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, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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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
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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 X No __
The aggregate market value of the common stock held by non-affiliates of the
registrant at February 23, 2005, was approximately $144.2 million.
The number of shares of the registrant's common stock outstanding on February
23, 2005, was 9,101,667.
Index to exhibits at pate 82
BNP RESIDENTIAL PROPERTIES, INC.
TABLE OF CONTENTS
Item No. FINANCIAL INFORMATION Page No.
PART I
1 Business 3
2 Properties 5
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, Related Stockholder Matters and Issuer 11
Purchases of Equity Securities
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 27
8 Financial Statements and Supplementary Data 28
9 Changes in and Disagreements With Accountants on Accounting and Financial 28
Disclosure
9A Controls and Procedures 28
9B Other Information 30
PART III
10 Directors and Executive Officers of the Registrant 30
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners and Management 34
13 Certain Relationships and Related Transactions 36
14 Principal Accounting Fees and Services 37
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38
Signatures 41
PART I
ITEM 1. BUSINESS
Company Profile
BNP Residential Properties, Inc. is a self-administered and
self-managed real estate investment trust ("REIT") focused on owning and
operating apartment communities. We own and operate 25 apartment communities
containing a total of 6,113 apartments. We also provide third-party management
services for seven apartment communities containing a total of 1,799 apartments.
In January 2005, we acquired an economic interest in and became the general
partner of the entities owning three of the seven apartment communities for
which we provide management services. We have previously announced that we have
entered into contracts to acquire the remaining four managed apartment
communities. In addition to our apartment communities, we own 40 restaurant
properties that we lease on a triple-net basis to a restaurant operator under a
master lease. We currently operate in the states of North Carolina, South
Carolina and Virginia.
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 83% of the outstanding operating partnership common
units and 100% of the outstanding operating partnership preferred units.
As of February 23, 2005, we have 9,101,667 shares of common stock and
909,090 shares of preferred stock outstanding. We have 1,300 shareholders of
record. We estimate that there are 4,350 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 1,865,927 operating
partnership minority common units outstanding.
We have 220 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 consisted primarily of
3
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. ("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 2001, our Board of Directors authorized the issuance of
Series B Cumulative Convertible Preferred Stock. Between 2001 and 2003, we
issued a total of 909,090 shares of this preferred stock for proceeds of $10
million.
From 1993 through 2003, we acquired 21 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 2004, we raised $30 million of new equity through the issuance
of 2.6 million shares of common stock to a number of institutional investors and
mutual funds.
We continued to add to and improve our portfolio of apartment
properties with five acquisitions in 2004. Three of these acquisitions were
direct purchases (Carriage Club Apartments in Mooresville, North Carolina, the
Fairington Apartments in Charlotte, North Carolina, and Bridges at Southpoint
Apartments in Durham, North Carolina) and two were made through the issuance of
operating partnership units (Bridges at Wind River Apartments in Durham, North
Carolina, and Savannah Shores Apartments in Myrtle Beach, South Carolina). With
these acquisitions, we owned 25 apartment communities at December 31, 2004.
In December 2004, we entered into agreements to acquire a portfolio of
four apartment communities containing a total of 1,086 apartment units. We
expect to complete these acquisitions by the end of March 2005. We currently
manage these apartment communities on a contract basis.
In January 2005, we acquired Boddie Investment Company through a
merger. As a result of this acquisition, we have assumed the role of general
partner and acquired certain economic interests in three limited partnerships
(50% interest in Marina Shores Associates One Limited Partnership, 1% interest
in The Villages of Chapel Hill Limited Partnership, and 1% interest in The
Villages of Chapel Hill - Phase 5 Limited Partnership). Prior to this
acquisition, we managed the apartment communities owned by these partnerships on
a contract basis; we will continue to manage these properties.
4
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 the southeastern United
States. We focus on markets that exhibit substantial economic growth and an
expanding job base that provide opportunities for us to quickly build 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.
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 25 apartment
communities consisting of 6,113 apartment units. For the fourth quarter of 2004,
our average economic occupancy rate was 93.2%, and our average monthly revenue
per occupied unit was $744. The average age of the apartment communities is 11.9
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 38% one-bedroom units, 54%
two-bedroom units, and 8% three-bedroom units. The units average 1,007 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, 2004, our total investment, on a historical cost
basis, in our 25 apartment communities was $389.1 million, and the net carrying
value of our 25 apartment communities was $334.6
5
million (an average of $13.4 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 $3.8 million per
year.
