UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Identification No.)
incorporation or organization)
301 S. College St., Suite 3850, Charlotte, NC 28202-6024
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704/944-0100
------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common Stock, par value $.01 per share American Stock Exchange
- -------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes__ No X
The aggregate market value of the common stock held by non-affiliates of the
registrant at February 23, 2004, was approximately $83.5 million.
The number of shares of the registrant's common stock outstanding on February
23, 2004, was 7,097,480.
Index to exhibits at page 62
BNP RESIDENTIAL PROPERTIES, INC.
TABLE OF CONTENTS
Item No. FINANCIAL INFORMATION Page No.
PART I
1 Business 3
2 Properties 6
3 Legal Proceedings 10
4 Submission of Matters to a Vote of Security Holders 10
X Executive Officers of the Registrant 10
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
7A Quantitative and Qualitative Disclosures About Market Risk 26
8 Financial Statements and Supplementary Data 27
9 Changes in and Disagreements With Accountants on Accounting and Financial 27
Disclosure
9A Controls and Procedures 27
PART III
10 Directors and Executive Officers of the Registrant 27
11 Executive Compensation 30
12 Security Ownership of Certain Beneficial Owners and Management and Related 31
Stockholder Matters
13 Certain Relationships and Related Transactions 33
14 Principal Accountant Fees and Services 34
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35
PART I
ITEM 1. BUSINESS
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust ("REIT") with operations in North
Carolina, South Carolina and Virginia. Our primary activity is the ownership and
operation of apartment communities. We currently manage 28 multi-family
communities containing 6,920 units. Of these, we own 20 apartment communities
containing 4,859 units. Third parties own the remaining 8 communities,
containing 2,061 units, and we manage them on a contract basis. In addition to
our apartment communities, we own 40 restaurant properties that we lease on a
triple-net basis to a third party under a master lease.
BNP Residential Properties, Inc. is structured as an UpREIT, or
"umbrella partnership real estate investment trust." We are the sole general
partner and own a controlling interest in BNP Residential Properties Limited
Partnership, through which we conduct all of our operations. We refer to this
partnership as the Operating Partnership. We refer to the limited partners of
the Operating Partnership as "minority common unitholders" or "minority
interest." We currently own approximately 76% of the outstanding Operating
Partnership common units and 100% of the outstanding Operating Partnership
preferred units.
As of February 23, 2004, we have 7,097,480 shares of common stock and
909,090 shares of preferred stock outstanding. We have approximately 1,375
shareholders of record. We estimate that there are approximately 3,600
beneficial owners of our common stock. Our shares are listed on the American
Stock Exchange, trading under the symbol "BNP." The Operating Partnership has an
additional 1,841,098 Operating Partnership minority common units outstanding.
We have approximately 200 employees, including management, accounting,
legal, acquisitions, development, property management, leasing, maintenance and
administrative personnel. Our executive offices are located at 301 South College
Street, Suite 3850, Charlotte, North Carolina 28202-6024, and our telephone
number is 704/944-0100.
In addition to this Annual Report, we file quarterly and special
reports, proxy statements and other information with the SEC. All documents that
we file with the SEC are available free of charge on our corporate website,
which is www.bnp-residential.com. You may also read and copy any document that
we file at the public reference facilities of the SEC at 450 Fifth Street NW,
Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further
information about the public reference facilities. These documents also may be
accessed through the SEC's electronic data gathering, analysis and retrieval
system ("EDGAR") via electronic means, including the SEC's home page on the
Internet (http://www.sec.gov). In addition, since some of our securities are
listed on the American Stock Exchange, you can read our SEC filings at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
History and Development of BNP Residential Properties, Inc.
The company was originally incorporated in the state of Delaware in
1987. Beginning in 1987, we elected to be taxed as a REIT under the Internal
Revenue Code. As such, we generally are not, and will not be, subject to federal
or state income taxes on net income. As a REIT, we are subject to a number of
organizational and operational requirements, including a requirement that we
currently distribute at least 90% of our REIT taxable income as dividends.
In 1987, we purchased 47 existing restaurant properties located in
North Carolina and Virginia for an aggregate purchase price of $43.2 million.
From 1987 through 1992, our assets primarily consisted of these 47 restaurant
properties. During this period we operated as an externally administered and
externally managed REIT. We leased the restaurants on a triple-net basis to
Boddie-Noell Enterprises, Inc.
3
("Enterprises"), a Hardee's franchisee, under a master lease. A master lease is
a single lease that covers multiple properties, while a triple-net lease is one
where the lessee pays all operating expenses, maintenance, property insurance
and real estate taxes.
In 1993, we began to change our focus from restaurant properties to
apartment communities, with the objective of increasing funds from operations
and enhancing shareholder value. In 1994 we acquired BT Venture Corporation, an
integrated real estate company specializing in the management, development and
acquisition of apartment properties, and began operating as a self-administered
and self-managed REIT.
In 1997, we reincorporated in the state of Maryland and reorganized to
our present UpREIT structure. Through our UpREIT structure, we can acquire
properties in exchange for Operating Partnership units and trigger no immediate
tax obligation for certain sellers. We believe that our conversion to an UpREIT
enables us to acquire properties not otherwise available or at lower prices
because of the tax advantages to certain property sellers of receiving limited
partnership interests instead of cash as consideration. Minority unitholders
will generally be able to redeem their units for cash or, at our option as
general partner, for shares of common stock of the company on a one-for-one
basis. Distributions of cash from the Operating Partnership are allocated
between the REIT and the minority unitholders based on their respective unit
ownership.
In December 1997, we completed a common stock offering and issued 2.7
million shares of common stock. We used proceeds of this offering to retire
long-term debt. This common stock offering almost doubled the number of the
company's common shares outstanding.
In April 2000, we changed the name of the company to BNP Residential
Properties, Inc. We believe this name more clearly reflects our business
activities and eliminates the confusion that existed because of the similarity
of our former name to that of Boddie-Noell Enterprises.
In December 2001, our Board of Directors authorized the issuance of up
to 454,545 shares of Series B Cumulative Convertible Preferred Stock, and we
issued 227,273 shares of this preferred stock for proceeds of $2.5 million. In
September 2002, we issued an additional 227,272 shares of our Series B preferred
stock for proceeds of $2.5 million.
From 1993 through 2002, we acquired 19 apartment properties through a
combination of cash purchases, assumption of long-term debt, and issuance of
Operating Partnership units. (We combined two of these properties to operate as
a single apartment community.)
To date we have sold seven restaurants to Enterprises, the lessee,
under an agreement that allowed Enterprises to close up to seven restaurants and
buy them back for no less than net carrying value.
Recent Developments
During 2003, we continued to add to and improve our portfolio of
apartment properties with two acquisitions - The Place Apartments in Greenville,
South Carolina, and The Harrington Apartments in Charlotte, North Carolina - in
direct purchases. With these acquisitions, we now own 20 apartment communities.
Results for 2003 were in line with our expectations. We entered 2003
expecting it to be a difficult year, but believed we would begin to see some
improvement in apartment operations by late in the year. A combination of
overbuilding of apartments, a weak economy, and extremely low interest rates
that made home ownership a more viable alternative to renting, resulted in
declines in both occupancy and rental rates beginning in 2001. This trend
continued until the middle of 2003, when we began to see improvement in
apartment performance. For apartments owned for the full period in both years
("same units"), average economic occupancy for the fourth quarter of 2003
improved by 3.3%, from 92.1% in the fourth quarter of 2002 to 95.4%in the fourth
quarter of 2003. At the same time, revenue per occupied unit improved from $721
per month in the fourth quarter of 2002 to $725 per month in the fourth quarter
of 2003. This was the
4
first time in several years that we have had simultaneous improvement in
year-over-year quarterly comparisons for both same-unit occupancy and monthly
revenue per occupied unit.
The surprise of 2003 was the significant improvement in sales at our
restaurant properties during the third and fourth quarters. On a same-store
basis, sales at our 40 restaurant properties increased by 7.4% in the third
quarter and 12.7% in the fourth quarter of 2003 as compared to the same periods
in 2002. As a result, same-store sales for the year 2003 increased by 2.4% over
2002. These increases, which appear to be the result of the introduction of
Hardee's new "Thickburger" menu and a revitalized advertising campaign,
represent the first significant positive same-store sales comparisons in over
ten years. While this improvement in sales at the restaurant properties did not
result in our receiving any rent beyond the specified minimum annual rent, it
certainly raises the hope that Hardee's efforts to reinvigorate the concept may,
at least, be taking hold. For us to begin to receive more than minimum rent,
annual sales at our restaurant properties would need to improve by 10% over 2003
levels.
We are cautiously optimistic about our prospects for 2004. The past few
years have been a very difficult period in which to operate apartments. It is
simply too early to tell whether the improvement in apartment operations we saw
during the fourth quarter is the beginning of an extended period of improving
apartment operations. In any event, we have a portfolio of well-maintained,
well-located apartment properties that, we believe, are positioned to take
advantage of any improvement in the apartment markets.
In September 2003, our Board of Directors authorized, and we issued, an
additional 454,545 shares of our Series B preferred stock for proceeds of $5.0
million.
On February 23, 2004, we sold 1,175,519 shares of our common stock to a
number of institutional investors and mutual funds pursuant to a private
placement for a total purchase price of approximately $13.8 million.
Business Strategy
Our principal investment objectives are to provide our shareholders
with current income and to increase the value of the company's common stock. We
focus on increasing long-term growth in funds from operations and funds
available for distribution per share, and on increasing the value of our
portfolio through effective management, growth, financing and investment
strategies. We expect to implement our strategies primarily through the
acquisition, operation, leasing and management of apartment communities.
We seek to acquire apartment properties in areas within the
southeastern United States exhibiting substantial economic growth and an
expanding job base in which we can establish a significant market presence.
