarter and $6.6
million in the first nine months of 2005.
Amounts for discontinued operations reflect the operating results of
Savannah Shores Apartments, which we sold in October 2005. Income from
discontinued operations, net of the operating partnership minority interest,
totaled $45,000 in the third quarter and $97,000 in the first nine months of
2005.
In November 2005, we redeemed all of the outstanding shares of
preferred stock in exchange for shares of our common stock. Because the
preferred shareholder had priority over common shareholders for receipt of
dividends prior to this conversion, we deducted the amount of net income to be
paid to the preferred shareholder, $250,000 for the third quarter and $750,000
for the first nine months, in calculating net income available to common
shareholders for 2005.
The net loss attributed to common shareholders was $1.3 million in the
third quarter and $1.7 million in the first nine months of 2006. Comparable
amounts for 2005 were $0.4 million in the third quarter and $7.3 million in the
first nine months.
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., after deducting the minority interests in FFO of the consolidated
limited partnerships, but before deducting the minority interest in the
operating partnership).
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.
24
Funds available for distribution is frequently referred to as "FAD." We
define FAD as FFO plus non-cash expenses, plus (less) gains (losses) from sales
of property, 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 GAAP. 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 GAAP) 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 $3.4 million in the third quarter of
2006, a decrease of $0.5 million, or 11.9%, compared to the third quarter of
2005. Funds from operations in the first nine months of 2006 totaled $12.2
million, an increase of $1.0 million, or 8.8%, compared to the first nine months
of 2005. These comparisons reflect the positive impact of apartment additions
and continued improvement in apartment operating results, which have been offset
or reduced by the $1.3 million charge in third quarter of 2006 for costs related
to the pending merger transaction. If the merger transaction costs had not been
incurred, FFO would have been $4.7 million in the third quarter and $13.5
million in the first nine months of 2006.
Funds available for distribution totaled $2.7 million in the third
quarter of 2006, a decrease of $0.4 million, or 14.4%, compared to the third
quarter of 2005. Funds available for distribution in the first nine months of
2006 totaled $10.1 million, an increase of $0.8 million, or 8.0%, compared to
the first nine months of 2005. Again, we have included the $1.3 million charge
in third quarter of 2006 for costs related to the pending merger transaction in
this measurement. The disparity between comparisons of FFO and FAD against prior
year periods arises primarily from the impact of timing of recurring capital
expenditures, which we deduct in our measurement of FAD. Recurring capital
expenditures include operating replacements such as floor coverings, appliances
and HVAC, as well as expenditures for capital replacements such as roofs and
exterior paint.
We calculated FFO of the operating partnership as follows:
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Net loss $ (1,298) $ (150) $ (1,692) $ (6,529)
Loss attributed to minority interests (324) (293) (421) (1,837)
Cumulative preferred dividend - (250) - (750)
Casualty gains - (168) (113) (168)
Amortization of
in-place lease intangibles 23 62 133 136
Depreciation, continuing operations 5,052 4,534 14,560 12,079
25
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Depreciation related to
discontinued operations - 84 - 255
Deficit distributions to minority partners
of consolidated limited partnerships(1)
90 150 270 7,771
Minority interest in FFO of consolidated
limited partnerships (130) (94) (565) 228
--------------- --------------- --------------- ---------------
Funds from operations $ 3,412 $ 3,875 $ 12,171 $ 11,185
=============== =============== =============== ===============
(1) In accordance with GAAP, deficit distributions to minority partners are
charges recognized in our statement of operations when a consolidated
limited partnership distributes cash to a minority partner in excess of the
positive balance in such partner's capital account. We are required to
record these charges for GAAP purposes even though there is no cash outlay
by the operating partnership. The economic cost of these distributions is
borne by the limited partnership making the distributions.
Deficit distributions to minority partners may occur when the fair value of
the underlying real estate exceeds its depreciated net book value because
the underlying real estate has appreciated or maintained its value. As a
result, deficit distributions to minority partners represent, in substance,
either our recognition of depreciation previously allocated to the
non-controlling partner or a cost related to the non-controlling partner's
share of real estate appreciation. Based on NAREIT guidance that requires
that real estate depreciation and gains be excluded from FFO, we add back
deficit distributions in our reconciliation of net income to FFO.