The average acquisition cost of the original 47 restaurant properties
was $920,000 per property. The net carrying value of the 40 restaurant
properties held at December 31, 2004, was $25.5 million (an average of $637,000
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
6
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. of Rentable Unit Type Average
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
Carriage Club Mooresville, NC 268 2000 6/04 22.5 253,114 110 136 22 944
Chason Ridge Fayetteville, NC 252 1994 1/99 29.1 246,886 56 164 32 980
Fairington Charlotte, NC 250 1981 8/04 32.0 267,300 108 106 36 1,069
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
Savannah Shores Myrtle Beach, SC 198 1998 7/04 13.1 215,418 84 108 6 1,088
Southpoint Durham, NC 192 1987 9.04 14.5 176,352 132 60 - 919
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
Wind River Durham, NC 346 2000 5/04 29.4 391,120 128 153 65 1,130
Average
Average Economic Monthly Revenue
Occupancy Percent per Occupied Unit
(1)
Community Location 2004 2003 2002 2004 2003 2002
- ------------------- ------------------ - ------ ------- ------ ------ ------- ------
Abbington Place Greensboro, NC 94.2 90.9 93.2 $760 $764 $770
Allerton Place Greensboro, NC 94.8 91.4 92.6 790 745 769
Barrington Place Charlotte, NC 94.4 94.3 91.9 756 748 782
Brookford Place Winston-Salem, NC 97.0 95.1 93.4 679 667 690
Carriage Club Mooresville, NC 95.3 - - 743 - -
Chason Ridge Fayetteville, NC 96.4 96.6 96.1 797 753 717
Fairington Charlotte, NC 93.7 - - 708 - -
Harrington Charlotte, NC 93.8 92.0 - 747 739 -
Harris Hill Charlotte, NC 95.0 93.3 92.1 635 663 684
Latitudes Virginia Beach, VA 97.5 96.5 97.2 919 873 817
Madison Hall Clemmons, NC 94.0 94.2 93.9 600 578 598
Marina Waterfront Cornelius, NC 94.6 91.0 89.4 772 750 801
Oak Hollow Cary, NC 93.9 90.0 89.3 616 617 650
Oak Hollow Ph 2 Cary, NC 92.0 89.1 88.2 604 599 606
Oakbrook Charlotte, NC 94.6 91.9 90.6 698 709 763
Paces Commons Charlotte, NC 95.2 92.2 91.0 632 660 668
Paces Village Greensboro, NC 94.9 94.3 89.0 675 654 667
Pepperstone Greensboro, NC 96.3 93.8 95.4 668 655 681
Savannah Place Winston-Salem, NC 93.0 93.4 93.1 716 699 714
Savannah Shores Myrtle Beach, SC 92.7 - - 798 - -
Southpoint Durham, NC 91.3 - - 690 - -
Summerlyn Place Burlington, NC 94.3 93.5 94.5 826 832 802
The Place Greenville, SC 95.6 91.1 - 559 569 -
Waterford Place Greensboro, NC 95.1 91.8 94.7 883 852 850
Woods Edge Durham, NC 93.6 92.7 92.3 705 722 754
Wind River Durham, NC 86.1 - - 820 - -
(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
*operated as a "BBQ & Ribs." All other sites are operated as "Hardee's."
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 2004.
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 53 Chairman of the Board of Directors, October 1994
Chief Financial Officer
D. Scott Wilkerson 47 Director, President, Chief Executive Officer October 1994
Eric S. Rohm 35 Vice President, Secretary, General Counsel December 2002
Pamela B. Bruno 51 Vice President, Treasurer, Chief October 1994
Accounting Officer, Assistant Secretary
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, Secretary, General Counsel. Mr. Rohm
joined the company in December 2002 as Vice President and General Counsel, and
was named Secretary in May 2004. 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, Treasurer, 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. She was named Treasurer in May 2004. 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
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Our common stock is traded on the American Stock Exchange under the
symbol "BNP." There were 1,300 common shareholders of record and one preferred
shareholder on February 23, 2005. 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 23, 2005, the closing price of the company's common stock was $16.13
per share.
Dividends
Stock Price Paid
High Low Close Per Share
----------------- ----------------- ----------------- -----------------
2004:
Fourth quarter $ 16.20 $ 13.62 $ 16.10 $ 0.25
Third quarter 13.90 12.80 13.68 0.25
Second quarter 13.24 12.35 13.14 0.25
First quarter 13.35 11.50 13.17 0.25
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
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
On January 26, 2005, we acquired Boddie Investment Company ("BIC")
through a merger. Because of this merger, we succeeded BIC as the general
partner of, and acquired an economic interest in, three limited partnerships. As
consideration in the merger, we privately issued 508,578 shares of common stock
pursuant to the exemption provided by Section 4(2) of the Securities Act. We
issued those shares, which had a value on that date of $16.10 per share, to B.
Mayo Boddie and Nicholas B. Boddie. Upon closing the merger, we canceled 72,399
shares of our common stock that BIC held immediately before the merger. The
value of the transaction was $8.2 million based on the $16.10 per share value.
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.
11
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
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Operating data: (1)
Revenue:
Apartment rental income $ 45,808 $ 37,475 $ 32,890 $ 30,867 $ 29,269
Restaurant rental income 3,830 3,908 4,021 4,053 4,162
Other income 1,227 1,277 1,253 1,342 427
------------- -------------- ------------- -------------- -------------
Total revenue 50,865 42,660 38,164 36,262 33,858
Expenses:
Apartment operations 18,563 15,458 12,682 11,182 9,766
Administrative costs 4,520 3,907 3,358 2,956 2,391
Interest 14,608 13,000 11,452 11,100 11,151
Depreciation 11,660 10,040 8,794 7,828 7,156
Amortization (1) 375 322 256 596 579
Write-off of unamortized loan
costs at refinance 85 - 95 129 -
Costs of terminated
equity transaction - - - - 237
------------- -------------- ------------- -------------- -------------
Total expenses 49,810 42,727 36,637 33,792 31,280
------------- -------------- ------------- -------------- -------------
Income (loss) before
minority interest 1,055 (66) 1,527 2,470 2,578
Minority interest in
Operating Partnership 16 (174) 279 567 595
------------- -------------- ------------- -------------- -------------
Net income 1,039 107 1,248 1,902 1,983
Cumulative preferred dividend 1,000 661 323 3 -
------------- -------------- ------------- -------------- -------------
Income (loss) available to
common shareholders $ 39 $ (553) $ 925 $ 1,900 $ 1,983
============= ============== ============= ============== =============
Earnings per share,
basic and diluted -
Income (loss) available to
common shareholders $ 0.01 $ (0.09) $ 0.16 $ 0.33 $ 0.35
============= ============== ============= ============== =============
Dividends per common share $ 1.00 $ 1.00 $ 1.24 $ 1.24 $ 1.24
============= ============== ============= ============== =============
Balance Sheet data:
Real estate assets (before
accumulated depreciation)