Through our UpREIT structure, we have the ability to acquire apartment
communities by issuing Operating Partnership units in tax-deferred exchanges
with owners of such properties. We expect that we will finance future
acquisitions of apartment communities with Operating Partnership units as well
as loans and funds from additional offerings of common stock, preferred stock or
joint venture arrangements.
We will selectively consider opportunities to add additional units to
existing communities, to acquire and rehabilitate older apartment communities,
and to develop new apartment communities. Members of our management team have
directed over $115 million of development or redevelopment projects, including
13 apartment communities containing over 2,500 apartment units. This development
and redevelopment experience will enable us to build additional apartment
communities and to rehabilitate existing communities when economic conditions
and available capital make such opportunities attractive.
Our residents are typically mid- to high-end "residents by
necessity"--individuals or families with moderate incomes that live in
apartments by necessity. They include retirees, young professionals,
manager-level white-collar workers, medical personnel, teachers, members of the
military and young families.
5
We strongly emphasize on-site property management. We seek
opportunities and have developed internal programs to increase average occupancy
rates, reduce resident turnover, raise rents and control costs. On-site
community managers report directly to regional managers who are locally based.
This flat organization provides for efficient staffing levels, reduces overhead
expenses, and enables us to respond to the needs of residents and on-site
employees. In an effort to reduce long-term operating costs, we regularly review
each apartment community and promptly attend to maintenance and recurring
capital needs. Our employees supervise all renovation and repair activities,
which are generally completed by outside contractors.
We continue to seek additional sources of revenue at our existing
apartment communities. These include water submetering and marketing of cable
television, high-speed Internet service and telephone services.
ITEM 2. PROPERTIES
Apartment Communities
Through the Operating Partnership, we own and operate 20 apartment
communities consisting of 4,859 apartment units. For the fourth quarter of 2003,
our average economic occupancy rate was 95.2%, and average monthly revenue per
occupied unit was $720. The average age of the apartment communities is
approximately 11 years. Our apartment communities are generally wood framed,
two- and three-story buildings, with exterior entrances, individually metered
gas and electric service, submetered water service, and individual heating and
cooling systems.
Our apartment units are comprised of 36% one-bedroom units, 57%
two-bedroom units, and 7% three-bedroom units. The units average approximately
1,000 square feet in area and are well equipped with modern appliances and other
conveniences. Our communities generally include swimming pools, tennis courts
and clubrooms, and most have exercise facilities.
As of December 31, 2003, our total investment, on a historical cost
basis, in our 20 apartment communities was approximately $299.7 million, and the
net carrying value of our 20 apartment communities was approximately $254.9
million (an average of $12.7 million per property). The apartment properties are
held subject to loans, discussed in the notes to the financial statements.
The table on page 8 summarizes information about each of our apartment
communities.
Restaurant Properties
We lease the restaurant properties on a triple-net basis to Enterprises
under a master lease. The master lease, as amended in 1995, has a primary term
expiring in December 2007, but grants Enterprises three five-year renewal
options. Enterprises pays annual rent equal to the greater of the specified
minimum rent or 9.875% of food sales from the restaurants. Under certain
conditions, and subject to our approval, Enterprises has the right to substitute
another restaurant property for a property covered by the lease. Assuming
renewal of the lease, after December 31, 2007, Enterprises has the right to
terminate the lease on up to five restaurant properties per year by offering to
purchase them under specified terms.
In addition, we entered into a separate agreement that allowed
Enterprises to purchase, under specified terms, up to seven restaurant
properties deemed non-economic for no less than net carrying value. The original
lease was for 47 restaurant properties; since 1999, we have sold seven
restaurants deemed non-economic to Enterprises for total proceeds of $4,373,000,
which equaled the net carrying value of the properties.
The minimum rent on the remaining 40 restaurants is approximately $3.8
million per year.
6
The average acquisition cost of the original 47 restaurant properties
was approximately $920,000 per property. The net carrying value of the 40
restaurant properties held at December 31, 2003, was $26.1 million (an average
of $654,000 per property). The restaurant properties are held subject to a line
of credit loan, discussed in the notes to the financial statements.
The restaurant properties are operated by Enterprises, which is
responsible for all aspects of the operation, maintenance and upkeep of the
properties. In addition, Enterprises is responsible for the cost of any
improvement, expansion, remodeling or replacement required to keep the
properties competitive or in conformity with applicable codes and standards.
Thirty-nine of the restaurant properties are operated as Hardee's
restaurants pursuant to franchise agreements with Hardee's Food Systems, Inc.
One property is operated as a "BBQ and Ribs" restaurant. Enterprises converted
this property to the BBQ and Ribs concept in 2002 and paid for the entire cost
of the conversion, approximately $500,000. There is no applicable franchise
agreement for the converted restaurant, as Enterprises owns the BBQ and Ribs
concept.
Each of the restaurant properties consists of a one-story brick, stucco
or wood building that embodies a contemporary style with substantial plate glass
areas. The buildings average 3,400 square feet and are located on sites
averaging 1.2 acres. The buildings are suitable for conversion to a number of
uses, but the exteriors would have to be substantially modified prior to their
use as restaurants of another concept or for non-restaurant applications.
The locations of our restaurant properties are listed on page 9 of this
Annual Report.
Property Insurance
We carry insurance coverage on our properties of types and in amounts
that we believe are in line with coverage customarily obtained by owners of
similar properties. In addition, properties that we manage but do not own are
covered by insurance policies under which we are a named insured. Our restaurant
properties are subject to an indemnification agreement whereby Enterprises, the
lessee, is responsible for all claims, including those relating to environmental
matters, arising from a restaurant property. Enterprises is required to provide
insurance, which identifies the company as a named insured, on each restaurant
property.
We believe all of our properties are adequately insured, including
insurance for acts of terrorism at all of our apartment properties. There are
types of losses, however, such as from wars or catastrophic acts of nature, for
which we cannot obtain insurance at all or at a reasonable cost. In the event of
an uninsured loss or a loss in excess of our insurance limits, we could lose
both the revenues generated from the affected property and the capital we have
invested in the affected property. It is possible, depending on the specific
circumstances of the affected property, that we could be liable for any mortgage
indebtedness or other obligations related to the property. Any such loss could
materially and adversely affect our business and financial condition and results
of operations.
7
INFORMATION ABOUT APARTMENT COMMUNITIES
Total Apartment Weighted
No. Rentable Unit Type Average
of Apt. Year Date Total Area 1 2 3 Apt. Size
Community Location Units Compl Acquired Acreage (Sq. Ft.) BR BR BR (Sq. Ft.)
- ------------------- ------------------ ------ -------- ---------- --------- ---------- ----- ----- ----- ----------
Abbington Place Greensboro, NC 360 1997 12/97 37.4 400,728 96 216 48 1,113
Allerton Place Greensboro, NC 228 1998 9/98 19.2 241,842 54 126 48 1,061
Barrington Place Charlotte, NC 348 1999 5/02 29.3 386,964 132 192 24 1,112
Brookford Place Winston-Salem, NC 108 1998 5/02 6.3 103,392 36 72 - 961
Chason Ridge Fayetteville, NC 252 1994 1/99 29.1 246,886 56 164 32 980
Harrington Charlotte, NC 288 1997 8/03 25.0 321,190 103 140 45 1,115
Harris Hill Charlotte, NC 184 1988 12/94 18.4 167,920 67 117 - 912
Latitudes Virginia Beach, VA 448 1989 10/94 24.9 358,700 269 159 20 800
Madison Hall Clemmons, NC 128 1997 8/98 10.5 110,352 42 86 - 862
Marina Waterfront Cornelius, NC 290 1994 9/02 33.6 254,356 128 126 36 877
Oak Hollow Cary, NC 221 1983 7/98 30.0 215,960 56 165 - 982
Oak Hollow Ph 2 Cary, NC 240 1986 12/00 26.8 220,840 160 80 - 920
Oakbrook Charlotte, NC 162 1985 6/94 16.4 178,668 32 120 10 1,100
Paces Commons Charlotte, NC 336 1988 6/93 24.8 322,046 154 142 40 958
Paces Village Greensboro, NC 198 1988 4/96 15.5 167,886 88 110 - 848
Pepperstone Greensboro, NC 108 1992 12/97 10.1 113,076 - 108 - 1,047
Savannah Place Winston-Salem, NC 172 1991 12/97 15.4 182,196 44 128 - 1,059
Summerlyn Place Burlington, NC 140 1998 9/98 12.1 156,756 48 84 8 1,120
The Place Greenville, SC 144 1985 3/03 10.1 158,264 40 104 - 1,106
Waterford Place Greensboro, NC 240 1997 12/97 20.6 277,296 72 120 48 1,155
Woods Edge Durham, NC 264 1985 6/98 32.4 268,620 66 198 - 1,018
Average
Average Economic Monthly Revenue
Occupancy Percent(1) per Occupied Unit
Community Location 2003 2002 2001 2003 2002 2001
- ------------------- ------------------ ------ ------- ------ ------ ------- ------
Abbington Place Greensboro, NC 90.9 93.2 95.9 $764 $770 $785
Allerton Place Greensboro, NC 91.4 92.6 95.4 745 769 773
Barrington Place Charlotte, NC 94.3 91.9 - 748 782 -
Brookford Place Winston-Salem, NC 95.1 93.4 - 667 690 -
Chason Ridge Fayetteville, NC 96.6 96.1 96.0 753 717 682
Harrington Charlotte, NC 92.0 - - 739 - -
Harris Hill Charlotte, NC 93.3 92.1 93.9 663 684 716
Latitudes Virginia Beach, VA 96.5 97.2 97.1 873 817 774
Madison Hall Clemmons, NC 94.2 93.9 92.9 578 598 605
Marina Waterfront Cornelius, NC 91.0 89.4 - 750 801 -
Oak Hollow Cary, NC 90.0 89.3 89.2 617 650 732
Oak Hollow Ph 2 Cary, NC 89.1 88.2 89.3 599 606 689
Oakbrook Charlotte, NC 91.9 90.6 92.3 709 763 783
Paces Commons Charlotte, NC 92.2 91.0 91.1 660 668 709
Paces Village Greensboro, NC 94.3 89.0 93.0 654 667 689
Pepperstone Greensboro, NC 93.8 95.4 97.3 655 681 695
Savannah Place Winston-Salem, NC 93.4 93.1 93.8 699 714 712
Summerlyn Place Burlington, NC 93.5 94.5 93.6 832 802 803
The Place Greenville, SC 91.1 - - 569 - -
Waterford Place Greensboro, NC 91.8 94.7 94.2 852 850 861
Woods Edge Durham, NC 92.7 92.3 95.3 722 754 776
(1) Average economic occupancy is calculated as gross potential rent less
vacancy, divided by gross potential rent.