A reconciliation of net cash provided by operating activities (as
defined by GAAP and reflected in our consolidated statements of cash flows) to
FAD follows:
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Net cash provided by
operating activities $ 2,965 $ 4,298 $ 13,409 $ 11,360
Cumulative preferred dividend - (250) - (750)
Recurring capital expenditures (992) (902) (2,933) (2,204)
Change in net operating
assets and liabilities 752 (8) (152) 792
Minority interest in consolidated limited
partnerships' share of reconciling items
(50) (15) (185) 187
--------------- --------------- --------------- ---------------
Funds available for distribution $ 2,674 $ 3,123 $ 10,138 $ 9,385
=============== =============== =============== ===============
26
Other information about our historical cash flows follows (all amounts
in thousands):
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(000's) (000's) (000's) (000's)
Net cash provided by (used in):
Operating activities $ 2,965 $ 4,298 $ 13,409 $ 11,360
Investing activities (6,850) (1,456) (21,115) (40,851)
Financing activities 2,882 (3,447) 7,128 31,071
Dividends and distributions paid to:
Preferred shareholders $ - $ 250 $ - $ 750
Common shareholders 2,717 2,361 8,123 6,942
Minority partners in consolidated
limited partnerships 90 150 270 7,772
Minority unitholders in operating
partnership 678 602 1,989 1,518
Scheduled debt principal payments 705 643 2,627 1,663
Non-recurring capital expenditures 779 1,087 4,989 3,882
Weighted average shares outstanding during the period:
Preferred shares - 909 - 909
Common shares 10,459 9,384 10,425 9,203
Operating partnership
minority units 2,609 2,408 2,585 2,231
Shares and units outstanding at end of period:
Preferred B shares - 909
Common shares 10,468 9,458
Operating partnership
minority units 2,609 2,408
Capital Resources and Liquidity
Net cash flows from operating activities totaled $3.0 million in the
third quarter of 2006, compared to $4.3 million in the third quarter of 2005.
Net cash flows from operating activities for the first nine months of 2006
totaled $13.4 million, compared to $11.4 million in the first nine months of
2005. Cash flows from operating activities in 2006 includes the $1.3 million
payments in the third quarter of 2006 for costs related to the pending merger
transaction. In addition, cash flows from operating activities in the first
quarter of 2005 included $0.5 million for penalties paid at refinance by a
consolidated limited partnership.
If these two non-routine costs had not been incurred, net cash flows
from operating activities would have been $4.2 million in the third quarter and
$14.7 million in the first nine months of 2006, and $4.3 million in the third
quarter and $11.9 million in the first nine months of 2005. The increase in
comparative amounts on a year-to-date basis reflect the growth in size of
27
our apartment operations, while the comparison in amounts for the third quarters
of 2006 and 2005 reflect fluctuations in timing of payments for operating assets
and liabilities.
In April 2006, we acquired the Sterling Bluff Apartments, a 144-unit
apartment property located in Carrboro, North Carolina, for a contract purchase
price of $9.4 million, from an unaffiliated third party. We funded this
acquisition by a draw on our existing revolving line of credit. We operate the
apartment community as Bridges at Chapel Hill Apartments.
In May 2006, we issued a $7.3 million fixed-rate note payable, secured
by a deed of trust and assignment of rents of Bridges at Chapel Hill Apartments.
The loan provides for interest at 6.22% (6.3% effective rate), with
interest-only monthly payments through June 2012, then installments of principal
and interest of $45,000 per month, and a balloon payment of $7.0 million in June
2016. We applied proceeds of this loan to reduce our revolving line of credit.
In early July 2006, we acquired the Quail Hollow Apartments, a 90-unit
apartment property located in Charlotte, North Carolina, for a contract purchase
price of $5.1 million, from an unaffiliated third party. We funded this
acquisition by a draw on our existing revolving line of credit. We operate the
apartment community as Bridges at Quail Hollow Apartments.
Other investing and financing activities 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 $0.26 per share, or approximately $2.7 million, on November 15,
2006, to shareholders of record of our common stock as of November 1, 2006. We
expect to pay regular quarterly distributions totaling approximately $0.7
million to operating partnership minority unitholders on the same date.
In June 2006, we entered into an exchange agreement with Laurel Springs
III, LLC and its members, pursuant to which we will acquire the Laurel Springs
Phase 3 Apartments, a 168-unit apartment property that is adjacent to our Laurel
Springs community. The purchase price for the property will be $11.7 million,
consisting of the assumption or refinancing of approximately $10.1 million of
debt and $1.6 million to be paid in operating partnership units with an imputed
value of $16.70 per unit. Under the terms of the exchange agreement, we will
complete the acquisition no later than January 2007, and we will issue one-half
of the operating partnership units (approximately 47,000 units) in July 2007 and
one-half in July 2008.
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 future property
acquisitions, through long-term secured and unsecured borrowings and the
issuance of debt securities or additional equity securities. We believe we have
sufficient resources to meet our short-term liquidity requirements.
Critical Accounting Policies
We identify and discuss our significant accounting policies in the
notes to our financial statements included in our Annual Report on Form 10-K.
Our policies and practice regarding our
28
accounting for our general partner interests in limited partnerships, for
acquisitions, capital expenditures and depreciation, and for stock compensation,
which may be of particular interest to readers of this Quarterly Report, are
further discussed below.