Apartment communities $ 389,119 $ 299,661 $ 275,713 $ 221,589 $ 217,818
Restaurant properties 37,405 37,405 39,159 39,159 39,702
Real estate assets, net 360,071 281,014 265,423 219,997 224,705
Total assets 367,764 287,200 271,723 225,385 230,691
Total debt 286,425 229,714 211,585 162,330 163,612
Minority interest 14,394 15,895 17,947 18,174 19,737
Shareholders' equity 62,996 38,733 39,271 42,034 44,548
12
Year ended December 31
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
(in thousands, except per share and property data)
Apartment Properties data:
Apartment communities
owned at year end 25 20 18 15 15
Apartment units owned
at year end 6,113 4,859 4,427 3,681 3,680
Average apartment
economic occupancy 94.4% 92.8% 92.8% 93.9% 95.9%
Average monthly revenue
per occupied unit $ 737 $ 725 $ 733 $ 744 $ 737
Other data:
Earnings before interest, taxes,
depreciation and
amortization (2) $ 27,783 $ 23,295 $ 22,124 $ 22,123 $ 21,463
Funds from operations (2) 11,447 9,313 9,998 10,702 10,139
Funds available
for distribution (2) 9,988 7,904 8,865 9,696 9,243
Net cash provided by
(used in):
Operating activities (3) $ 12,677 $ 9,594 $ 10,118 $ 10,729 $ 10,854
Investing activities (3) (52,848) (25,275) (32,669) (2,401) (13,407)
Financing activities 40,123 15,361 22,018 (7,966) 3,177
Weighted average number of
shares and units outstanding:
Preferred B shares 909 601 293 2 -
Common shares 7,617 5,868 5,787 5,717 5,708
Operating partnership
minority units 1,856 1,843 1,786 1,706 1,711
(1) We adopted Statement of Financial Accounting Standards ("FAS") No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. After
December 31, 2001, we no longer amortize the intangible asset related to
our 1994 acquisition of management operations. Amortization expense
related to this intangible asset was $406,000 per year in 2001 and 2000.
(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):
13
Year ended December 31
2004 2003 2002 2001 2000
------------- -------------- ------------- -------------- -------------
Income (loss) before minority
interest $ 1,055 $ (66) $ 1,527 $ 2,470 $ 2,578
Interest 14,608 13,000 11,452 11,100 11,151
Depreciation 11,660 10,040 8,794 7,828 7,156
Amortization 375 322 256 596 579
Write-off of unamortized
loan costs 85 - 95 129 -
------------- -------------- ------------- -------------- -------------
Earnings before interest,
taxes, depreciation and
amortization $ 27,783 $ 23,295 $ 22,124 $ 22,123 $ 21,463
============= ============== ============= ============== =============
Funds from operations is frequently referred to as "FFO." FFO is defined
by the National Association of Real Estate Investment Trusts ("NAREIT") as
"net income (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures." Our calculation of FFO is consistent
with FFO as defined by NAREIT. Because we hold all of our assets in and
conduct all of our operations through the operating partnership, we
measure FFO at the operating partnership level (i.e., before minority
interest). Historical cost accounting for real estate assets implicitly
assumes that the value of real estate assets diminishes predictably over
time. In fact, real estate values have historically risen or fallen with
market conditions. FFO is intended to be a standard supplemental measure
of operating performance that excludes historical cost depreciation from -
or "adds it back" to - GAAP net income. We consider FFO to be useful in
evaluating potential property acquisitions and measuring operating
performance.
Funds available for distribution is frequently referred to as "FAD." We
calculate FAD as FFO plus non-cash expense for amortization and write-off
of unamortized loan costs, less recurring capital expenditures. We believe
that, together with net income and cash flows from operating activities,
FAD provides investors with an additional measure to evaluate the ability
of the operating partnership to incur and service debt, to fund
acquisitions and other capital expenditures, and to fund distributions to
shareholders and minority unitholders.
Funds from operations and funds available for distribution do not
represent net income or cash flows from operations as defined by generally
accepted accounting principles. You should not consider FFO or FAD to be
alternatives to net income as reliable measures of the company's operating
performance; nor should you consider FFO or FAD to be alternatives to cash
flows from operating, investing or financing activities (as defined by
generally accepted accounting principals) as measures of liquidity.
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."
(3) Beginning in 2004, we have presented operating activities in our
consolidated statements of cash flows using the direct method, which
provides cash flow amounts corresponding directly to lines in our
statements of operations. We have adjusted the 2003 and 2002 comparative
amounts in our
14
consolidated statements of cash flows to conform to the 2004 presentation
by reclassifying the net cash flows related to funding of lender reserves
for apartment property replacements from operating activities to investing
activities. This reclassification has no impact on the net change in cash
and cash equivalents for 2003 and 2002, only in the subtotals for net cash
provided by operating activities and net cash used in investing
activities. The net effect on net cash provided by operating activities is
a decrease of $213,000 in 2003, and an increase of $133,000 in 2002, from
amounts previously reported.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains forward-looking statements. 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.
We cannot guaranty that we will achieve the plans, intentions or
expectations suggested by these forward-looking statements, even though we
believe them to be reasonable. 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 be unable 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 be unable to complete anticipated acquisitions;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates could cause our debt service costs to
exceed our expectations;
o we may be unable to meet our long-term liquidity requirements on favorable
terms; and
o we could lose key executive officers.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to revise these
forward-looking statements if future events or circumstances render them
inaccurate.
You should read this discussion in conjunction with the financial
statements and notes thereto included in this Annual Report.
Overview
2004 was a year of significant growth for us. During the year we
acquired five apartment communities that increased our apartment holdings by
26%, completed two equity offerings in which we raised approximately $30
million, and consummated seven financing and four refinancing transactions for
various apartment properties. As a result of these activities, we saw
significant increases in revenue, expenses, debt and equity.