8
RESTAURANT PROPERTIES LOCATIONS
Virginia
(27 properties)
Ashland
106 North Washington
Blackstone
North Main Street
Bluefield
701 South College Street
Chester
12401 Jefferson Davis Hwy.
Clarksville
916 Virginia Avenue
Clintwood
U.S. Highway 83
Dublin
208 College Avenue
Franklin
105 North Mechanic Street
Galax
425 Main Street
Hopewell
East City Point Road
Lebanon
Route 1
Lynchburg
8411 Timberlake Road
2231 Langhorne road
Norfolk
3908 Princess Anne Road
Orange
200 Madison Road
Petersburg
1865 Crater Road, South
Richmond
921 Myers Street
6850 Forest Hill Avenue
7917 Midlothian Pike
Roanoke
4407 Abenham Avenue SW
3401 Hollins Road
Rocky Mount
322 Tanyard Road, NE
Smithfield
Smithfield Shopping Center
Verona
160 East Route 612
Virginia Beach
4261 Holland Road
1951 Lynnhaven Parkway
Wise
US Highway 23, Business
North Carolina
(13 properties)
Burlington
2712 Alamance Road
Denver
Route 1
Eden
202 West Kings Highway
Fayetteville
3505 Ramsey Street
360 North Eastern Blvd.
Hillsborough
380 S. Churton Street
Kinston
200 West Vernon Street
1404 Richlands Street
Newton
South Ashe & North "D"
Siler City
Chatham Shopping Center
Spring Lake
400 South Main Street
Thomasville
1116 East Main Street
Randolph Street
9
ITEM 3. LEGAL PROCEEDINGS
We are a party to a variety of legal proceedings arising in the
ordinary course of business. We do not expect any of these matters, individually
or in aggregate, to have a material adverse impact on the company.
In the event a claim was successful, we believe that we are adequately
covered by insurance and indemnification agreements. We have insurance coverage
on each of our apartment communities. Our restaurant properties are subject to
an indemnification agreement whereby Enterprises, the lessee, is responsible for
all claims arising from a restaurant property. In addition, Enterprises is
required to provide insurance, which identifies the company as a named insured,
on each restaurant property. Each apartment property that we manage but do not
own is covered by an insurance policy under which we are a named insured.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2003.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
We have set forth below a listing and brief biography of each of the
executive officers of the company.
Name Age Position Officer Since
- ------------------------- ------- --------------------------------------------------- ------------------
Philip S. Payne 52 Chairman of the Board of Directors, October 1994
Treasurer, Chief Financial Officer
D. Scott Wilkerson 46 Director, President, Chief Executive Officer October 1994
Eric S. Rohm 34 Vice President, General Counsel, December 2002
Assistant Secretary
Pamela B. Bruno 50 Vice President, Chief Accounting Officer, October 1994
Assistant Secretary
Douglas E. Anderson 56 Vice President, Secretary April 1987
Messrs. Payne and Wilkerson are also members of our Board of Directors.
Brief biographies of Messrs. Payne and Wilkerson are included at Part III, Item
10. Directors and Officers of the Registrant in this Annual Report. Biographical
information for our other executive officers follows.
Eric S. Rohm - Vice President, General Counsel, Assistant Secretary.
Mr. Rohm joined the company in December 2002 as Vice President and General
Counsel. Prior to joining the company, Mr. Rohm was a partner in the Real Estate
Department of Kennedy Covington Lobdell & Hickman, LLP in Charlotte, North
Carolina, where he practiced law from 1994 to 2002. Mr. Rohm received an AB
degree in government from Georgetown University in 1991, and his JD degree from
The Ohio State University College of Law in 1994. Mr. Rohm is licensed to
practice law in the State of North Carolina, and is a member of the North
Carolina State Bar, the North Carolina Bar Association, and the Association of
Corporate Counsel.
Pamela B. Bruno - Vice President, Chief Accounting Officer, Assistant
Secretary. Ms. Bruno joined BT Venture Corporation in 1993 as Controller and
became our Vice President and Chief Accounting Officer in October 1994. From
1984 to 1993, Ms. Bruno was with Ernst & Young LLP, in Charlotte, North
Carolina, and Anchorage, Alaska, serving as audit manager from 1987 through
1993. She received a BS degree in accounting from the University of North
Carolina at Charlotte in 1984. She is a licensed certified public accountant,
and is a member of the North Carolina Association of Certified Public
Accountants.
10
Douglas E. Anderson - Vice President, Secretary. Mr. Anderson has
served as Vice President and Secretary since our inception in 1987. He has been
with Enterprises since 1977 and is currently a director, executive vice
president and secretary of Enterprises. Mr. Anderson is also president of BNE
Land and Development Company, the real estate development division of
Enterprises. He serves as a director of Wachovia Bank of Rocky Mount, North
Carolina. In addition, he serves on the Board of Visitors of the Lineberger
Comprehensive Cancer Center in Chapel Hill, North Carolina. He received a BS
degree in finance and accounting from the University of North Carolina at Chapel
Hill in 1970.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Dividends
Our common stock is traded on the American Stock Exchange under the
symbol "BNP." There were approximately 1,375 common shareholders of record and
one preferred shareholder on February 23, 2004. The table below shows, for the
periods indicated, the range of high, low, and closing sale prices of our common
stock as reported by the American Stock Exchange and the dividends paid per
share. As of February 20, 2004, the closing price of the company's common stock
was $12.40 per share.
Dividends
Stock Price Paid
High Low Close Per Share
-------------- -------------- -------------- -------------
2003:
Fourth quarter $11.75 $10.41 $11.61 $0.25
Third quarter 11.50 10.26 10.55 0.25
Second quarter 11.00 9.68 10.80 0.25
First quarter 10.79 9.00 9.70 0.25
2002:
Fourth quarter $10.70 $9.40 $10.15 $0.31
Third quarter 12.65 9.19 9.80 0.31
Second quarter 13.00 11.30 12.60 0.31
First quarter 11.80 10.31 11.42 0.31
We have paid regular quarterly dividends to holders of our common stock
since our inception, and we intend to continue to do so. We anticipate that we
will pay all dividends from current funds from operations. We expect
distributions to substantially exceed the 90% annual distribution requirement
for a REIT.
We have a dividend reinvestment plan that is available to all
shareholders of record. Under this plan, as amended in February 2004, the plan
administrator, Wachovia Bank, N. A., reinvests dividends on behalf of plan
participants in our common stock. Wachovia will either issue new shares or
purchase shares on the open market, at our direction. In addition, shareholders
who participate in the plan may elect to make direct cash investments or
supplement their reinvestment program with additional cash investments of any
amount from $25 to $25,000 per quarter. Participants do not pay any commissions
on stock purchased under the plan.
Sales of Unregistered Securities
In September 2003, we issued 454,545 shares of our Series B Preferred
Stock to a single investor for proceeds of approximately $5.0 million in cash.
These shares were issued pursuant to the exemption
11
from the registration requirements of the Securities Act of 1933 set forth in
Section 4(2) of the Act. The investor will have the right to convert each Series
B share into one share of the company's common stock beginning December 2004 or
in certain circumstances, such as a change of control or the company's calling
the Series B stock for redemption. The conversion ratio may be adjusted for
certain dilutive issuances, such as stock dividends or issuances of common stock
at less than $11.00 per share. The purchaser was an accredited investor, and
offers were not accompanied by any form of general solicitation. The managing
member of the purchaser is one of our directors.
On November 17, 2003, we issued 19,507 shares of common stock under our
dividend reinvestment plan. Of these shares, 14,544 exceeded the number
authorized under the plan and under the registration statement registering the
plan's shares. On January 22, 2004, our Board of Directors retroactively
authorized the issuance of these excess shares. The Board also authorized an
increase in the number of shares we can sell under our dividend reinvestment
plan and authorized us to file a registration statement registering the sale of
those shares. We filed a registration statement on February 6, 2004, registering
1.0 million shares of common stock to be sold pursuant to our dividend
reinvestment plan.
On February 23, 2004, we issued 1,175,519 shares of common stock at a
price of $11.75 per share to a number of institutional investors and mutual
funds pursuant to a private placement for total proceeds of approximately
$13,812,000. We expect to file a registration statement for these shares in the
near future.
We have included information regarding securities authorized for
issuance under equity compensation plans in Part III, Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters of this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
We present below selected financial information. We encourage you to
read the financial statements and the notes accompanying the financial
statements in this Annual Report. This information is not intended to be a
replacement for the financial statements.
This financial information includes all apartment communities and
restaurant properties that we owned for each period shown.