Accounting for general partner interests in limited partnerships
As managing general partner in three real estate limited partnerships,
we have the ability to exercise significant influence over operating and
financial policies and activities. The appropriate accounting treatment for our
interests in these partnerships varies.
If the partnership is considered a variable interest entity ("VIE") and
we are the "primary beneficiary," as defined by GAAP, we include the accounts of
the partnership in our consolidated financial statements. We initially record
all of the VIE's assets, liabilities and minority interests at fair value. We
account for our interest in the Villages Partnership using this approach.
If we, as general partner, control a partnership that is not a VIE, we
also include the accounts of the partnership in our consolidated financial
statements. We initially record our prorata interest in the partnership's assets
and liabilities at the lower of our cost or fair value; we reflect the minority
partners' interest in the partnership's assets and liabilities at historical
cost, except to adjust an existing deficit capital account balance to $-0-. We
account for our interests in the Marina Shores Partnership and the Villages
Phase 5 Partnership using this approach.
If a consolidated limited partnership makes distributions to a minority
partner in excess of the positive balance in such partner's capital account, we
record a charge to our earnings for "deficit distributions to minority
partners," even though the cash outlay is made by the consolidated limited
partnership, and not by our operating partnership.
We allocate proportional income and losses of the consolidated limited
partnerships to minority partners; however, we may allocate losses to a minority
partner only to the extent of his positive capital account balance. If losses
attributable to a minority partner exceed his capital account balance, we record
a charge to our earnings to absorb those losses, even though our operating
partnership suffers no adverse economic effect.
We may subsequently recover such deficit distributions or absorbed
losses if and when the consolidated limited partnership generates positive net
income.
Purchase price allocation for apartment community acquisitions
In connection with the acquisition of an apartment community, we
perform a valuation and allocation to each significant asset and liability based
on their estimated fair values at the date of acquisition. Significant tangible
asset values generally include real estate investments, which we subsequently
depreciate over their estimated useful lives. We include an estimate of
intangible asset values, generally consisting of at-market, in-place leases, and
amortize these amounts over the remaining lease terms as a reduction in reported
rental income. In general, we have found that the average remaining life of
in-place leases at acquisition date ranged from five to nine months, and such
intangible assets represented approximately 0.1% to 0.3% of contract prices.
29
Capital expenditures and depreciation
In general, for the 16 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.
For apartment properties acquired after 2001, we performed detailed
analyses of components of the real estate assets acquired. For these properties,
we assigned estimated useful lives, based on age and condition at acquisition,
as follows: base building structure, 43-60 years; land improvements, 7-20 years;
short-lived building components, 5-20 years; and fixtures, equipment and floor
coverings, 5-10 years.
We generally complete and capitalize acquisition improvements (planned
expenditures we identify when we acquire the property and that are intended to
position the property consistent with our physical standards) within one to two
years of acquisition of the related apartment property. We capitalize
non-recurring expenditures for additions and betterments to buildings and land
improvements. In addition, we generally capitalize recurring capital
expenditures for exterior painting, roofing, and other major maintenance
projects that substantially extend the useful life of existing assets. For
financial reporting purposes, we depreciate these additions and replacements on
a straight-line basis over estimated useful lives of 5-20 years. We retire
replaced assets with a charge to depreciation for any remaining 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.
We expense ordinary repairs and maintenance costs at apartment
communities. Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
Impairment of long-lived assets
We evaluate our real estate assets when significant adverse changes in
operations or economic conditions occur in order to assess whether any
impairment indicators are present that affect the recovery of the recorded
values. If we considered any real estate assets to be impaired as defined by
GAAP, we would record a loss to reduce the carrying value of the property to its
estimated fair value. To date, there have been no such circumstances, and we
consider none of our assets to be impaired.
Revenue recognition
We record rental and other income monthly as it is earned. We record
rental payments that we receive prior to the first of a given month as prepaid
rent. We hold tenant security deposits in trust in bank accounts separate from
operating cash (these amounts are included in other current assets on our
balance sheet), and we record a corresponding liability for security deposits on
our balance sheet.
We amortize any cash concessions given at the inception of an apartment
lease over the approximate life of the lease, which is generally one year or
less. In general, cash concessions range from $100 to $300 and are taken by
residents during the first two months of the lease.
30
Stock-based compensation
The company has one employee Stock Option and Incentive Plan in place,
which we describe in more detail in the notes to our financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2005. Prior to July
1, 2005, we accounted for options granted under this plan using the intrinsic
value method; no stock-based employee compensation expense was reflected in our
earnings, as all outstanding options had been granted at exercise prices equal
to market value of the underlying stock on the dates of grant. All outstanding
options were fully vested by the end of 2004.