15
For the year, total revenue increased by $8.2 million (19.2%) over
2003. This increase was attributable to an $8.3 million (22.2%) increase in
apartment rental income in 2004. While the majority of the increase in apartment
rental income ($6.9 million) was the result of five apartment acquisitions in
2004 and two apartment acquisitions in 2003, significant improvement in
apartment occupancy and rental rates in 2004 made a meaningful contribution
($1.4 million) to the increase. On a same units basis (for the 4,427 units that
we owned throughout 2004 and 2003), apartment rental income increased by 4.0%.
Average economic occupancy for these units was 94.8% in 2004 as compared to
92.9% in 2003, and average monthly revenue per occupied unit was $739 in 2004 as
compared to $728 in 2003.
The increase in apartment rental revenue was partially offset by a 2.0%
($0.1 million) decline in restaurant rental income due to the sale of two
restaurant properties in 2003. This decline from the sale of the two restaurant
properties actually masked continued improvement in food sales at our restaurant
properties.
In an attempt to reverse years of declining sales, Hardee's, the
concept at 39 of our 40 restaurant properties, introduced the "Thick-Burger"
product line in 2003. Almost immediately we began to see significant sales
increases with same store sales at our restaurant properties increasing by 2.4%
in 2003. These increases continued into 2004 with same store sales for 2004
improving by 8.5% over 2003 levels. The rent we receive from the restaurants is
the greater of percentage rent (9.875% of annual food sales) or a set minimum
rent (currently $3.8 million per annum). We received the minimum rent in 2004.
For us to receive percentage rent in 2005, same store sales would have to
increase by 1.3%. Given the current state of flux in the fast food industry, we
are uncomfortable making a prediction or relying on the forecasts of others as
to future sales trends for Hardee's. For this reason, we have based our plans
and expectations on continuing to receive the minimum rent in 2005.
The growth in the size of our apartment portfolio led to significant
growth in total expenses (16.6%) with large increases in apartment operations
(20.1%), apartment administration (29.2%), interest expense (12.4%), and
depreciation (16.1%). Interestingly, on a same units basis, apartment operating
expense for 2004 increased by only 0.3%. It is also interesting to note that as
a percentage of apartment rental income, apartment operating expense decreased
from 41.2% in 2003 to 40.5% in 2004.
The positive impact of the new apartment communities and improving
apartment operations were reflected in positive corporate operating results. Net
income (after the minority interest in the operating partnership net income or
loss, and before deduction for cumulative preferred dividend) increased to
$1,039,000 in 2004 from $107,000 in 2003, while funds from operations in 2004
increased by 22.9% compared to 2003.
After several difficult years, we began to see significant improvement
in our apartment operations in mid-2003. This improvement continued throughout
2004 with improving occupancies and improving rental rates. With economic
occupancy for all apartments for 2004 averaging 94.4% it will be difficult for
us to make significant gains in occupancy going forward, therefore our emphasis
will turn to increasing rental rates. While we have some concerns, we are
confident that we are in good position to enjoy continued improvement in our
apartment operations. This confidence is based on a number of factors:
o Most important among these is our emphasis on middle market apartments.
We believe there is an increasing need for high quality, modestly
priced apartments that are well located, extremely well maintained and
professionally managed. At an average base rental rate of slightly more
than $700 per month, we provide high quality housing for firefighters,
policemen, teachers, office workers, store clerks, young couples and an
increasing number or retirees. Our combination of affordability with
quality gives us a wide group of potential residents.
o Our properties are in good markets with excellent locations within
those markets. We operate in Virginia, North Carolina and South
Carolina. While, like much of the country, they have displayed some
weakness over the past few years, we are quite positive about the
long-term economic and demographic outlook for these states and the
markets within them in which we operate.
16
o Our properties are in very good physical condition. An essential part
of our strategy is the maintenance of our properties. We do not develop
new properties, but believe we can deliver a higher quality product at
a more reasonable price by maintaining existing apartment properties.
Maintenance is very important to us; not only because we believe it is
essential to preserving and enhancing the value of our investment, but
also because we believe it is essential to our marketing efforts to
attract residents. As a result, our properties are in very good
physical condition.
o We are well positioned to compete on price with single-family homes and
new apartment construction. Our two biggest sources of competition for
residents are single-family homes and new apartment construction. The
advent of no down payment single-family home mortgages combined with
historic low interest rates has posed a challenge for us for the past
few years. However, significant increases in construction costs and
rising home mortgage rates appear to be resolving this issue. The same
is true for new apartment construction, as rising construction costs
are making it more difficult to build new apartments of similar size,
quality and location as ours that can be profitably rented in the $700
per month range.
All in all, we are optimistic about the long-term outlook for both our
apartment markets and our apartment operations. We do, however, expect early
2005 to continue to be somewhat weak, with an expectation that apartment
performance will strengthen as the year progresses. One area of concern is
interest rates. As we enter 2005, we have $286 million of debt. While we have
attempted to mitigate interest rate risk somewhat by having approximately 75% of
this amount be at fixed rates, the balance carries a floating rate. Based on the
amounts in place at 2004 year-end a 1% rise in average annual rates for the full
year would increase our interest expense by approximately $720,000. In theory,
rising interest rates correlate with improving apartment operating fundamentals,
but whether this will in fact be the case or whether it will match in timing and
amount remains to be seen. We intend to monitor the situation and may adjust the
amount of debt or the allocation of debt between fixed and variable rates as the
year progresses.
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 the 16 apartment properties acquired before 2002, we
compute depreciation using the straight-line method over composite estimated
useful lives of the related assets, generally 40 years for buildings, 20 years
for land improvements, 10 years for fixtures and equipment, and five years for
floor coverings.
For apartment properties acquired after 2001, we performed detailed
analyses of components of the real estate assets acquired. For these properties,
we assigned estimated useful lives as follows: base building structure, 43-60
years; land improvements, 7-20 years; short-lived building components, 5-20
years; and fixtures, equipment and floor coverings, 5-10 years.