Year ended December 31
2003 2002* 2001* 2000 1999
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Operating data: (1)
Revenue:
Apartment rental income $ 37,475 $ 32,890 $ 30,867 $ 29,269 $ 28,608
Restaurant rental income 3,908 4,021 4,053 4,162 4,339
Other income 1,277 1,253 1,342 427 510
------------- -------------- ------------- -------------- -------------
Total revenue 42,660 38,164 36,262 33,858 33,457
Expenses:
Apartment operations 15,458 12,682 11,182 9,766 9,395
Administrative costs 3,907 3,358 2,956 2,391 2,380
Depreciation 10,040 8,794 7,828 7,156 6,956
Amortization (1) 322 256 596 579 569
Interest 13,000 11,452 11,100 11,151 10,703
Write-off of unamortized loan
costs at refinance - 95 129 - -
Costs of terminated
equity transaction - - - 237 -
------------- -------------- ------------- -------------- -------------
Total expenses 42,727 36,637 33,792 31,280 30,003
------------- -------------- ------------- -------------- -------------
12
Year ended December 31
2003 2002* 2001* 2000 1999
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
(Loss) income before
minority interest (66) 1,527 2,470 2,578 3,454
Minority interest in
Operating Partnership (174) 279 567 595 728
------------- -------------- ------------- -------------- -------------
Net income 107 1,248 1,902 1,983 2,726
Cumulative preferred dividend 661 323 3 - -
------------- -------------- ------------- -------------- -------------
(Loss) income available to
common shareholders $ (553) $ 925 $ 1,900 $ 1,983 $ 2,726
============= ============== ============= ============== =============
Basic earnings per share -
(loss) income available to
common shareholders $ (0.09) $ 0.16 $ 0.33 $ 0.35 $ 0.46
============= ============== ============= ============== =============
Diluted earnings per share -
(loss) income available to
common shareholders $ (0.09) $ 0.16 $ 0.33 $ 0.35 $ 0.46
============= ============== ============= ============== =============
Dividends per common share $ 1.00 $ 1.24 $ 1.24 $ 1.24 $ 1.24
============= ============== ============= ============== =============
Balance Sheet data:
Real estate assets (before
accumulated depreciation)
Apartment communities $ 299,661 $ 275,713 $ 221,589 $ 217,818 $ 203,365
Restaurant properties 37,405 39,159 39,159 39,702 40,545
Real estate assets, net 281,014 265,423 219,997 224,705 217,984
Total assets 287,200 271,723 225,385 230,691 224,270
Total debt 229,714 211,585 162,330 163,612 150,883
Minority interest 15,895 17,947 18,174 19,737 21,317
Shareholders' equity 38,733 39,271 42,034 44,548 49,896
Apartment Properties data:
Apartment communities
owned at year end 20 18 15 15 15
Apartment units owned
at year end 4,859 4,427 3,681 3,680 3,440
Average apartment
economic occupancy 92.8% 92.8% 93.9% 95.9% 95.1%
Average monthly revenue
per occupied unit $ 725 $ 733 $ 744 $ 737 $ 729
Other data:
Earnings before interest, taxes,
depreciation and
amortization (2) $ 23,295 $ 22,124 $ 22,123 $ 21,463 $ 21,682
Funds from operations (2) 9,313 9,998 10,702 10,139 10,816
Funds available
for distribution (2) 7,904 8,865 9,696 9,243 9,868
Net cash provided by
(used in):
Operating activities $ 9,807 $ 9,984 $ 10,729 $ 10,854 $ 10,919
Investing activities (25,488) (32,535) (2,401) (13,407) 111
Financing activities 15,361 22,018 (7,966) 3,177 (11,089)
13
Year ended December 31
2003 2002* 2001* 2000 1999
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Weighted average number of shares and units outstanding:
Preferred B shares 601 293 2 - -
Common shares 5,868 5,787 5,717 5,708 5,973
Operating Partnership
minority units 1,843 1,786 1,706 1,711 1,601
*2002 and 2001 amounts have been reclassified to conform to FAS 145 - the
write-off of unamortized loan costs was previously reported as an extraordinary
item, net of minority share.
(1) We adopted Statement of Financial Accounting Standards ("FAS") No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. The
intangible related to our 1994 acquisition of management operations is no
longer amortized after December 31, 2001. Amortization expense related to
this intangible was approximately $406,000 per year in 1998 through 2001.
(2) Earnings before interest, taxes, depreciation and amortization, funds from
operations, and funds available for distribution amounts reflect
measurements for the Operating Partnership (before deduction for minority
interest).
Earnings before interest, taxes, depreciation and amortization is
frequently referred to as "EBITDA." This measurement is derived directly
from amounts included in the Statement of Operations. We consider EBITDA
to be a useful measurement of operations performance before the impact of
financial structure and significant non-cash charges.
We calculated EBITDA as follows (all amounts in thousands):
Year ended December 31
2003 2002 2001 2000 1999
------------- -------------- ------------- -------------- -------------
(Loss) income before minority
interest $ (66) $ 1,527 $ 2,470 $ 2,578 $ 3,454
Interest 13,000 11,452 11,100 11,151 10,703
Depreciation 10,040 8,794 7,828 7,156 6,956
Amortization 322 256 596 579 569
Write-off of unamortized
loan costs - 95 129 - -
------------- -------------- ------------- -------------- -------------
Earnings before interest,
taxes, depreciation and
amortization $23,295 $22,124 $22,123 $21,463 $21,682
============= ============== ============= ============== =============
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
14
from - or "adds it back" to - GAAP net income. We consider FFO to be
useful in evaluating potential property acquisitions and measuring
operating performance.
Funds available for distribution is frequently referred to as "FAD." We
calculate FAD as FFO plus non-cash expense for amortization and write-off
of unamortized loan costs, less recurring capital expenditures. We believe
that, together with net income and cash flows from operating activities,
FAD provides investors with an additional measure to evaluate the ability
of the Operating Partnership to incur and service debt, to fund
acquisitions and other capital expenditures, and to fund distributions to
shareholders and minority unitholders.
Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. You should not consider FFO or FAD to be
alternatives to net income as reliable measures of the company's operating
performance; nor should you consider FFO or FAD to be alternatives to cash
flows as measures of liquidity.
Funds from operations and funds available for distribution do not measure
whether cash flow is sufficient to fund all of our cash needs, including
principal amortization, capital improvements and distributions to
shareholders. FFO and FAD do not represent cash flows from operating,
investing or financing activities as defined by generally accepted
accounting principles. Further, FFO and FAD as disclosed by other REITs
might not be comparable to our calculation of FFO or FAD.
For a reconciliation of FFO and FAD to net (loss) income before minority
interest, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Funds From Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual 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
apartments, or other rental or competitive housing alternatives;
o our markets could suffer unexpected declines in economic growth or an
increase in unemployment rates;
o general economic conditions could cause the financial condition of a
large number of our tenants to deteriorate;
o we may 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
15
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 this discussion in conjunction with the financial
statements and notes thereto included in this Annual Report.
Results of Operations
2003 compared to 2002
Revenues
Total revenue in 2003 was $42.7 million, an increase of 11.8% compared
to 2002. Apartment related income (apartment rental income plus income from
apartment management and investment activities) accounted for 90.8% of our total
revenue in 2003 compared to 89.5% in 2002.
Apartment rental income in 2003 totaled $37.5 million, an increase of
13.9%, or $4.6 million, compared to 2002. This increase is attributable to
rental income at five apartment communities that we acquired during 2002 and
2003, which offsets a slight decline at other communities. On a same-units basis
(for the 3,681 units that we owned throughout all of both 2003 and 2002),
apartment rental income declined by 0.4% in 2003 compared to 2002.
On a same-units basis, average economic occupancy was 92.9% in 2003
compared to 92.8% in 2002, and average monthly revenue per occupied unit was
$727 in 2003 compared to $730 in 2002. In 2003, average economic occupancy for
all apartments was 92.8%, and average revenue per occupied unit was $725.
Restaurant rental income in 2003 totaled $3.9 million, a decline of
2.8% compared to 2002. The decrease in restaurant rental income is due to the
sale of two restaurant properties in 2003. We received the minimum rent
specified in the lease agreement throughout both years. Under our master lease
with Enterprises, restaurant rental income payments are the greater of specified
minimum rent or 9.875% of food sales. Minimum rent is set at approximately
$8,000 per month, or $96,000 per year, per restaurant property. We currently
hold 40 restaurant properties under this lease, and minimum rent is currently
set at approximately $319,000 per month, or $3.8 million per year.
Same-stores sales (for the 40 restaurants that were open throughout all
of both 2003 and 2002) increased by 2.4% in 2003 compared to 2002. Sales at
these stores would have to increase by approximately 10% before we would receive
rent exceeding the minimum rent. We do not expect restaurant rental income to
exceed the minimum rent in 2004.
In late 2003, we began to see improvements in both apartment rental
income and in sales at our restaurant properties, which we discussed in Part I,
Item 1. Business - Recent Developments of this Annual Report.
Management fee income in 2003 totaled $873,000, a decline of 20.3%
compared to 2002. This decrease is attributable to our acquisition of two
previously managed properties in May 2002, as well as the termination of
management contracts for several smaller properties in the first quarter of
2003. We do not expect any significant increase in management fee income in
2004.
16
Interest and other income totaled $404,000 in 2003 compared to $158,000
in 2002. This comparison reflects the impact of non-routine income totaling
approximately $300,000 offsetting a decline in interest income during 2003.
Expenses
Total expenses, including non-cash charges for depreciation and
amortization, in 2003 were $42.7 million, an increase of $6.l million, or 16.6%,
compared to 2002.
Apartment operations expense totaled $15.5 million in 2003, an increase
of 21.9%, or $2.8 million, compared to 2002. This increase is primarily
attributable to the addition of five apartment communities during 2002 and 2003.
On a same-units basis, apartment operations expense increased by 4.2% in 2003
compared to 2002, reflecting higher costs for compensation, contracted services,
and turnover costs.
Apartment operations expense includes only direct costs of on-site
operations. Apartment operations expense in 2003 represented 41.2% of related
apartment rental income, compared to 38.6% in 2002.