Effective July 1, 2005, we adopted the fair value recognition
provisions of Statement No. 123, as revised in 2004 ("FAS 123(R)"), using the
modified-prospective transition method. Under this transition method,
compensation cost recognized in the second half of 2005 and the first quarter of
2006 includes compensation cost for all share-based payments granted subsequent
to July 1, 2005, based on the grant-date fair value estimated in accordance with
the provisions of FAS 123(R). Under the modified-prospective transition method,
there is no compensation cost recognized for previously granted options that
were fully vested prior to July 1, 2005.
Additional information regarding capital expenditures
We provide the following information to analysts and other members of
the financial community for use in their detailed analyses.
A summary of capital expenditures for our owned apartment communities
during the first nine months of 2006, in aggregate and per apartment unit,
follows:
Total Per unit
------------ ------------
(000's)
Recurring capital expenditures:
Floor coverings $ 975 $ 121
Appliances/HVAC 408 51
Computer/support equipment 151 19
Other 906 113
------------ ------------
$ 2,440 $ 303
============ ============
Non-recurring capital expenditures:
Acquisition improvements at apartment properties $ 2,473
Casualty replacements 1,326
Additions and betterments at apartment properties 816
Computer/support equipment 137
-------------
$ 4,752
=============
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our owned apartment communities during
the first nine months of 2006 totaled $7.5 million, including $2.7 million in
compensation of service staff and $4.8 million in payments for material and
contracted services.
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
All of our long-term debt is secured by real estate investments. As of
September 30, 2006, long-term debt, on a consolidated basis, totaled $453.6
million, including $388.2 million of notes payable at fixed rates ranging from
5.0% to 7.4%, and $65.4 million at variable rates indexed primarily on 30-day
LIBOR rates. The weighted average interest rate on debt outstanding at September
30, 2006, was 6.0%, compared to 5.8% at December 31, 2005. This increase is
primarily attributable to steady increases in variable interest rates during the
first and second quarters of 2006. A 1% fluctuation in variable interest rates
would increase or decrease our annual interest expense by approximately $0.7
million.
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, 2006.
Expected maturity dates
2006 2007 2008 2009 2010 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
(all dollar amounts in thousands)
For owned properties:
Fixed rate notes $ 544 $ 2,254 $41,946 $31,247 $20,919 $243,768 $340,678
Average interest rate 5.9% 5.9% 6.5% 5.3% 6.8% 5.7% 5.8%
Variable rate notes $ 54 $ 9,177 $30,709 $25,475 - $ - $ 65,415
Average interest rate 7.3% 7.3% 7.2% 7.1% 7.2%
For consolidated limited partnerships:
Fixed rate notes (1) $ 158 $ 664 $ 698 $ 743 $ 786 $ 43,594 $ 46,643
Average interest rate 5.7% 5.7% 5.7% 5.7% 5.7% 5.8% 5.8%
(1) Amounts do not include $0.9 million debt premium to adjust one loan to fair
value in consolidation.
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 chairman, 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 2006, our chairman, chief executive officer and chief
financial officer believe that our disclosure controls and procedures are
effective. There were no changes in our internal control over financial
reporting identified in connection with our third quarter 2006 evaluation of
such internal control that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
32
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. Description
------------- ---------------------------------------------------------------
10.1 Employment agreement dated August 31, 2006, between BNP
Residential Properties, Inc. and Philip S. Payne
10.2 Employment agreement dated August 31, 2006, between BNP
Residential Properties, Inc. and D. Scott Wilkerson
10.3 Employment agreement dated August 31, 2006, between BNP
Residential Properties, Inc. and Pamela B. Bruno
10.4 Employment agreement dated August 31, 2006, between BNP
Residential Properties, Inc. and Eric S. Rohm
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chairman
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.3 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1 Section 1350 Certification by Chairman, Chief Executive Officer,
and Chief Financial Officer
33
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 6, 2006 /s/ Philip S. Payne
---------------------------------------
Philip S. Payne
Chairman
November 6, 2006 /s/ Pamela B. Bruno
---------------------------------------
Pamela B. Bruno
Vice President, Treasurer and
Chief Financial Officer
34
INDEX TO EXHIBITS
Exhibit No. Description Page
------------- -------------------------------------------------------------------------------------- --------
10.1 Employment agreement dated August 31, 2006, between BNP Residential Properties, Inc. 36
and Philip S. Payne
10.2 Employment agreement dated August 31, 2006, between BNP Residential Properties, Inc. 48
and D. Scott Wilkerson
10.3 Employment agreement dated August 31, 2006, between BNP Residential Properties, Inc. 60
and Pamela B. Bruno
10.4 Employment agreement dated August 31, 2006, between BNP Residential Properties, Inc. 71
and Eric S. Rohm
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chairman 82
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer 83
31.3 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer 84
32.1 Section 1350 Certification by Chairman, Chief Executive Officer, and Chief Financial 85
Officer
35