We generally complete and capitalize acquisition improvements
(expenditures that have been identified at the time the property is acquired,
and which are intended to position the property consistent with our physical
standards) within one to two years of acquisition of the related apartment
property. We capitalize non-recurring expenditures for additions and betterments
to buildings and land improvements. In addition, we generally capitalize
recurring capital expenditures for exterior painting, roofing, and other major
maintenance projects that substantially extend the useful life of existing
assets. For financial reporting purposes, we depreciate these additions and
replacements on a straight-line basis over estimated useful lives of 5-20 years.
We retire replaced assets with a charge to depreciation for any remaining
17
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 2004 totaled
$5.2 million, including $1.1 million for acquisition improvements, $1.6 million
for additions and betterments, $0.5 million for reconstruction and replacement
of casualty losses, and $1.9 million in recurring capital expenditures.
We expense ordinary repairs and maintenance costs at apartment
communities. Repairs and maintenance at our apartment communities during 2004
totaled $6.6 million, including $2.5 million in compensation of service staff
and $4.1 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 compare 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 seven apartment properties that we
acquired in 2004 and 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.
We amortize any cash concessions given at the inception of an apartment
lease over the approximate life of the lease, which is generally one year or
less. In general, cash concessions range from $100 to $300 and are taken by
residents during the first two months of the lease.
18
Results of Operations
2004 compared to 2003
Revenues
Revenues in 2004 totaled $50.9 million, an increase of 19.2% compared
to 2003. Apartment related income (apartment rental income plus income from
apartment management and investment activities) accounted for 92.5% of our total
revenue in 2004, compared to 90.8% in 2003.
Apartment rental income in 2004 totaled $45.8 million, an increase of
22.2%, or $8.3 million, compared to 2003. $6.9 million of this increase is
attributable to rental income at seven apartment communities that we acquired
during 2004 and 2003. On a same-units basis (for the 4,427 units that we owned
throughout all of both 2004 and 2003), apartment rental income increased by $1.4
million, or 4.0%, compared to 2003.
On a same-units basis, average economic occupancy was 94.8% in 2004
compared to 92.9% in 2003, and average monthly revenue per occupied unit was
$739 in 2004 compared to $728 in 2003. In 2004, for all apartment units, average
economic occupancy was 94.4%, and average revenue per occupied unit was $737.
Restaurant rental income in 2004 totaled $3.8 million, a decline of
2.0% compared to 2003. 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 Boddie-Noell Enterprises, restaurant rental income payments are the greater
of specific 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 $319,000 per month, or $3.8 million per year.
Same-store sales (for the 40 restaurants that were open throughout all
of both 2004 and 2003) increased by 8.5% in 2004 compared to 2003. For the first
time in almost nine years, during the second and third quarters of 2004, sales
at our restaurant properties exceeded the threshold for percentage rent;
however, for the full 12-month period, sales fell 1.3% short of the threshold
for rent exceeding the minimum rent.
Management fee income in 2004 totaled $0.8 million, a decline of 12.8%
compared to 2003. This decrease is primarily attributable to our acquisitions of
two previously managed properties (one in August 2003, and one in July 2004). We
expect that management fee income will further decline significantly in 2005 as
a result of our anticipated acquisitions of managed properties.
During 2004, we recorded casualty gains of $269,000 related to fires
that occurred at two apartment communities - in each case, one building incurred
substantial damage. We received insurance proceeds totaling $895,000, against
which we identified and wrote off $626,000 net carrying value of assets
destroyed. Generally accepted accounting principles require us to recognize this
difference as a gain. However, we intend to reinvest all of the insurance
proceeds in replacement assets. We are fully insured for the losses, including
rent continuation insurance which covers 100% of lost rental income.
Expenses
Total expenses, including non-cash charges for depreciation,
amortization and write-off of unamortized loan costs, totaled $49.8 million in
2004, an increase of 16.6% compared to 2003.
Apartment operations expense includes only direct costs of on-site
operations. This line item totaled $18.6 million in 2004, an increase of 20.1%,
or $3.1 million, compared to 2003. This increase is primarily attributable to
operating expenses at seven apartment communities that we acquired during 2004
19
and 2003. On a same-units basis, apartment operations expense increased by only
0.3% in 2004 compared to 2003, reflecting higher costs for compensation, offset
by reductions in insurance, leasing and turnover costs. As a percentage of
apartment rental income, apartment operations expense decreased from 41.2% in
2003 to 40.5% in 2004.
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
properties we own and properties we manage) totaled $2.2 million in 2004, an
increase of 29.2% compared to 2003. Corporate administration expense totaled
$2.3 million in 2004, an increase of 5.2% compared to 2003. These increases are
attributable to additional corporate support staff, software and insurance
costs, as well as approximately $100,000 spent in 2004 for development of
compliance documentation required by Section 404 of the Sarbanes-Oxley Act of
2002. Going forward, we expect to incur ongoing expenses for professional
services related to compliance with Section 404 of the Sarbanes-Oxley Act of
2002.
Interest expense totaled $14.6 million in 2004, an increase of $1.6
million, or 12.4%, compared to 2003. This increase reflects the impact of a net
increase in outstanding debt of $57 million, primarily at fixed rates, in 2004,
related to apartment acquisitions. During 2004, fixed-rate debt increased by $48
million while the average rate on fixed-rate debt outstanding declined from 6.8%
to 6.4%. Variable interest rates increased by 1.3% during the last half of 2004.
Overall, weighted average interest rates were 5.7% in 2004 and 5.9% in 2003.
Depreciation expense totaled $11.7 million in 2004, an increase of $1.6
million, or 16.1%, compared to 2003. This increase is attributable to the
addition of seven apartment communities during 2004 and 2003 and the impact of
additions and replacements at other apartment communities. We generally assign
those additions and replacements shorter lives than the composite lives we
assigned at the acquisition of the assets to which the additions and
replacements relate.