We incur no operating expenses for restaurant properties because the
triple-net lease arrangement requires the lessee to pay virtually all costs and
expenses associated with the restaurant properties.
Apartment administration expense (the costs associated with oversight,
accounting, and support of our apartment management activities for both owned
and third-party properties) totaled $1.7 million in 2003, an increase of 25.4%
compared to 2002. Corporate administration expense totaled $2.2 million in 2003,
an increase of 10.1% compared to 2002. These increases reflect the impact of
additional executive and corporate support staff and related compensation and
increased corporate insurance and software costs.
Interest expense totaled $13.0 million in 2003, an increase of 13.5%,
or $1.5 million, compared to 2002. This increase reflects the impact of
approximately $69 million in new debt related to apartment acquisitions since
June 2002, offset by the effect of lower interest rates on our variable-rate
debt. In part because of favorable variable interest rates, we financed the
acquisition of The Harrington apartments with a variable-rate loan in August
2003. Variable interest rates have declined approximately 0.3% during 2003.
Overall, weighted average interest rates were 5.9% in 2003, compared to 6.2% in
2002.
Depreciation expense totaled $10.0 million, an increase of 14.2%, or
$1.2 million, compared to 2002. This increase is attributable to the addition of
five apartment communities in 2002 and 2003, as well as the impact of additions
and replacements at other apartment communities. We have generally assigned
shorter lives to those specifically identifiable additions and replacement
assets than the composite lives initially assigned at acquisition.
Amortization expense (of deferred financing costs) totaled $322,000 in
2003, compared to $256,000 in 2002.
Net income
Operating Partnership earnings before non-cash charges for depreciation
and amortization totaled $10.3 million, a decrease of 3.5% compared to 2002.
After including these non-cash charges, the Operating Partnership loss in 2003
was $66,000, compared to Operating Partnership net income of $1.5 million in
2002. The minority interest in Operating Partnership earnings absorbed $174,000
of the loss in 2003, compared to $279,000 of earnings in 2002.
Net income (before deduction for cumulative preferred dividend) was
$107,000 in 2003, compared to $1.2 million in 2002.
17
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. In September 2003, we issued 454,545 shares of cumulative
preferred stock, which doubled the number of preferred shares outstanding. The
cumulative preferred dividend totaled approximately $661,000 for 2003, compared
to $323,000 for 2002. The dividend on the Series B shares is $1.10 per year per
share. The total cumulative preferred dividend will increase to $1,000,000 for
2004 for the 909,090 shares currently outstanding.
Loss available to common shareholders in 2003 was $553,000, or $.09 on
a diluted per share basis, compared to income available to common shareholders
in 2002 of $925,000, or $0.16 on a diluted per share basis.
These comparisons reflect the impact of declining margins in apartment
operations and the increased cumulative preferred dividend in 2003, offset
somewhat by the favorable impact of lower interest rates.
2002 compared to 2001
Reclassifications
In January 2003, we adopted FAS 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
FAS 145 generally requires gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations, rather than as
extraordinary items as previously required under FAS 4. We have reclassified the
extraordinary items for loss on early extinguishment of debt in 2002 and 2001 to
conform to FAS 145. While adoption of FAS 145 has no impact on net income, it
increases total expenses, reduces income before extraordinary items and
eliminates those extraordinary items as previously reported. We have adjusted
the 2002 and 2001 comparative amounts in our consolidated financial statements,
and in this discussion, to conform to the 2003 presentation.
Revenues
Total revenue in 2002 was $38.2 million, an increase of 5.2% compared
to 2001. Apartment related income accounted for 89.5% of our total revenue in
2002 compared to 88.8% in 2001.
Apartment rental income in 2002 totaled $32.9 million, an increase of
6.6%, or $2.0 million, compared to 2001. This increase is attributable to $3.0
million in rental income at three apartment communities that we acquired during
2002, which offsets declines at other communities. On a same-units basis (for
the 3,681 units that we owned throughout all of both 2001 and 2002), apartment
rental income declined by 3.0% in 2002 compared to 2001.
On a same-units basis, average economic occupancy was 92.8% in 2002
compared to 93.9% in 2001, and average monthly revenue per occupied apartment
was $730 in 2002 compared to $744 in 2001. In 2002, average economic occupancy
for all apartments was 92.8%, and average revenue per occupied apartment was
$733.
Restaurant rental income in 2002 totaled $4.0 million, a decline of
0.8% compared to 2001. The decrease in restaurant rental income is due to the
sale of one restaurant property in April 2001. Restaurant rental income during
both 2002 and 2001 was the minimum rent specified in the lease agreement.
Same-stores sales (for the 42 restaurants that were open throughout all
of both 2002 and 2001) declined by 2.6% in 2002 compared to 2001.
Management fee income in 2002 totaled $1.1 million, a significant
increase compared to $0.5 million in 2001. This increase is attributable to a
significant increase in the number of managed properties
18
in the fourth quarter of 2001 and early 2002, offset somewhat by the impact of
our acquisition of two of those properties in May 2002.
Interest and other income totaled $158,000 in 2002 compared to $813,000
in 2001. This comparison reflects the impact of non-routine income totaling
approximately $560,000 in 2001, as well as a decline in interest income during
2002.
Expenses
Total expenses, including non-cash charges for depreciation and
amortization, in 2002 were $36.6 million, an increase of $2.8 million, or 8.4%,
compared to 2001.
Apartment operations expense totaled $12.7 million in 2002, an increase
of 13.4%, or $1.5 million, compared to 2001. This increase is primarily
attributable to the addition of three apartment communities during 2002. On a
same-units basis, apartment operations expense increased by 3.7% in 2002
compared to 2001, reflecting the impact of higher costs for property insurance,
along with higher costs associated with marketing and maintenance.
Apartment operations expense includes only direct costs of on-site
operations. Apartment operations expense in 2002 represented 38.6% of related
apartment rental income, compared to 36.2% in 2001.
We incur no operating expenses for restaurant properties, because the
triple-net lease arrangement requires the lessee to pay virtually all the costs
and expenses associated with the restaurant properties.
Apartment administration expense totaled $1.4 million in 2002, an
increase of 23.3% compared to 2001. This increase is primarily attributable to a
significant increase in the number of managed properties in the fourth quarter
of 2001 and early 2002.
Corporate administration expense totaled $2.0 million in 2002, an
increase of 7.8% compared to 2001. This increase is primarily attributable to
executive bonuses paid in the fourth quarter of 2002 along with the cost of an
executive compensation study conducted during 2002.
Interest expense totaled $11.5 million in 2002, an increase of 3.2%
compared to 2001. This increase reflects the impact of approximately $49 million
in new debt related to apartment acquisitions in the second and third quarters
of 2002, offset by the effect of lower interest rates on our lines of credit and
the impact of refinancing two fixed-rate loans at lower rates during 2001 and
early 2002. Variable interest rates have declined approximately 0.5% during
2002. Overall, weighted average interest rates were 6.2% in 2002, compared to
6.8% in 2001.
Depreciation expense totaled $8.8 million in 2002, an increase of
12.3%, or $1.0 million, compared to 2001. This increase is primarily
attributable to the addition of three apartment communities in 2002, as well as
the impact of additions and replacements at other apartment communities.
Amortization expense totaled $256,000 in 2002, compared to $596,000 in
2001. Effective January 1, 2002, in accordance with current accounting guidance,
we no longer amortized the intangible related to our 1994 acquisition of
management operations. Amortization expense for this asset was approximately
$406,000 in 2001.
In conjunction with the refinancing of long-term debt, we wrote off
unamortized loan costs of $95,000 in 2002 and $129,000 in 2001. As discussed
above, we have classified these expenses as charges to operating expenses rather
than as extraordinary items, net of minority interests' share, as previously
reported.
19
Net income
Operating Partnership earnings before non-cash charges for
depreciation, amortization, and write-off of deferred financing costs totaled
$10.7 million, a 3.2% decrease compared to 2001. After including these non-cash
charges, the Operating Partnership net income in 2002 was $1.5 million, compared
to $2.5 million in 2001. The minority interest in Operating Partnership earnings
totaled $279,000 in 2002, compared to $567,000 in 2001.
Net income (before deduction for cumulative preferred dividend) was
$1.2 million in 2002, compared to $1.9 million in 2001.
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. The cumulative preferred dividend totaled
approximately $323,000 for 2002, compared to $3,000 for four days in the fourth
quarter of 2001.
Income available to common shareholders in 2002 was $925,000, or $0.16
on a diluted per share basis, compared to income available to common
shareholders in 2001 of $1.9 million, or $0.33 on a diluted per share basis.
These comparisons reflect the impact of declining margins in apartment
operations, the increased cumulative preferred dividend in 2002, and the effect
of non-routine and non-recurring revenues during 2001, offset somewhat by the
favorable impact of lower interest rates and the effect of discontinuing
amortization of the intangible related to management operations.
Funds from Operations
Funds from operations and funds available for distribution are defined
in footnote 2 on page 14. You should read and understand that footnote before
reviewing the following discussion.