Net income
Operating partnership earnings before non-cash charges for
depreciation, amortization and write-off of unamortized loan costs totaled $13.2
million in 2004, an increase of $2.9 million, or 28.0%, compared to 2003. After
including these non-cash charges, the operating partnership net income was
$1,055,000 in 2004, compared to a net loss of $66,000 in 2003.
Net income (after the minority interest in the operating partnership
net income or loss, and before deduction for cumulative preferred dividend) was
$1,039,000 in 2004, compared to $107,000 in 2003.
Because the preferred shareholder has priority over common shareholders
for receipt of dividends, we deduct the amount of net income that will be paid
to the preferred shareholder in calculating net income available to common
shareholders. In September 2003, we issued 454,545 shares of cumulative
preferred stock, which doubled the number of preferred shares outstanding. The
cumulative preferred dividend totaled $1,000,000 for 2004, compared to $661,000
for 2003. The dividend on the Series B shares is $1.10 per year per share, or
$1,000,000 for the 909,090 shares currently outstanding.
Income available to common shareholders in 2004 was $39,000, or $0.01
on a diluted per share basis, compared to loss attributable to common
shareholders in 2003 of $553,000, or $0.09 on a diluted per share basis.
These favorable comparisons are primarily attributable to the positive
impact of new apartment communities and improvements in apartment operating
results.
20
2003 compared to 2002
Revenues
Revenues in 2003 totaled $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 2003 and
2002, 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 was due to the
sale of two restaurant properties in 2003. We received the minimum rent
specified in the lease agreement throughout both years. 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.
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.
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 was primarily
attributable to the addition of five apartment communities during 2003 and 2002.
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 in 2003 represented 41.2% of
related apartment rental income, compared to 38.6% in 2002.
Apartment administration expense 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
reflected 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 reflected the impact of $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. Variable interest
rates declined 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 in 2003, an increase of
14.2%, or $1.2 million, compared to 2002. This increase was attributable to the
addition of five apartment communities in 2003 and 2002, as well as the impact
of additions and replacements at other apartment communities.
21
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 (after the minority interest in the operating partnership
net income or loss, and before deduction for cumulative preferred dividend) was
$107,000 in 2003, compared to $1.2 million in 2002.
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 $661,000 for 2003, compared to $323,000 for 2002.
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 reflected the impact of declining margins in
apartment operations in 2003 compared to 2002, and the increased cumulative
preferred dividend in 2003, offset somewhat by the favorable impact of lower
interest rates.
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 reclassified the
extraordinary item for loss on early extinguishment of debt in 2002 to conform
to FAS 145. While adoption of FAS 145 had no impact on net income, it increased
total expenses, reduced income before extraordinary items and eliminated the
extraordinary item as previously reported in our 2002 Annual Report.
Funds from Operations
Funds from operations and funds available for distribution are defined
in footnote 2 on page 14. Both of these measures are made at the operating
partnership level. You should read and understand that footnote before reviewing
the following discussion.
We calculated FFO as follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Income (loss) before minority interest $ 1,055 $ (66) $ 1,527
Less casualty gains (269) - -
Cumulative preferred dividend (1,000) (661) (323)
Depreciation 11,660 10,040 8,794
--------------- -------------- --------------
Funds from operations $ 11,447 $ 9,313 $ 9,998
=============== ============== ==============
22
A reconciliation of FFO to FAD follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Funds from operations $ 11,447 $ 9,313 $ 9,998
Amortization of loan costs 375 322 256
Write-off of unamortized loan costs at refinance 85 - 95
Recurring capital expenditures (1,918) (1,731) (1,484)
--------------- -------------- --------------
Funds available for distribution $ 9,988 $ 7,904 $ 8,865
=============== ============== ==============
A further reconciliation of FAD to net cash provided by operating
activities follows (all amounts in thousands):
2004 2003 2002
--------------- -------------- --------------
Funds available for distribution $ 9,988 $ 7,904 $ 8,865
Add casualty losses charged to operations 14 - -
Cumulative preferred dividend 1,000 661 323
Recurring capital expenditures 1,918 1,731 1,484
Amortization of deferred interest defeasance (105) (228) (167)
Changes in operating assets and liabilities (138) (472) (388)
--------------- -------------- --------------
Net cash provided by operating activities $ 12,677 $ 9,594 $ 10,118
=============== ============== ==============
Other information about our historical cash flows follows (all amounts
in thousands):
2004 2003 2002
--------------- -------------- --------------
Net cash provided by (used in)
Operating activities $ 12,677 $ 9,594 $ 10,118
Investing activities (52,848) (25,275) (32,669)
Financing activities 40,123 15,361 22,018
Dividends and distributions paid to
Preferred shareholder $ 1,000 $ 537 $ 200
Common shareholders 7,551 5,859 7,163
Minority unitholders in operating partnership 1,847 1,845 2,171
Scheduled debt principal payments $ 1,378 $ 1,172 $ 417
Non-recurring capital expenditures
Acquisition improvements and replacements $ 1,104 $ 1,053 $ 860
Apartment property additions and betterments 1,613 565 387
Reconstruction and replacement of casualty losses 526 - -
Weighted average Preferred B shares outstanding 909 601 293
Weighted average common shares outstanding 7,617 5,868 5,787
Weighted average operating partnership
minority units outstanding 1,856 1,843 1,786
Funds from operations in 2004 totaled $11.5 million, an increase of
22.9% compared to 2003. Funds from operations in 2003 totaled $9.3 million, a
decrease of 6.9% compared to $10.0 million in 2002. These comparisons reflect
the positive impact of new apartment communities and improved margins in
apartment operations in 2004, unlike the declining margins in apartment
operations in 2003 as compared to 2002.
23
Funds available for distribution totaled $9.9 million in 2004, an
increase of 26.4% compared to 2003. Funds available for distribution totaled
$7.9 million in 2003, a decrease of 10.8% compared to $8.9 million in 2002. 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 $354 per apartment
unit in 2004, $374 per apartment unit in 2003, and $369 per apartment unit in
2002.
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
All of our properties are encumbered by or serve as collateral for
debt. As of December 31, 2004, total long-term debt was $286.4 million,
including $215.6 million at effective fixed interest rates ranging from 5.0% to
8.6%, and $70.8 million at variable rates indexed on 30-day LIBOR rates. The
weighted average interest rate on debt outstanding at December 31, 2004, was
5.9%, compared to 5.8% at December 31, 2003.
During 2004, we issued $58 million in four new fixed-rate notes payable
at effective rates ranging from 5.0% to 5.7%, and retired a fixed-rate note
payable at 8.5%. As a result of these transactions, the weighted average rate on
our fixed-rate notes payable declined from 6.8% at the end of 2003 to 6.4% at
the end of 2004.
Also during 2004, we issued $34 million in new variable-rates notes,
retired one $14 million variable-rate note, and reduced our variable-rate line
of credit by $10 million, for a net increase in variable-rate notes payable of
$10 million. The weighted average rate on our variable-rate notes payable
increased from 2.9% at the end of 2003 to 4.2% at the end of 2004, primarily as
a result of increases in variable rates during the last half of 2004. At our
level of variable-rate debt, a 1% fluctuation in variable interest rates would
increase or decrease our annual interest expense by $720,000.
In June 2004, we modified our revolving line of credit with a bank
secured by the Latitudes Apartments to increase the maximum loan amount to $30.0
million, extend the term of the loan through November 2007, and reduce the
variable interest rate on outstanding amounts to 30-day LIBOR plus 1.65%. We
currently have $19 million available for draw under this line of credit.
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 deed of trust loan for Harris Hill Apartments, due June 2005 ($5.5 million
outstanding at December 31, 2004);
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, 2004);
o our revolving line of credit secured by a deed of trust and assignment of
rents of Latitudes Apartments, due November 2007 (up to $30.0 million, $10.2
million outstanding at December 31, 2004);
o deed of trust loans for six apartment communities due in 2007 totaling $57.8
million;
24
o deed of trust loans for five apartment communities due in 2008 totaling $36.5
million; and
o deed of trust loans for five apartment communities due in 2009 totaling $52.5
million.
The deed of trust loan for Harris Hill Apartments expires in June 2005.
Based on our estimate of the underlying value of the property, we expect to
refinance this loan at a lower rate than the 8.55% loan currently in place.
Capital Stock and Operating Partnership Units
At December 31, 2004, we had 8.7 million common shares and 0.9 million
preferred shares outstanding. In addition, there were 1.8 million operating
partnership minority common units outstanding.
During 2004, we issued 2.6 million new common shares, through two
placements, to a number of institutional investors and mutual funds, for net
proceeds of $30.0 million. We also issued 66,000 common shares through our
Dividend Reinvestment and Stock Purchase Plan for proceeds of $0.8 million, and
60,000 common shares through our employee Stock Option and Incentive Plan for
net proceeds of $0.7 million. We applied these proceeds to acquire apartment
properties and reduce our operating line of credit. In addition, we issued
25,000 common shares in non-cash transactions to redeem a like number of
operating partnership minority units.
In addition, during 2004 the operating partnership issued 49,000 common
units in conjunction with acquisitions of apartment properties. All of the
operating partnership units held by minority interest owners were issued in 1997
through 2004 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 totaled $12.7 million in 2004,
$9.6 million in 2003, and $10.1 million in 2002. The increase in cash flows from
operating activities in 2004 is primarily attributable to the positive impact of
new apartment communities in 2003 and 2004 and improvements in apartment
operating results. Investing and financing activities focused primarily on
apartment acquisitions and capital expenditures at apartment communities, along
with payments of dividends and distributions. During the three-year period, we
acquired a total of ten apartment communities - five in 2004, two in 2003, and
three in 2002.
We paid dividends to common shareholders of $0.25 per share per quarter
in each quarter of 2004 and 2003, and $0.31 per share per quarter in each
quarter of 2002. Our payout ratio (the ratio of common dividends plus
distributions paid, divided by operating partnership funds from operations) was
82.1% in 2004, 82.5% in 2003, and 93.4% in 2002. 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 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 7.5% of our revenue in 2004, 9.2% of our revenue in 2003,
and 10.5% of our revenue in 2002, from rent received from Boddie-Noell
Enterprises for the use of our restaurant properties. In
25
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
$240 million and net equity exceeding $90 million. Its principal line of
business is the operation of 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; Cafe Carolina, a cafe bakery/fast
casual dining concept with seven restaurants; and BBQ and Ribs, a fast-food
barbeque concept with two restaurants. Enterprises also operates four Moe's
Southwestern Grills. In addition to its restaurant operations, Enterprises
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.
Contractual obligations
In December 2004, we entered into agreements to acquire a portfolio of
four apartment communities containing a total of 1,086 apartment units. The
aggregate purchase price for the properties will be approximately $51.8 million,
and consists of the assumption or refinancing of up to $43.2 million of debt on
the properties, with the remaining amount (estimated at $8.6 million) to be paid
in operating partnership units. We expect to complete these acquisitions by the
end of March 2005. We currently manage these apartment communities on a contract
basis.