We calculated FFO as follows (all amounts in thousands):
2003 2002 2001
--------------- -------------- --------------
(Restated) (Restated)
(Loss) income before minority interest $ (66) $ 1,527 $ 2,470
Cumulative preferred dividend (661) (323) (3)
Depreciation 10,040 8,794 7,828
Amortization of management intangible - - 406
--------------- -------------- --------------
Funds from operations $ 9,313 $ 9,998 $10,702
=============== ============== ==============
A reconciliation of FFO to FAD follows (all amounts in thousands):
2003 2002 2001
--------------- -------------- --------------
(Restated) (Restated)
Funds from operations $ 9,313 $ 9,998 $10,702
Amortization of loan costs 322 256 189
Write-off of unamortized loan costs at refinance - 95 129
Recurring capital expenditures (1,731) (1,484) (1,324)
--------------- -------------- --------------
Funds available for distribution $ 7,904 $ 8,865 $ 9,696
=============== ============== ==============
20
Other information about our historical cash flows follows (all amounts
in thousands):
2003 2002 2001
--------------- -------------- --------------
Net cash provided by (used in)
Operating activities $ 9,807 $ 9,984 $ 10,729
Investing activities (25,488) (32,535) (2,401)
Financing activities 15,361 22,018 (7,966)
Dividends and distributions paid to
Preferred shareholder $ 537 $ 200 $ -
Common shareholders 5,859 7,163 7,082
Minority unitholders in Operating Partnership 1,845 2,171 2,116
Scheduled debt principal payments $ 1,172 $ 417 $ 348
Non-recurring capital expenditures
Acquisition improvements and replacements $ 1,053 $ 860 $ 936
Apartment property additions and betterments 565 387 553
Weighted average Preferred B shares outstanding 601 293 2
Weighted average common shares outstanding 5,868 5,787 5,717
Weighted average Operating Partnership
minority units outstanding 1,843 1,786 1,706
Funds from operations in 2003 (before deduction for minority interest)
totaled $9.3 million, a decrease of 6.9% compared to 2002. Funds from operations
in 2002 totaled $10.0 million, a decrease of 6.6%, compared to $10.7 million in
2001. These comparisons are primarily attributable to the impact of declining
margins in apartment operations.
Funds available for distribution totaled $7.9 million in 2003, a
decrease of 10.8% compared to 2002. Funds available for distribution totaled
$8.9 million in 2002, a decrease of 8.6% compared to $9.7 million in 2001. The
variance in comparison of FAD and FFO reflects the impact of recurring capital
expenditures for operating replacements and major capital replacements at our
older communities. Recurring capital expenditures averaged $374 per apartment
unit in 2003, $369 per apartment unit in 2002, and $360 per apartment unit in
2001.
Capital Resources and Liquidity
Capital Resources
We intend to pursue our growth strategy through the utilization of our
flexible capital structure. This may include the issuance of Operating
Partnership units, common stock and/or preferred stock, additional debt, and
joint venture investments. We may use our lines of credit or variable- and
fixed-rate, long-term debt to acquire and refinance apartment communities.
Long-term Debt
As of December 31, 2003, all of our properties were encumbered by or
served as collateral for debt. As of December 31, 2003, total long-term debt was
$229.7 million, including $168.3 million at fixed interest rates ranging from
5.13% to 8.55%, and $61.4 million at variable rates indexed on 30-day LIBOR
rates. The weighted average interest rate on debt outstanding at December 31,
2003, was 5.8%, compared to 6.1% at December 31, 2002. This reduction is
primarily due to declines in variable rates during 2003. 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 $625,000.
21
In December 2003, we modified and extended our previously established
line of credit with a bank secured by our restaurant properties. Previously, in
December 2002, we modified and expanded our previously established revolving
line of credit with a bank secured by Latitudes Apartments; we were able to
increase this line based on the lender's estimate of the appreciated fair market
value of the property. Our line of credit arrangements are now as follows:
o $25.9 million, secured by a deed of trust and assignment of rents of
Latitudes Apartments, due November 2004. Interest-only payments on the
outstanding balance are due monthly at a variable interest rate of
30-day LIBOR plus 1.75%. At December 31, 2003, the outstanding balance
on this line was $20.0 million, with approximately $5.9 million
available under this revolving line of credit.
o $16.3 million, secured by deeds of trust and assignments of rents of 40
restaurant properties, due January 2006. Interest-only payments on the
outstanding balance are due monthly at a variable interest rate of
30-day LIBOR plus 1.80%. The available line of credit declines to $15.5
million effective January 2005. At December 31, 2003, the outstanding
balance on this line was $16.3 million, the current maximum amount.
We utilized long-term debt, along with draws on our revolving line of
credit, to finance acquisitions of apartment communities in 2003 as follows:
o In August 2003, we acquired The Harrington Apartments for a total cost
of approximately $17.9 million. We financed this acquisition with a
$14.4 million variable-rate note payable, secured by a deed of trust on
the community, and draws on our line of credit secured by Latitudes
Apartments.
o In March 2003, we acquired The Place Apartments for a total cost of
approximately $5.6 million. We financed this acquisition with a $4.6
million fixed-rate note payable, secured by a deed of trust on the
community, and draws on our line of credit secured by Latitudes
Apartments.
We also utilized our revolving line of credit secured by Latitudes to
fund the required $833,000 reduction in our line of credit secured by restaurant
properties and to fund capital improvements at our apartment communities.
A summary of scheduled principal payments on long-term debt is included
in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and the
notes to the financial statements in this Annual Report. Significant scheduled
balloon payments include maturities of:
o our revolving line of credit secured by a deed of trust and assignment
of rents of Latitudes Apartments, due November 2004 (up to $25.9
million, $20.0 million outstanding at December 31, 2003);
o our deed of trust loan for Oak Hollow Apartments Phase 2, due December
2004 (up to $11.7 million for acquisition and renovation construction,
$10.7 million outstanding at December 31, 2003);
o our deed of trust loan for Harris Hill Apartments, due June 2005
($5.6 million outstanding at December 31, 2003);
o our line of credit secured by deeds of trust and assignments of rents
of our restaurant properties, due January 2006 ($16.3 million
outstanding at December 31, 2003);
o our deed of trust loans for five apartment communities due in 2007
totaling $47.8 million; and
o our deed of trust loans for six apartment communities due in 2008
totaling $50.6 million.
Our revolving line of credit secured by Latitudes Apartments and the
deed of trust loan for Oak Hollow Apartments Phase 2 expire in late 2004. Based
on our estimates of the underlying value of the properties securing these loans,
we expect to extend or refinance these loans.
22
Capital Stock and Operating Partnership Units
At December 31, 2003, we had approximately 5.9 million common shares
and approximately 909,000 preferred shares outstanding. In addition, there were
approximately 1.8 million Operating Partnership minority common units
outstanding.
In late December 2001, we issued 227,273 shares of Series B Cumulative
Convertible Preferred Stock for net proceeds of approximately $2.3 million. In
September 2002, we issued 227,272 shares of this preferred stock for net
proceeds of approximately $2.4 million; and in September 2003, we issued 454,545
shares of this preferred stock for net proceeds of approximately $4.9 million.
All of the Series B preferred stock is held by a single investor. The preferred
shares have a purchase price and liquidation preference of $11.00 per share, an
initial dividend yield of 10% through December 2009, and may be converted to our
common stock on a one-for-one basis, subject to adjustment, beginning in
December 2004. We applied the proceeds of the 2003 issue to reduce our revolving
line of credit secured by the Latitudes Apartments.
During 2003, we issued approximately 73,000 shares of our common stock
through our Dividend Reinvestment and Stock Purchase Plan for net proceeds of
approximately $800,000. We generally applied these proceeds to capital
expenditures at apartment communities. In addition, we issued approximately
3,000 shares of our common stock in non-cash transactions to redeem a like
number of Operating Partnership minority units.
On February 23, 2004, we issued 1,175,519 shares of our common stock at
a price of $11.75 per share to a number of institutional investors and mutual
funds pursuant to a private placement for a total purchase price of $13,812,000.
Cohen & Steers Capital Advisors, LLC acted as placement agent for the
transaction. We expect to use the net proceeds to fund future acquisitions,
repay bank debt, and for general corporate purposes. We will immediately apply
approximately $13.0 million of the net proceeds to reduce our revolving line of
credit secured by Latitudes Apartments.
All of the Operating Partnership units held by minority interest owners
were issued in 1997 through 2002 in conjunction with acquisitions of apartment
communities. Holders of Operating Partnership units generally are able to redeem
their units for cash or, at our option, for shares of our common stock on a
one-for-one basis after one year from issuance.
Cash Flows and Liquidity
Net cash flows from operating activities were $9.8 million in 2003,
$10.0 million in 2002, and $10.7 million in 2001. Investing and financing
activities focused primarily on apartment acquisitions and capital expenditures
at apartment communities, along with payments of dividends and distributions.
We paid dividends to common shareholders of $0.25 per share per quarter
in each quarter of 2003, and $0.31 per share per quarter in each quarter of 2002
and 2001. Our payout ratio (the ratio of common dividends plus distributions
paid, divided by Operating Partnership funds from operations) was 82.5% in 2003,
93.4% in 2002, and 86.0% in 2001. We intend to pay dividends quarterly, expect
that these dividends will substantially exceed the 90% distribution requirement
for REITs, and anticipate that all dividends will be paid from current funds
from operations.
We generally expect to meet our short-term liquidity requirements
through net cash provided by operations and utilization of credit facilities. We
believe that net cash provided by operations is, and will continue to be,
adequate to meet the REIT operating requirements in both the short- and the long
term. We anticipate funding our future acquisition activities primarily by using
short-term credit facilities as an interim measure, to be replaced by funds from
equity offerings, long-term debt, or joint venture investments. We expect to
meet our long-term liquidity requirements, such as scheduled debt maturities and
repayment of short-term financing of possible property acquisitions, through
long-term secured and
23
unsecured borrowings and the issuance of debt securities or additional equity
securities. We believe we have sufficient resources to meet our short-term
liquidity requirements.
We received approximately 9.2% of our revenue in 2003, 10.5% of our
revenue in 2002, and 11.2% of our revenue in 2001, from rent received from
Enterprises for the use of our restaurant properties. In addition, Enterprises
is responsible for all of the costs associated with the maintenance and
operations of these properties. Over time, we expect that restaurant rental
income will continue to represent a decreasing percentage of our total revenue.
Enterprises is a privately owned company with total assets exceeding
$200 million and net equity exceeding $80 million. Its principal line of
business is the operation of approximately 317 Hardee's restaurants. In addition
to its Hardee's operations, Enterprises is the owner of Texas Steakhouse and
Saloon, a casual dining concept with 29 restaurants. Enterprises also conducts
extensive real estate investment and development activities through BNE Land and
Development. These activities involve a full range of property types, including
land, commercial, retail, office, apartment and single-family properties. We
have had extensive discussions with management of Enterprises and have reviewed
their financial statements, cash flow analysis, restaurant contribution
analysis, sales trend analysis and forecasts. We believe that Enterprises will
have sufficient liquidity and capital resources to meet its obligations under
the master lease as well as its general corporate operating needs.
Critical Accounting Policies
Our significant accounting policies are identified and discussed in the
notes to our financial statements included in this Annual Report. Those policies
that may be of particular interest to readers of this Annual Report are further
discussed below.
Capital expenditures and depreciation
In general, for 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 the five apartment properties acquired after 2001, we performed
detailed analyses of components of the real estate assets acquired. For these
properties, we assigned estimated useful lives as follows: base building
structure, 45-60 years; land improvements, 7-20 years; short-lived building
components, 5-20 years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition. We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize recurring capital expenditures for exterior
painting, roofing, and other major maintenance projects that substantially
extend the useful life of existing assets. For financial reporting purposes, we
depreciate these additions and replacements on a straight-line basis over
estimated useful lives of 5-20 years. We retire replaced assets with a charge to
depreciation for any remaining carrying value. We capitalize all floor covering,
appliance, and HVAC replacements, and depreciate them using a straight-line,
group method over estimated useful lives of 5-10 years.
Capital expenditures at our apartment communities during 2003 totaled
approximately $3.3 million, including $1.0 million for acquisition improvements,
$0.6 million for additions and betterments, and $1.7 million in recurring
capital expenditures.
24
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during 2003
totaled approximately $5.6 million, including $2.1 million in compensation of
service staff and $3.5 million in payments for materials and contracted
services.
Costs of repairs, maintenance, and capital replacements and
improvements at restaurant properties are borne by the lessee.
Impairment of long-lived assets
In accordance with FAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," we periodically review our real estate assets to
determine whether our carrying amount will be recovered from their undiscounted
future operating cash flows. If the carrying value were to be greater than the
undiscounted future operating cash flows, we would recognize an impairment loss
to the extent the carrying amount is not recoverable. Our estimates of the
undiscounted future operating cash flows expected to be generated are based on a
number of assumptions that are subject to economic and market uncertainties,
including, among others, demand for apartment units, competition for tenants,
changes in market rental rates, and costs to operate each property. As these
factors are difficult to predict and are subject to future events that may alter
our assumptions, the undiscounted future operating cash flows that we estimate
in our impairment analyses may not be achieved, and it is possible that we could
be required to recognize impairment losses on our properties at some point in
the future.
Valuation of leases in place at property acquisitions
We calculate an estimate of the value of leases in place at the dates
of property acquisitions to determine if we should allocate a portion of the
purchase price to an intangible asset for the value of these leases. In
preparing this calculation, we consider the estimated costs to make an apartment
unit rent ready (frequently called turnover costs), the estimated costs and lost
income associated with executing a new lease on an apartment unit, and the
remaining terms of leases in place, and we compared rental rates on leases in
place to our estimate of prevailing market rates in the neighborhood of the
acquired property.
Based on our analyses for the two apartment properties that we acquired
in 2003, we determined that the net value of leases in place at the dates of
acquisition was insignificant to the acquisition costs, and we did not record
any intangible asset for leases in place. This result is primarily due to the
relatively short-term nature of apartment leases, the regular pattern of
turnover of apartment leases, and the relatively gradual movement of prevailing
rental rates in the respective neighborhoods. We plan to prepare similar
calculations in conjunction with future property acquisitions.
Revenue recognition
We record rental and other income monthly as it is earned. We record
rental payments that we receive prior to the first of a given month as prepaid
rent. We hold tenant security deposits in trust in bank accounts separate from
operating cash (these amounts are included in other current assets on our
balance sheet), and we record a corresponding liability for security deposits on
our balance sheet.
Inflation
We do not believe that inflation poses a material risk to the company.
The leases at our apartment properties are short term in nature. None are longer
than two years. The restaurant properties are leased on a triple-net basis,
which places the risk of rising operating and maintenance costs on the lessee.
Environmental Matters
Phase I environmental studies performed on the apartment communities
when we acquired each of them did not identify any problems that we believe
would have a material adverse effect on our results of operations, liquidity or
capital resources. Environmental transaction screens for each of the restaurant
25
properties in 1995 did not indicate existence of any environmental problems that
warranted further investigation. Enterprises has indemnified us under the master
lease for environmental problems associated with the restaurant properties.
Additional Information
We provide the following information to analysts and other members of
the financial community for use in their detailed analysis. This information has
not been included in our Annual Report to Shareholders.
A summary of capital expenditures, in aggregate and per apartment unit,
follows:
2003 2002 2001
Total Per unit Total Per unit Total Per unit
--------- ----------- ---------- ------------ --------- ------------
(000's) (000's) (000's)
Recurring capital expenditures:
Floor coverings $ 772 $167 $ 593 $148 $ 662 $180
Appliances/HVAC 256 55 212 53 197 54
Exterior paint 183 39 182 45 - -
Computer/support equipment 85 18 102 25 54 15
Other 436 94 396 98 411 112
--------- ----------- ---------- ------------ --------- ------------
$1,731 $374 $1,484 $369 $1,324 $360
========= =========== ========== ============ ========= ============
Non-recurring capital
expenditures:
Acquisition improvements $1,053 $ 861 $ 936
Additions and betterments 508 303 502
Computer/support equipment 57 84 50
--------- ---------- --------
$1,619 $1,248 $1,489
========= ========== =========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A summary of long-term debt as of December 31, 2003 and 2002 is
included in the notes to the financial statements in this Annual Report. At
December 31, 2003, long-term debt totaled $229.7 million, including $168.3
million notes payable at fixed interest rates ranging from 5.13% to 8.55%, and
$61.4 million at variable rates indexed on 30-day LIBOR rates. The weighted
average interest rate on debt outstanding was 5.8% at December 31, 2003, 6.1% at
December 31, 2002, and 6.2% at December 31, 2001. At our current level of
variable-rate debt, a 1% change in variable interest rates would increase or
decrease our annual interest expense by approximately $625,000.
The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on those instruments (all amounts in thousands):
Expected maturity dates
2004 2005 2006 2007 2008 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 986 $ 6,485 $ 992 $48,881 $37,674 $73,260 $168,279
Average interest rate 6.84% 8.27% 6.62% 6.96% 6.58% 6.70% 6.81%
Variable rate notes $ 30,720 $ 833 $15,560 $ 310 $14,013 $ - $ 61,435
Average interest rate 2.95% 2.96% 2.96% 2.91% 2.91% 2.94%
26
We estimate the fair value of fixed rate and variable rate notes using
discounted cash flow analysis, based on our current incremental borrowing rates
for similar types of borrowing arrangements. The fair value of our notes payable
at December 31, 2003, totaled approximately $242 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item
15(a) and filed as part of this Annual Report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 Securities and
Exchange Commission's rules and forms. In addition, we designed these disclosure
controls and procedures to ensure that this information is accumulated and
communicated to our management, including our chief executive officer (our
"CEO") and chief financial officer (our "CFO"), to allow timely decisions
regarding required disclosure. SEC rules require that we disclose the
conclusions of our CEO and CFO about the effectiveness of our disclosure
controls and procedures.
We do not expect that our disclosure controls and procedures will
prevent all error or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitation in a cost-effective control system,
misstatements due to error or fraud could occur and not be detected.
We evaluate the effectiveness of our disclosure controls and procedures
as of the end of each fiscal quarter. Based on our most recent evaluation, our
CEO and CFO believe, and have certified, that our disclosure controls and
procedures are effective to (1) ensure that material information relating to us
and our consolidated subsidiaries is made known to management, including the CEO
and CFO, particularly during the period when our periodic reports are being
prepared, and (2) provide reasonable assurance that our financial statements
fairly present in all material respects our financial condition and results of
operations.
Since the date of this most recent evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect the internal controls subsequent to the date we completed
our evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors hold office for the terms described below or
until their successors are elected and qualified. The current members of our
Board of Directors are identified in the following table, followed by
biographical information on each member.
27
Name Age Position Director Since
- ---------------------------- ---------- ------------------------------------------------ -------------------
Directors serving until the 2004 annual meeting:
Philip S. Payne 52 Chairman, Treasurer, Chief Financial Officer December 1997
Stephen R. Blank 58 Director May 1999
Peter J. Weidhorn 56 Series B Director December 2001
Directors serving until the 2005 annual meeting:
D. Scott Wilkerson 46 Director, President, Chief Executive Officer December 1997
Paul G. Chrysson 49 Director December 1997
Directors serving until the 2006 annual meeting:
B. Mayo Boddie 74 Director, Chairman Emeritus April 1987
W. Michael Gilley 48 Director December 1997
Philip S. Payne - Chairman of the Board of Directors, Treasurer, Chief Financial
Officer. Mr. Payne joined BT Venture Corporation, which was subsequently
purchased by the company, in 1990 as Vice President of Capital Markets
Activities and became Executive Vice President and Chief Financial Officer in
January 1993. He was named Treasurer in April 1995 and a Director in December
1997. In January 2004, Mr. Payne was named Chairman of the Board of Directors
and continues in his role as Chief Financial Officer. From 1987 to 1990, he was
a principal in Payne Knowles Investment Group, a financial planning firm. From
1983 to 1987, he was a registered representative with Legg Mason Wood Walker.