Our other contractual obligations as of December 31, 2004, are
summarized as follows (all amounts in thousands):
Payments due by period
Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
------------ ------------- ------------ ------------- ------------
Long-term debt obligations $286,425 $7,869 $87,325 $102,007 $89,224
Operating lease - corporate office 630 180 360 90 -
Purchase obligation - reconstruction of
apartment building at Latitudes 705 705 - - -
------------ ------------- ------------ ------------- ------------
Total $287,760 $8,754 $87,685 $102,097 $89,224
============ ============= ============ ============= ============
Off balance sheet arrangements
In January 2005, we acquired Boddie Investment Company ("BIC") through
a merger. We issued 508,578 shares of common stock, and cancelled 72,399 shares
of common stock that BIC held immediately before the merger. The value of this
transaction was $8.2 million. As a result of this acquisition, we have assumed
the role of general partner and acquired certain economic interests in three
limited partnerships (50% interest in Marina Shores Associates One Limited
Partnership, 1% interest in The Villages of Chapel Hill Limited Partnership, and
1% interest in The Villages of Chapel Hill - Phase 5 Limited Partnership). Prior
to this acquisition, we managed the apartment communities owned by these
partnerships on a contract basis; we will continue to manage these properties.
We expect that, going forward, we will include the accounts of Marina
Shores Apartments in our consolidated financial statements, and that Marina
Shores will generate revenues, expenses and cash flows commensurate with the
properties in which we own 100% interest. We have not completed the detailed
26
analyses necessary to determine whether we will consolidate The Villages of
Chapel Hill and The Villages of Chapel Hill - Phase 5; however, we do not expect
that our 1% interest in these partnerships will have a significant impact on our
financial condition or operating results.
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
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:
2004 2003 2002
Total Per unit Total Per unit Total Per unit
---------- ------------ --------- ------------ --------- ------------
(000's) (000's) (000's)
Recurring capital expenditures:
Floor coverings $ 775 $143 $ 772 $167 $ 593 $148
Appliances/HVAC 385 71 256 55 212 53
Exterior paint - - 183 39 182 45
Computer/support equipment 4 1 85 18 102 25
Other 754 139 436 94 396 98
----------- ----------- ---------- ----------- ---------- -----------
$1,918 $354 $1,731 $374 $1,484 $369
=========== =========== ========== =========== ========== ===========
Non-recurring capital
expenditures:
Acquisition improvements $1,104 $1,053 $ 861
Additions and betterments 1,541 508 303
Replacements of casualty losses 526 - -
Computer/support equipment 72 57 84
----------- ---------- ----------
$3,243 $1,619 $1,248
=========== ========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A summary of long-term debt as of December 31, 2004 and 2003 is
included in the notes to the financial statements in this Annual Report. At
December 31, 2004, long-term debt totaled $286.4 million, including $215.6
million notes payable at fixed interest rates ranging from 5.0% to 8.6%, and
$70.8 million at variable rates indexed on 30-day LIBOR rates. The weighted
average interest rate on debt outstanding was 5.9% at December 31, 2004, 5.8% at
December 31, 2003, and 6.1% at December 31, 2002. At our
27
current level of variable-rate debt, a 1% change in variable interest rates
would increase or decrease our annual interest expense by $720,000.
The table below provides information about our long-term debt
instruments and presents expected principal maturities and related weighted
average interest rates on those instruments (all amounts in thousands):
Expected maturity dates
2005 2006 2007 2008 2009 Later Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed rate notes $ 6,784 $ 1,597 $49,536 $38,453 $29,996 $89,224 $215,590
Average interest rate 8.12% 6.08% 6.93% 6.55% 5.28% 6.29% 6.40%
Variable rate notes $ 1,085 $15,745 $20,446 $ 774 $32,784 $ - $70,835
Average interest rate 4.27% 4.26% 4.21% 4.22% 4.22% 4.23%
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, 2004, totaled $296 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
Management's Conclusions Regarding the Effectiveness of Disclosure Controls and
Procedures
We have performed a review and evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer, the
Chief Financial Officer and the Chief Accounting Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the
end of the period covered by this annual report on Form 10-K. Based on our
review and evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that, as of December 31, 2004, our disclosure controls
and procedures, as designed and implemented, were effective to provide
reasonable assurance that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required, including reasonable
assurance that information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
Management Report on Internal Control Over Financial Reporting
Management of the company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the company's principal executive and principal financial officers and effected
by the company's Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
28
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the company's assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and Directors of the company; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's assets
that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of
internal controls, including the possibility of human error and the
circumvention or overriding of controls and procedures. Accordingly, even
effective internal control over financial reporting may not prevent or detect
misstatements. Further, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions or that the degree of compliance with policies or
procedures may deteriorate.
Management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, the company's management believes that, as of December
31, 2004, the company's internal control over financial reporting was effective
based on those criteria.
Our independent auditors, Ernst & Young, have issued an audit report on
management's assessment of the company's internal control over financial
reporting, a copy of which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of their evaluation. There were no material weaknesses identified in
the course of our review and evaluation.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
BNP Residential Properties, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that BNP Residential
Properties, Inc. maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). BNP Residential
Properties Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable
29
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that BNP Residential Properties, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, BNP Residential Properties, Inc. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
BNP Residential Properties, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004 of BNP
Residential Properties, Inc. and our report dated March 2, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 2, 2005
ITEM 9B. OTHER INFORMATION
None.
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.
30
Name Age Position Director Since
- ---------------------------- ---------- ------------------------------------------------ -------------------
Directors serving until the 2005 annual meeting:
D. Scott Wilkerson 47 Director, President, Chief Executive Officer December 1997
Paul G. Chrysson 50 Director December 1997
Peter J. Weidhorn 57 Series B Director (1) December 2001
Directors serving until the 2006 annual meeting:
W. Michael Gilley 49 Director December 1997
Directors serving until the 2007 annual meeting:
Philip S. Payne 53 Chairman, Chief Financial Officer December 1997
Stephen R. Blank 59 Director May 1999
(1) The terms of the Certificate of Designation establishing the rights and
preferences of the Series B Convertible Preferred Stock provide that the
holders of a majority in interest of the Series B Convertible Preferred
Stock can elect one director, to whom we refer as the "Series B Director."
Philip S. Payne - Chairman of the Board of Directors, 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 is a member of the
board of directors of Ashford Hospitality Trust, a REIT focused on the
hospitality industry, and serves as chairman of its audit committee.
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 es