From 1978 to 1983, Mr. Payne practiced law, and he currently maintains his
license to practice law in Virginia. He received a BS degree from the College of
William and Mary in 1973 and a JD degree in 1978 from the same institution. He
is a member of the board of directors of the National Multi Housing Council and
is a member of the Urban Land Institute (Multi Family Council - Gold). In
addition, he serves on the board of directors of Ashford Hospitality Trust, a
REIT focused on the hospitality industry.
D. Scott Wilkerson - Director, President, Chief Executive Officer. Mr. Wilkerson
joined BT Venture Corporation, which was subsequently purchased by the company,
in 1987 and served in various officer-level positions, including Vice President
of Administration and Finance and Vice President for Acquisitions and
Development before becoming President in January 1994. He was named Chief
Executive Officer in April 1995 and a Director in December 1997. From 1980 to
1986, Mr. Wilkerson was with Arthur Andersen LLP in Charlotte, North Carolina,
serving as tax manager from 1985 to 1986. His specialization was in the
representation of real estate investors, developers and management companies.
Mr. Wilkerson received a BS degree in accounting from the University of North
Carolina at Charlotte in 1980. He is a certified public accountant and licensed
real estate broker. He serves on the boards of directors of the National Multi
Housing Council, the National Apartment Association and the Apartment
Association of North Carolina, and is a past president of the Charlotte
Apartment Association. He is active in various professional, civic and
charitable activities.
Stephen R. Blank - Director. Mr. Blank is a Senior Fellow, Finance, with the
Urban Land Institute, and an Adjunct Professor at the Columbia University
Graduate School of Business. From 1993 to 1998, he was the Managing Director for
Real Estate Investment Banking with CIBC Oppenheimer Corp. He is an independent
trustee of Ramco-Gershenson Properties Trust and Atlantic Realty Trust, and
serves on the boards of directors of WestCoast Hospitality Corporation and MFA
Mortgage Investments, Inc. In addition, he serves as a member of the board of
advisors of Paloma, LLC, the principal investor in a private multifamily real
estate investment trust. Mr. Blank serves as the chair of the audit committees
for both Ramco-Gershenson Properties Trust and MFA Mortgage Investments, Inc. He
has over 20 years experience as a senior real estate investment banking officer,
advising and evaluating a wide array of real estate companies, including
publicly reporting companies.
B. Mayo Boddie - Director, Chairman Emeritus. Mr. Boddie was one of our founders
and a co-founder of Boddie-Noell Enterprises, Inc. ("Enterprises") in 1961. He
serves as Chairman of the Board of Directors of Enterprises. In January 2004,
Mr. Boddie retired from his position as Chairman of the Board of Directors
28
of the company. He was named Chairman Emeritus in recognition of his long and
distinguished service to the company. He served as Chairman of our Board from
the company's inception until January 2004, and as Chief Executive Officer from
inception until April 1995.
Paul G. Chrysson - Director. Mr. Chrysson is President of C.B. Development
Company, Inc., a developer of single-family and multi-family residential
properties. Mr. Chrysson is a member of the Board of Advisors of Wachovia Bank
(Forsyth County). He is a former director of Triad Bank and United Carolina Bank
(North Carolina) and has served on the boards of various charitable
organizations. He has been a licensed real estate broker since 1974 and has been
actively involved in construction since 1978.
W. Michael Gilley - Director. Mr. Gilley is a private real estate investor and
developer of single-family and multi-family residential properties. From January
1995 to January 1997, he was Executive Vice President of Greenbriar Corporation.
He also served on their board of directors from September 1994 to September
1996. He has been a licensed real estate broker since 1984.
Peter J. Weidhorn - Series B Director. Mr. Weidhorn is a consultant and private
real estate investor in the multi-family housing market. From 1998 to 2000, he
was Chairman of the Board, President and Director of WNY Group, Inc., a real
estate investment trust that owned and operated 8,000 apartment units throughout
New Jersey, Pennsylvania, Delaware and Maryland prior to its sale to the Kushner
Companies. From 1981 to 1998, he was President of WNY Management Corp. Mr.
Weidhorn serves on the boards of directors of Monmouth Real Estate Investment
Corporation and The Community Development Trust, and is immediate past president
of the New Jersey Apartment Association. Mr. Weidhorn currently serves as the
chair of the audit committee of Monmouth Real Estate Investment Corporation and
as a member of the audit committee of The Community Development Trust. He has
over 30 years of experience in the management, acquisition, and financing of
commercial real estate. Mr. Weidhorn is a certified public accountant
(inactive). He is active in various professional, civic and charitable
activities.
Information about our executive officers is included in Part I, Item X.
Executive Officers of the Registrant, in this Annual Report.
Audit Committee Financial Experts
The members of our Audit Committee are Messrs. Blank, Gilley, and
Weidhorn. Our Board of Directors has determined that Messrs. Blank and Weidhorn
qualify as "audit committee financial experts" as defined by SEC regulations.
All three members are considered "independent" as defined by SEC regulations,
and "financially literate" under the rules of the American Stock Exchange.
Messrs. Blank's and Weidhorn's relevant experience is described above in the
biographical information for each.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of the forms in its possession,
and on written representations from certain reporting persons, the company
believes that during 2003 all of its executive officers and directors filed the
reports required under Section 16(a) on a timely basis, except that B. Mayo
Boddie failed to file timely one Form 4 covering one transaction.
Code of Ethics
Our Board of Directors has adopted a Code of Conduct and Business
Ethics that is applicable to all directors, officers and employees of the
company. You may obtain a copy of this document free of charge by mailing a
written request to: Investor Relations, BNP Residential Properties, Inc., 301
South College Street, Suite 3850, Charlotte, NC 28202, or by sending an email
request to: investor.relations@bnp-residential.com.
29
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following tables provide information regarding the annual and
long-term compensation of our chief executive officer, and the other most highly
paid executive officers whose total salary and bonus exceeded $100,000 in 2003.
We refer to them as the "named executive officers."
Annual Compensation
-------------------------------
Name and Principal Position Year Salary Bonus
- ----------------------------------------------------------------------------------------------------------
D. Scott Wilkerson, President, 2003 $225,000 $ 0
Chief Executive Officer 2002 200,000 25,000
2001 200,000 0
Philip S. Payne, Chairman of the Board of Directors, 2003 $225,000 $ 0
Treasurer, Chief Financial Officer 2002 200,000 25,000
2001 200,000 0
Eric S. Rohm, Vice President, 2003 $140,000 $ -
General Counsel, Assistant Secretary
Pamela B. Bruno, Vice President, 2003 $136,250 $ 18,750
Chief Accounting Officer, Assistant Secretary 2002 125,000 0
2001 125,000 0
No options were granted or exercised during the year ended December 31,
2003. At December 31, 2003, the values of options granted to named executive
officers are as follows:
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ------------------------------------------------------------------------------------------------------------
D. Scott Wilkerson 150,000 - - -
Philip S. Payne 150,000 - - -
Pamela B. Bruno 40,000 - - -
(1) Based on the closing price of $10.61 per share of common stock on December 31, 2003.
We do not have a long-term incentive plan in place.
Compensation of Directors
During 2003, we paid directors' fees to each director who is not an
executive officer of the company. During the year ended December 31, 2003,
Messrs. Blank, Boddie, Chrysson, Gilley, and Weidhorn were each paid annual
retainers of $10,000 plus fees totaling $3,400 each for participation in board
meetings. In addition, Messrs. Blank, Gilley and Weidhorn each received
approximately $200 for participation in Audit Committee meetings. Messrs.
Wilkerson and Payne did not receive any compensation for their service as
directors.
30
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In July 1997, we entered into substantially identical employment
agreements with D. Scott Wilkerson (President and Chief Executive Officer) and
Philip S. Payne (Treasurer and Chief Financial Officer). The term of the
agreements is four years, subject to automatic annual renewal for additional
one-year periods extending the term to a maximum of ten years. The agreements
provide for initial annual base salaries of $139,920, annual discretionary
bonuses as determined by the Board of Directors and participation in an
incentive compensation plan, along with specified death and disability benefits.
The agreements provide for severance payments equal to the then current base
salary for the remaining term of the contract (excluding any unexercised renewal
periods) in the event of termination without cause. In the event of a change in
control of the company, the agreements provide for payments of three times base
salary then in effect and three times average discretionary bonus and annual
bonus over the prior three fiscal years. In addition, the agreements provide for
a lump sum cash payment of the benefit the executive would otherwise have
received had all stock options and other stock based compensation been fully
vested, been exercised and become due and payable.
In July 1997, we entered into an employment agreement with Pamela B.
Bruno (Vice President, Chief Accounting Officer). The two-year agreement (with
automatic annual renewal periods) is substantially identical to the agreements
signed by Messrs. Wilkerson and Payne, except that this agreement provides for
an initial annual base salary of $90,000 and limits severance payments to no
more than the greater of the then-remaining term of the agreement or one year's
total compensation.
In December 2002, we entered into an employment agreement with Eric S.
Rohm (Vice President, General Counsel). The two-year agreement (with automatic
annual renewal periods) is substantially identical to the agreement signed by
Ms. Bruno, except that this agreement provides for an initial annual base salary
of $140,000.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are Messrs. Blank, Chrysson
and Weidhorn. All three members are considered "independent" as defined by SEC
regulations. Mr. Weidhorn is identified in Item 13. Certain Relationships and
Related Transactions in our discussion of "BNP Residential Properties, Inc. and
Preferred Investment I, LLC." Mr. Chrysson is identified in Item 13 in our
discussion of "BNP Residential Properties, Inc. and the Chrysson Parties."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan
We have reserved 570,000 shares of the company's common stock for
issuance under our employee Stock Option and Incentive Plan. Options have been
granted to employees at prices equal to the fair market value of the stock on
the dates the options were granted or repriced. Options are generally
exercisable in four annual installments beginning one year after the date of
grant, and expire ten years after the date of grant.
The following table provides summary information about securities to be
issued under our equity compensation plan. More detailed information is provided
in the notes to our financial statements